OIL: A New Business Model

In 2014

A while back I wrote, “The Middle East will have to find ways to protect future oil revenues. It appears that they have. Despite the falling price of crude from $100 a barrel to $80 a barrel and now to $75 a barrel, Saudi Arabia is maintaining production and other oil producing nations seem to be in sync.”

Remember, I said protecting revenues.  Not prices, not profits—revenues.

Falling oil prices, Middle East supply, and a slugging global economy are bad news for U.S. Oil Company revenue. 

Remember the basic business paradigm: increased revenue and a rising demand curve ultimately effectuate a rise in capital investment and operations spending: buy more equipment, drill for more oil. (And now, natural gas.)

However, spending money to increase supply is valid only if there is a demand curve growth and a reasonable expectation of increasing ROI.

Now, the oil producing nations are maintaining output to maintain market share.  Add to this that sluggish global economy; US production increases, and competition and we have analysts predicting energy stocks will fall along with profits.  In addition, advances in alternative energy may further impinge on market share and influence future R&D--both the activity and the strategy & planning aspects.

Now, onto the present.

We all know the concept of fixed costs and variable costs.  Now, I would like to discuss fixed demand v. variable demand.

The Metaphor

Mr. BigWell’s Analysis.

• Fixed number of cars

• Maximum gas tank capacity

• Fixed Demand:

• 20 gallon gas tank

• 20 mpg

• 40 mile commute to work each day

• 400 miles per week

• 20 gallons per week

• 1 million cars

• 20,000,000 gallons of gas per week

Now Mr. BigWell knows his fixed demand.

Then we have variable demand

• Weekend trip to the beach

• A visit to Grandma’s house

As gasoline prices rise, the variable demand will taper off.  Mr. BigWell knows this. He also knows that the fixed demand will cover his costs and he will make a profit.

When the Economy Flags

If the economy flags, unemployment will increase and the fixed demand will decline.

Now we go to Supply

Remember what I said?

However, spending money to increase supply is valid only if there is a demand curve growth and a reasonable expectation of increasing ROI.

You make a large profit at $100 a barrel.

You invest in supply

You ramp up supply beyond demand

Prices fall

The return from fixed demand falls while expenses rise

You increase investment in production to increase supply when you see a rising demand curve. 

Metaphor:

In some instances of fierce competition, Mr. Widget will sell widgets at a loss to put his competitor out of business. Then, increase prices. Or, to maintain market share.

Right now, with cheap oil and diminishing storage capacity, what can we look forward to if customers are “storing widgets”?

Mr. Widget is selling widgets at half-price.  Mr. MaxWell is buying up half-price widgets.

When the market turns around, Mr. MaxWell does not buy widgets. Mr. Widgets can’t benefit from the rising widget demand and the rising prices.

Years back, I wrote Energy Independence. (Then What?)  22. March 2012  

Saudi Arabia is no longer our customer. Saudi Arabia needs new customers. Saudi Arabia sells oil to China. 

When the oil prices turn around, China will not be looking to buy oil at $80 a barrel when they can use the $40 a barrel oil they have in their inventory.

Remember when I said, “China doesn’t have a housing bubble. China has a housing inventory”?

China will have lower energy costs and be better able to compete.  China will be able to switch from coal depressing the coal market, and benefit from solar and hydro-electric power.

Malcolm Forbes said, "Put all your eggs in one basket. And watch that basket." 

However, Warren Buffet is increasing his holdings in Alternative Energy. Berkshire Hathaway Energy.

OIL:  The Real Outlook.

Warmest regards,

Slim

slimfairview@yahoo.com

Copyright © 2015 Bob Asken

All rights reserved.

GREEK PROPOSAL

Dear Mr. Prime Minister,

Please find the following Proposal for submission to the EuroCrats.  The Proposal is written in the form of a fait-accompli.

Very truly yours,

Slim.

THE FINAL PROPOSAL OF GREECE

Whereas all proposals submitted heretofore have been deemed unacceptable, and 

Whereas the Debt Crisis arises from the Economic Crisis; and

Whereas the efforts to resolve the Debt Crisis cannot be resolved without first resolving the issue of the Economic Crisis, we are submitting this fait-accompli.

I.

Greece will amortise the Greek debt over a period of 10 years or 15 years with a balloon payment.  The exact terms to be declared upon the completion of the following:

            A financial statement analysis

            A cash flow forecast

            The establishment of an economic growth model 

through capital investment.

II.

Greece will meet with Madame Lagarde of the IMF and with Mario Draghi, of the ECB in Greece to construct a Memo of Understanding upon which the final agreement will be based. Chancellor Merkel will not be represented at this meeting.

III.

Madame Lagarde and M. Draghi will present the terms to the European leaders for their approval.

If the terms of this Memo of Understanding are rejected, I will

            Cancel all debts owed by Greece by Executive Order;

            Declare ourselves no longer to be members of the    EuroUnion;

            Join in the formation of an E 20 as outlined in the presentation attached by link;

            Assist in the forming of a Union of Emerging Economic Unions and join same;

            Negotiate a Capital Investment treaty with China; and

     Negotiate a natural gas treaty with Russia.

IV.

CAVEAT TO THE CHANCELLOR

If you take vengeance against Greece and against the Greek People, The people of emerging nations will remember. 

they will remember The Kaiser, they will remember The Fuhrer, and they will remember The Chancellor.

V.

Whereas the haves are increasing arithmetically and the have-nots are increasing geometrically; and

Whereas the rising global challenge is not the difference in the number of dollars between the haves and the have-nots; and

Whereas the rising global challenge is the difference in the number of people between the haves and the have-nots; and

Whereas this is not a sustainable model;

We will, in addition to the aforementioned actions, invite other nations whose austerity constraints has financed The Chancellor’s economic machine, to join us in 

forming an Emerging Nations Economic Union,  

to join a Union of Emerging Nations Economic Union, and 

to participate in the forming of an E 20.

VI.

In the repaying of Greek debts to the sovereign creditors, all payments will be made from the money derived from the positive results of Capital Investment, Economic Development, and Growth.

To justify above we will offer the following information in evidence.

Has Europe Embraced Merkel’s strict adherence to the theory of Austerity?

Yes.

Has the European Economy improved?

No.

Has the European Economy worsened?

Yes.

Conclusion: 

Austerity is a failure.

Austerity should be abandoned.

To support the position that the European Economy has not improved, we offer in evidence the QE programme initiated by The ECB. 

If the European Economy had improved, there would have been no need for the QE programme.

In addition, we offer in evidence: German Post-War Debt Forgiveness.

If you wish compurgation with academic substance:

Dr. Albert Einstein said, “You don’t get yourself out of trouble using the same thinking you used to get yourself into trouble.” ~ Albert Einstein.

In addition, it should be underscored, If Greece cancels its debts by executive order, then sovereign creditors who do not receive payment will have no option but to appeal to the ECB for Debt Relief.   

The ECB can extinguish one small fire or extinguish six small fires.

VII.

Abandonment of Rules:

Case in point: The restrictions on monetary transfer to intra-national transactions only has had the net effect of placing viable businesses, engaged in trade and commerce, and in employing Greek people, in the position of unable to engage in trade and commerce.

The rules say, a functioning business that employs Greeks is not allowed to function.   

This is not acceptable. Therefore, this being an example, rules that prohibit trade and commerce will be declared invalid by executive order if deemed to be necessary and proper.

Submitted 

AMDG

______________________________________  

 Alexis Tsipras  

 Prime Minister of Greece. 

    

 ____________________

                                                               

 Date.

Warmest regards and best of luck,

Slim.

Additional Reading

Solving the Emerging Crisis

Emerging Nations Economic Union

Forming an E 20

Mr. Putin’s ETO

China! Economics! Diversification!

Antigone Defeats Merkel

Germany Slaps Greece

Merkel’s Big Lies

Copyright © 2015 Slim Fairview.

All rights reserved.