So You Want To Get Into The Oil Business?
If you’re not familiar with NPR’s Planet Money podcast; they cover world news, politics, variety shows, and it’s definitely worth checking out.
We couldn’t help but be drawn into a recent episode, where Planet Money made the brave and somewhat naïve decision to get into the oil business this summer. In a five part-series, they seek to work every angle of the oil business, from getting the stuff out of the ground to funneling into someone’s gas tank. Along the way, they travel to “handshake country” to buy oil, sell it to a middle man, follow the oil from a pipeline to a refinery, and eventually to a gas station in Council Bluffs, Iowa.
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Unlike the trillions of revenue coming from the “The Big Dogs of Physical Commodity Trading,” Planet Money only purchases 100 gallons of oil. And instead of drilling for it in the Arctic or offshore in Brazil, they get it from Kansas, of all places (and with a briefcase stuffed with cash). But they run into problems almost immediately. First they had to register with the state of Kansas to be an official purchaser of oil. They only find one Kansas well owner (also a preacher) willing to sell to them, and then the issues of price come to play.
When going to buy their 100 barrels – Jason, the Kansas oil well owner wants to sell it to them at the Oklahoma Sweet price and not any of the other Kansas area oil prices – such as Kansas Common, Central Kansas, Eastern Kansas, Nebraska, and Wyoming Sweet. Jason claims that since there are physically located closer to Oklahoma, and the people that are willing to come pick up that oil are willing to pay the Oklahoma sweet price, that’s what he’s selling it at. Planet Money agrees and gets a slight discount because they are paying in cash. But upon reselling the oil to the middle man who will get it refined, they end up losing around 800 dollars. And that doesn’t include all the legal counseling and other maneuvers NPR had to jump through.
After they go through the rigmarole of physically purchasing the oil from the ground; they realize they could have done the same thing in Chicago, at the Chicago Mercantile Exchange. They meet a trader with a cow print jacket named, Scott. They learn some of the lingo such as: “a bag = 1,000, a Valarie = 1, a Monkey = 500.” They also realize that a crude contract is 1,000 barrels, 900 barrels more than the 100 they bought in Kansas.
Perhaps the biggest question they are looking to answer in the series is what actually drives the price of oil, and for the most part they get it right. They first insinuate it’s speculators. But after talking to a purely discretionary speculator, and using phrases like betting and holding onto oil thinking prices will rise, they conclude that sometimes speculators can make prices rise; although they can also make prices fall. Of course, people only complain about speculators when prices are high.
They speak to an economist about other factors and conclude that it’s not one factor, but many factors that push the price of oil. The major factor? Global supply and demand and the fact that oil is different than anything else we buy, because oil has to come out of the ground from somewhere in the world – with the cost to get the oil out of the ground, refine it and ship it vastly different depending on where you are in the world.
Interestingly, they argue that it’s not OPEC, or Oil Sand Production in Canada, or the Saudis that set oil prices these days. They argue that it’s all based on the least expensive barrel someone is able to get their hands on. They argue that it’s the minimum price that will cause producers to turn on their oil wells that becomes the true price gauge, it’s the oil well owner who is willing to accept the smallest profit that sets the price of oil, at least in their opinion. Kind of like Amazon or Walmart driving down prices for the rest of us, that producer willing to earn the least profit (or able to because of ease of getting out of the ground) that sets prices.
Whether you know the inner workings or not, the five-part series is worth the listen! Enjoy!
Here’s the first episode: