Re: [Marxism] PEMEX looks to lock in current oil prices

["Joaquin Bustelo" <jbustelo@xxxxxxxxx>]

Brad writes: "This could be the begining of a big decline in oil prices if
more follow Mexico and lock in current oil prices."

Actually, I suspect the article Brad cited is more likely to be some part of
a pump-and-dump fleecing operation by the pirates in the trading pits than a
serious presentation. 

The idea that because tons of people are willing to commit NOW to paying the
current unprecedentedly HIGH prices for oil years in the future, that this
means prices are LIKELY to fall, is absurd on the face of it. That, however,
is the central theses of the article.

PRODUCERS who lock in a price willingly sacrifice possibly even higher
future profits in exchange for a *guaranteed* good-enough price that they
can live with. That's why they function in futures markets, and it makes
sense. The consequences of TOO LOW a price is the bankruptcy and collapse of
the given producer. This is why futures market work, why they can exist AT
ALL. For producers, the downside risk is disproportionate to the upside
gain. Thus, even if the calculation is that you can get a better price by
waiting, it might still make sense to lock in a GOOD price even if the
chances that prices might fall to ruinous levels are much smaller.

But what is the interest of the PURCHASER? To protect themselves against
even higher prices months or years from now. Now, if you are, say, a
producer of copper tubes and have the opportunity to make a really good sale
over a two-year period but at fixed prices, you can protect yourself by
hedging against price rises through the futures market. Otherwise, if the
price of copper doubled, you might find fulfilling the two-year contract to
be ruinous. 

In the case of oil, there may be one or a couple of specific purchasers for
whom a higher price would mean ruin, but generally that's not the case. For
that reason, the likelihood that prices will be higher when the contract
matures has to be judged fairly high in order for the purchaser to accept
the contract to buy years from now at current very high price levels. And
every futures contract has both a seller and a buyer. It is not enough for
PEMEX to want to SELL future production as what it views as an attractively
"high" price from the producer point of view. You also need, for each and
every futures contract, a purchaser who sees that price as an attractively
"low" price. 

So someone a little more convincing than the article's author and the couple
of bookies he quotes will have to explain to me how locking in current HIGH
prices for the future leads to a decline in oil prices, now or in the
future. 

Insofar as there is an economic "price" signal coming from those contracts
at current high price levels, it is that oil will remain at those levels --
or go higher.

As for PEMEX, I would be extremely surprised if the story about locking in
prices several years into the future for substantial amounts of production
were true, for a couple of reasons. 

The production from Mexico's most important field, and with it the country's
total production and exports, seem to be declining much more rapidly than
had been expected. There is no way Mexico can guarantee delivery of very
substantial amounts (a large portion compared to current exports) years in
the future from its own production. And the ENTIRE decline in production
comes out of net exports.

Therefore PEMEX would be exposing itself to tremendous market risk with such
contracts. The risk is that it would have to buy petroleum at a price higher
than it has agreed to sell it for if the future contracted amounts are
large. This runs counter to the objectives producers generally seek in
futures markets. Therefore, if there are commitments several years in the
future, it is likely to involve only a small fraction of Mexico's current
exports, and not likely to be a significant part of the overall market.

Second, the Mexican government is trying to push through what is in essence
a partial privatization of the oil industry to very widespread opposition.
Were it to be found out that it had agreed to sell to American oil companies
Mexico's petroleum at below-market rates (and that is how it would be
presented and understood in the Mexican media) the government's
privatization plans would face even more problems.

The story in the article --that the government is pressuring PEMEX to sign
contracts for future deliveries for future accounting purposes-- doesn't
really fit with the drive towards privatization. 

I don't discount that Mexico may be hedging against a price decline in the
short term, or has made longer-terms commitments for a modest quantity of
production, but that is not what the article sent to the list describes. On
its face, the case the article presents for Mexico having done this makes
little sense, and neither does the conclusion that this represents a
generalized expectation that prices will decline, never mind a pressure on
them to do so.

Joaquin


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