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So I think I must be stupid, but can somebody less stupider than me explain the economics of “American oil crashes below $0 a barrel” to me like I’m five please?

My mental model of this is that it should asymptotically approach zero, negative implies they will pay me to get a barrel of crude

Comments
  • 0
    I second this
  • 13
    If you mean future contracts that are bettings that were made in past ?

    You can treat it as banker insurance for producers.

    Same can be with wheat you want to sell wheat for next year but you can’t predict weather and you don’t want to be out of business so you sell contracts for wheat to bankers ex

    I produce 10 tons of wheat and to keep my business running I need to sell at least 1 ton wheat for 10 dollars in August 2021.
    Banker makes it a future contract so they make instrument and someone can bet that this wheat will be worth 100$. Times go on and this contract price is floating around bankers get commission and people either buy those and sell.

    End buyer need to buy this wheat for sure but what if you’re bank and you’re with 1milion tons of wheat no one wants to buy cause wheat turns to be free ? You already daily sold and bought lots of wheat and gained profit on it so now you want to get rid of this toxic paper as soon as possible to put it somewhere else to gain more money.

    Hope I made it clear.

    Edit: movie “the social network” first scene in bar explains it about oil and temperatures
  • 9
    yes that's what happend.

    Why? Russia and Saudi Arabia have a feud and are pumping more oil. And because of the Corona virus lockdown there is less demand for oil. So all storage tanks are full.

    There are 3 actors & prices.
    - The oil drilling price
    - The oil trader price
    - The oil distribution price

    Oil traders trade oil from the drilling hole to the oil distribution up to several months in the future.
    And they are like stock trades, everything is done virtually. Traders mostly don't own oil storage. Now there is no demand. So nobody wants that crude oil to process it to gasoline etc.
    Traders don't want the physical oil deliverd into their fancy wallstreet office.
    So they have to pay the oil refineries to take their oil.

    tldr: Too much oil, no demand, no storage = help! take our oil we pay you!
  • 7
    Also there are many CFD on forex on that with leverage and how leverage works is explained by Selena Gomez in the movie Big Short.

    You can find those scenes on youtube
    The social network
    https://youtu.be/9rOXj4E4hNQ
    Big short
    https://youtu.be/AUM59Eh6vTw
  • 5
    If you've got some empty rail tank wagons or a oil tanker at your disposal you could make some money.
  • 7
    To put it simply it cost money to store oil and you can't start and stop an industry like that on a dime so it works out better for them to take their loss now and free up resources for something profitable than to sit on what they have and wait for things to take a turn for the better.

    Not only would they have to have the funds to outlast the pandemic in its entirety, if they failed to do so the hit they took would only be multiplied by the amount of days they did try to stick it out.
  • 6
    @M1sf3t I'm somewhat worried all that excess oil is just gonna spill over into plastic production.
  • 3
    I hope some oil related companies will go bankrupt that would be good for the climate.
  • 4
    Interesting, thanks to everyone for sharing.
  • 3
    @theKarlisK I don't doubt it will. Plastics make it possible 🙄
  • 3
    @theKarlisK

    That would suit 3D printing folk, since prices have gone up as everyone and their dog is printing medical supplies..
  • 1
    How does it work for electricity companies ?

    https://theguardian.com/environment...

    -------------------

    Thousands of British homes will be paid to use electricity during the day for the first time, as wind and solar projects produce a surge in clean energy during the coronavirus lockdown.

    -------------------

    How do they make a profit if they are paying folk to use their electricity ?

    And will this become the norm...

    Does this happen in other countries ?
  • 2
    @Nanos something to do with a grant maybe, the more people they get using their clean energy system, the more money the government pays them?
  • 3
    @Nanos In some countries if you opt for clean energy alternatives, and generate more power than what your household uses, you can sell the excess power production to the power company that services your area. So even though they are paying you a small fee, they are still using that power for other regions of the grid and charging consumers, running on petrol power, for it
  • 1
    This is why you can sometimes buy chinese electronics for $0.1 per kg at sites like alibaba and such. Someone made too much, and it's costing them to store it. It would cost more to dispose of it, so ideally they want you to just buy it normally at $0 plus shipping.

    I would not be surprised if their prices were negative as well if the logistics were set up for it.
  • 1
    yes, what you guys explain is economic 101 more or less, but he's asking why nobody is giving him money for tanking gas

    my explanation is, while there might be a point in the distribution where "take my money and also my oil" because it costs money to store things and at some point you are trying to stop going to worse numbers - that is probably happening on the beginning of the distro and not involving the end user ¯\_(ツ)_/¯
  • 1
    well the people selling the gas still have to get paid. also the transportation. Those guys don't see green, they flip the lights off and go home. Worse comes to worse they sell their truck/store or just haul/sell something else with it.
  • 3
    @webdev banking is not related to economy it’s only related to finding ways to create money out of nothing.

    It’s mostly about lending money so moving it between people who have it by storing money and creating debt and who need it by providing insurance and taking commission that’s why distributed hash called blockchain is so stupid idea but revolutionary because if you have trusted quorum who lend money it will be more powerful then bank and their algorithmic models and analytics.

    Number of money banks and third party agents take to lend someone money can be lowered drastically if we only use digital currency so no one is required to keep physical money.

    Ideally every product created on earth should have its digital currency as sum of all sub components + creator commission and those subcomponents should have their currency too.
    With one big commodity exchange you could buy everything and sell everything based on current market price. It requires logistics changes, bigger compute power, human thinking changes etc. obviously we’re not ready for that for at least 100 years or even more cause pf lazy fuckers who are steering idiots with power.

    But in this schema we can get rid of all parasites that are just moving those money from creators to consumers.

    We just started by creating global network and a way to store large amounts of information and exchange it.

    But that’s another story.
  • 2
    @vane the way we do things now allows for a modest buffer zone for those who have already made it and have at least one offspring per generation with the common sense required to manage it.
  • 1
    @M1sf3t yeah but that’s not free market that promotes those who are smart and good, drives innovation and moves us out of this shit hole called earth. That’s only a way to survive in highly hostile environment
  • 0
    @M1sf3t

    I dunno, I've tried asking around, but either no one knows, or I just get smart alec replies which aren't helpful. :-)

    Not that yours fit into that category, but its as if anyone who knows are pretty rare these days.
  • 1
    My dream is a local power station that provides free electricity to local folk.

    But building that dream, is difficult..

    First start with providing free power for myself !
  • 0
    Yes, negative selling values mean you get money for buying with no money
  • 1
    @Nanos heres what you do
    get you some land. with a stream
    make sure ur not breaking any relevant laws. get in the stream
    get dirty, wet, muddy. usd local tree branches and other materials to build a simple wooden dam.

    its a temporart thing so its not gonna last or do any real damage.

    do that and then see about if you want to build a power station still.

    I did it. aas ezhausting but rewarding. way back over a decade ago.
  • 1
    @Wisecrack

    I remember some years ago building a small bridge using riverboard rocks and old tyres.

    I wouldn't mind building a stone arch one, but for that, I'd need some robot stonemasons !

    I still want to build a power station.

    I remember a few decades ago chatting to a guy who did just that, and they now own a large utility company they built from the grown up.

    Back then, all his hippy friends told him that money wasn't the answer..

    Since then, he is the only one who has built power stations..

    Whilst everyone else, is still living in the mud..
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