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Drill the coast for oil ?and or build a refinery?

Discussion in 'General Discussion' started by Quigley_Sharps, Jun 18, 2008.

  1. Quigley_Sharps

    Quigley_Sharps The Badministrator Administrator Founding Member

    To build a new oil refinery in the united states a refinery operator would need to spend an estimated $5-7 Billion Dollars if it could get through the legal/environmental/political hurdles.

    Refiners contribute roughly 14% of the cost per gallon of gas. (@ $4.59 a gallon that is .58 Cents per gallon of gas is refining costs. That isn't their profit, thats just what they add on to a gallon of gasoline.

    Refineries operate on a very slim margin of roughly 5-6%. so out of the .58 cents per gallon that they add on, they make about $3 cents per gallon.

    What is the pay back period of their investment? How long is it going to take them to start making money on their investment?


    Total US refinery capacity is sitting at 17M barrels per day.


    1 barrel of Oil = 42 gallons of gasoline (google search)

    A new refinery (if you could get it built) could produce say 150,000 barrels per day (with no downtime factored in)

    150,000 X 42 X.03= $189,000 in profit per day.

    $7,000,000,000/($189,000 X 365 days (no downtime factored in for maintenance) = about 101 years to pay it off.

    Does that sound like a good investment to you?
  2. Quigley_Sharps

    Quigley_Sharps The Badministrator Administrator Founding Member

    <TABLE class=tborder id=post2056072 cellSpacing=0 cellPadding=6 width="100%" align=center border=0><TBODY><TR vAlign=top><TD class=alt1 id=td_post_2056072 style="BORDER-RIGHT: #ffffff 1px solid">Futures trading
    has been mentioned in this thread as well as some others so I thought maybe a tutorial on the Oil contract might be in order.

    The commonly quoted price for oil is based on the light sweet crude contract that trades on the NYMEX. While there are other markets and other contracts the LSC on the nymex is the "gold standard".

    The contract specifics are these:
    The contract consists of 1000 barrels of light sweet crude.
    The minY is 500 barrels
    The Margin req. for purchase is 11,813 dollars (abt 8.5% at close)
    The minY 5906
    The maintenance Req. is the same as initial margin.
    The settlement is physical delivery.
    The minY settles Financially
    The delivery site is sellers terminal in Cushing, Oklahoma
    You can offset the physical with another futures contract in some cases
    Position limits are 20,000 net contracts in any one or all months. No more then net 3000 in the last three days of the contract.
    The contract trades out to 9 years. Years 1-5 settle every month, while years 6-9 settle June and December.

    OK here is how it works.
    Scene 1. You buy 1 contract at 135/brl for September 08 delivery. You are out of pocket 11,813 dollars. You now control 1000 brls of oil. Tomorrow the price goes to 145/brl. That 10 dollars X 1000 brls/oil equals 10,000.00. your account is now worth 21813 minus trading costs. The 10,000.00 is yours, you can do whatever you would like with it.
    Scene 2. You buy 1 contract at 135/brl for September 08 delivery. You are out of pocket 11,813 dollars. You now control 1000 brls of oil. Tomorrow the price goes to 125/brl. That ten dollars X 1000 brls/oil equals 10,000.00. your account is now worth 1,813 dollars. About 1:00 west coast time your broker calls and says you have a 10,000 margin call and they need the money in good funds by close of business. If it is not there you will be sold out on the open and they will come after their money by all means possible. There is no grace period or humor in these calls.
    This process goes on daily until you liquidate your contract with an offsetting transaction. Note it is as easy to initially sell a contract as it is to buy one.
    How is this different to "normal" investing?
    1. Commodity markets are a "Zero Sum" game. For every dollar you make someone else loses that dollar and vice-versa. I can buy a stock and sell it to "A" and make 5 dollars. "A" can sell it to "B" and make 5 dollars and so on. Not so in the futures world.
    2. Stock market makers are obligated to buy or sell you stock even if no one else in the world wants to. Commodity traders are not. If there is no contra party you own your position until someone takes the other side. This means you can get stuck holding positions you want out of but cant liquidate.
    3. If you own or have sold a contract you are legally obligated to deliver the contract specs at expiration. Even if you have to go buy them for more then your contract specifies and pay to deliver them to OK.
    4. Futures are the only investment I know of that can cost you more money then you invested, in fact it can cost you your whole net worth and there may be nothing you can do to prevent it.
    5. the market is made up of Hedgers and Speculators. Hedgers are direct users of the underlying commodity and use the markets to lock in product prices for the future. Specs simply try to guess which way the market moves and profit from that move. The specs are a big part of the current "problem" IMHO
    6. "Inside Information" is legal in the commodity marKets, it is illegal in the stock and bond markets.
    7. A whole list of others that are to long to list.

    Finally commodity trading is a Big Boy Game played by Big Boys with sharp knives and deep pockets. Most of the players have financial resources we cannot even dream about. They make a lot of money and lose a lot of money sometimes in just a few minutes (Start taking the numbers above and multiply them by the 20,000 contract limits) They dont care if you get on the wrong side of the market and lose everything you have got and commit suicide, just don't whine and cry about it.
    Anyway that is a thumbnail about how the commodity markets work, I hope it clears up some mis-information.
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  3. Pauly Walnuts

    Pauly Walnuts Monkey++

    Both , I want cheap EARL (oil) for my race car dam it.
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