I got thinking about the components of the market price for oil after I finished my analysis of the US Navy's renewable energy policies in my latest Third Eye OSINT article. That article was oriented to military affairs, and this article is for business. I'll develop the complete breakdown in a longer report to publish at Alfidi Capital, but I'll start here with some basic components.
Production cost. This varies by wellhead but investment banks covering the oil sector figure some broad averages each year. The best way to look at production cost (for my purposes anyway) is by country and then by type of oil: light sweet, heavy, shale, etc. The EIA has a good breakdown of oil and gas production costs in the US.
Transportation cost. This includes shipping by ocean carrier, pipeline, and rail. Oil imports to the US move primarily by ocean carrier and pipeline. The Association of Oil Pipe Lines (AOPL) has a general breakdown of the traffic but I don't know when that data was published. Barge movement plays little role for unrefined petroleum but is a major transportation mode for refined petrochemical products. Platts breaks down oil shipping prices by seaborne routes. I'm too cheap to pay for Platts' data so I'll have to wing it with open source data I find for free. FERC's oil pipeline page shows that their indexing methodology for rate changes is tied to the BLS Producer Price Index for Finished Goods (PPI-FG) plus a statistical adjustment. I find it interesting that the AOPL mentions several alternate methods FERC may use to adjust its approved pipeline rates. That AOPL link is so intriguing I used it twice in a paragraph.
Security premium. RFF studied the oil price security premium in 2010. I mentioned this study in my Third Eye OSINT article (see the link up top). Platts analyzed a security premium specific to the Middle East in 2011.
Other factors. Stanford's Energy Modeling Forum studied oil price determinants in a 2010 workshop. Their conclusions considered asymmetric information, inventories, and futures market speculation. I have not yet decided whether insurance cost gets its own special treatment or should be counted as a subset of production and transportation. I should also account for the US tax code's oil depletion allowance. The International Energy Agency's (IEA) statistics site has a lot of pricing and volume data but I will dig deeper to see if they have cost data. Likewise, the Oil and Gas Financial Journal has plenty of current market data but for this project I need to see if they have cost breakdowns buried somewhere.
This analysis is by no means mature. Like I said above, it's more suitable for a longer report. These components matter for both the West Texas Intermediate and Brent crude prices. I'll develop each of the ideas above from the perspective of an energy contract trader who must hedge the price of oil. I want to understand energy price movements so I may use futures contracts to hedge my own portfolio. Financial engineering techniques for energy and other hard assets may prove very useful to me during a hyperinflationary period in the US.
Production cost. This varies by wellhead but investment banks covering the oil sector figure some broad averages each year. The best way to look at production cost (for my purposes anyway) is by country and then by type of oil: light sweet, heavy, shale, etc. The EIA has a good breakdown of oil and gas production costs in the US.
Transportation cost. This includes shipping by ocean carrier, pipeline, and rail. Oil imports to the US move primarily by ocean carrier and pipeline. The Association of Oil Pipe Lines (AOPL) has a general breakdown of the traffic but I don't know when that data was published. Barge movement plays little role for unrefined petroleum but is a major transportation mode for refined petrochemical products. Platts breaks down oil shipping prices by seaborne routes. I'm too cheap to pay for Platts' data so I'll have to wing it with open source data I find for free. FERC's oil pipeline page shows that their indexing methodology for rate changes is tied to the BLS Producer Price Index for Finished Goods (PPI-FG) plus a statistical adjustment. I find it interesting that the AOPL mentions several alternate methods FERC may use to adjust its approved pipeline rates. That AOPL link is so intriguing I used it twice in a paragraph.
Security premium. RFF studied the oil price security premium in 2010. I mentioned this study in my Third Eye OSINT article (see the link up top). Platts analyzed a security premium specific to the Middle East in 2011.
Other factors. Stanford's Energy Modeling Forum studied oil price determinants in a 2010 workshop. Their conclusions considered asymmetric information, inventories, and futures market speculation. I have not yet decided whether insurance cost gets its own special treatment or should be counted as a subset of production and transportation. I should also account for the US tax code's oil depletion allowance. The International Energy Agency's (IEA) statistics site has a lot of pricing and volume data but I will dig deeper to see if they have cost data. Likewise, the Oil and Gas Financial Journal has plenty of current market data but for this project I need to see if they have cost breakdowns buried somewhere.
This analysis is by no means mature. Like I said above, it's more suitable for a longer report. These components matter for both the West Texas Intermediate and Brent crude prices. I'll develop each of the ideas above from the perspective of an energy contract trader who must hedge the price of oil. I want to understand energy price movements so I may use futures contracts to hedge my own portfolio. Financial engineering techniques for energy and other hard assets may prove very useful to me during a hyperinflationary period in the US.
