
The Price of Oil Is About to Blow a Hole in Corporate Accounting - hotgoldminer
http://www.bloomberg.com/news/articles/2015-03-04/oil-at-95-a-barrel-discovered-in-sec-rules-on-reserves
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rcarrigan87
I bought some shares in an oil ETF a fews weeks ago my investment rationale
was:

1\. If the price stays low I win because my gas will be cheaper (essentially
hedging my gas costs). If the price rises my cost at the pump will increase
but will be offset some by gains on the ETF.

2\. Geopolitical flares up typically drive oil prices higher. Low oil prices
destabilize a lot of countries and increase the probability of these issues.
It's almost like low oil prices will inevitably lead to high oil prices.

Of course, this is all speculative (mostly for fun for me although it is real
money). I would never invest money I couldn't lose based on this loose
reasoning. But now I get to call myself an "oil man."

~~~
URSpider94
Public service message from someone who went down this road before: it's worth
studying up on the futures market. In particular, there's a nasty little thing
called "contango" that effectively makes your investment worth less and less
every month that you hold it and oil prices don't go up. Think of it as a
rental fee for the tanks where they keep the oil held by investors.

The upshot is that you can lose money on oil futures even if prices don't go
any lower, and you may lose money even if prices go up, if it takes a long
time for that to happen.

tl;dr -- there's no clear way to make an investment that cleanly tracks the
price of oil, like there is for the Dow or the S&P 500 or the Japanese Yen.

~~~
dynode
Is investing in a company like exxon a good proxy for oil price?

~~~
ucha
No, it's not.

An integrated oil company like Exxon has activities that lose money when the
price of oil goes down (drilling, exploitation) and others that make more
(refining, retail). The price of oil dropped by about half during the past few
months; Exxon barely budged.

A better proxy for oil price could be drillers (Diamond Offshore Drilling for
example) but they're very far from perfect either. In general, it is very hard
to track an asset which price is expected to be mean-reverting like the price
of oil.

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jerf
Well, if the stock market reacts by savaging the prices of these companies,
sounds to me like a fantastic long-term investment opportunity will be opening
up. However large this may be, it's still a transient price drop with a lot of
politics in it, and in the long term prices are still only going to go back
up. Most of that oil in the ground is still going to be pumped up at much
higher prices, and not _all_ that many years from now.

~~~
imaginenore
You don't know that.

The world is really on the way of getting rid of oil.

Electric cars, bioplastics, solar panels getting exponentially cheap.

From my point of view the only thing that stops us all from switching to
electric cars is the battery technology.

When it comes to the industrial use of solar energy, we already have the
technology of storing energy - flywheel (google Beacon Power).

~~~
adventured
The largest impediment to everyone switching over to electric cars, is grid
and supply, not storage.

We can do the battery storage right now, it's just not as great as what we'd
like.

If you switched all cars over to electric tomorrow, the grid would melt down
in every country that attempted it. There is not even remotely enough power
available to handle it. Most first world countries are running their national
power grids with a very modest buffer (and for countries sub first world,
forget about it, they're still dealing with routine rolling blackouts).

By the time all autos are switched to electric in 30 years, hopefully self-
driving cars have wiped out at least half of all vehicles in the first world.

~~~
greglindahl
"If you switched all cars over to electric tomorrow" is not a useful scenario.
In reality, the shift will take decades, and that's enough time for changes in
the grid to happen.

~~~
adventured
Of course. The parent said this however:

"From my point of view the only thing that stops us all from switching to
electric cars is the battery technology."

My obvious point was that, in fact, that is not even remotely the only thing
stopping us from switching to electric cars. My scenario was extremely useful
in highlighting the fact that we do not have the capacity to switch to an all-
electric car approach, and not primarily due to batteries.

We can do the battery tech and manufacturing in the present, to build very
effective electric vehicles. Building up the grid to support ~500 million cars
in the first world would cost tens of trillions of dollars and take decades.
It makes the battery challenge look hilariously minuscule by comparison.

~~~
mikeash
If building up the grid to support 500 million electric cars only costs
trillions, it sounds like an order of magnitude easier than the batteries.

~~~
adventured
Emphasis on tens of trillions and decades (not merely a few trillion).

Batteries are not a $30 trillion and 30 year problem, not even remotely close.
Batteries are an order of a magnitude smaller of a problem.

We can build the Tesla S already. Musk is going to spend $5 billion building a
plant that can produce 500,000+ car battery systems. We can already make
effective battery systems for mainstream electric cars, the challenge now is
to make them better and scale up manufacturing (which has already begun).

It costs $5 billion in the US just to build one major nuclear power plant.

I rarely see anybody discussing where the trillions of dollars in new spending
is going to come from to boost energy supply and grid to handle 100 million
electric cars in the US. It'll cost trillions just to maintain what we already
have now over that time.

~~~
mikeash
Right now, batteries for a realistic replacement car (not a compromise EV like
a Leaf) cost about $20,000 per vehicle. That's $10 trillion for 500 million
cars. It doesn't look an order of magnitude smaller to me.

As for where the money comes from, doesn't that just fall out of supply and
demand? As demand for electricity increases, prices will go up, funding the
infrastructure improvements needed to accommodate the increased demand.

The solution may not even lie in the grid. Batteries can solve the grid
problem as well as the battery problem. Give every electric car customer
enough solar to cover his charging needs and a fixed storage installation to
keep the power for when the car comes home, and the grid won't even know the
cars are there.

I'm sure this will all be wonderfully challenging for those involved, but it
doesn't look like something to worry about from the outside.

~~~
Padding
> As for where the money comes from, doesn't that just fall out of supply and
> demand? As demand for electricity increases, prices will go up, funding the
> infrastructure improvements needed to accommodate the increased demand.

Looking forward to oil-shareholders claiming how expensive electric cars for
the elites are making electricity unaffordable for the poor.

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cheriot
In case anyone forgets that it can go too far in the opposite direction:
[http://en.wikipedia.org/wiki/Enron_scandal#Mark-to-
market_ac...](http://en.wikipedia.org/wiki/Enron_scandal#Mark-to-
market_accounting)

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aaron_m04
Isn't the price being held at an unsustainably low price by OPEC? If so, then
any accounting problems would be short lived. Once OPEC cuts supply, the
prices will bounce back to ~$100/barrel, I would expect.

~~~
matt4077
There's a lot of speculation on OPEC's motives and power. They could be trying
to shut down exploration in the US. The Saudis could be doing the US a favour
by trying to destabilise russia. They could be trying to sabotage green energy
for a while. Their coalition might just be powerless because everyone needs to
pump out as much oil as possible, especially at these price levels.

Regarding future price levels the efficient market hypothesis probably holds:
nobody without inside information knows which way the oil price is going.

~~~
aikah
I read a lot about the subject and couldn't come up with a satisfying answer
as to why the Saudis are doing that. All I know is they are playing a very
dangerous game and Washington is letting them do it.

People say,there will be no consequences for USA,but oil prices will go up
again sooner or later. What then ? I don't believe shale oil is an
explanation.

~~~
tptacek
You don't believe shale oil is an explanation... why? Have you looked at the
barrels/day production figures for shale oil? They are gargantuan.

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iwwr
I take it no serious investor makes any decision based on that arbitrary
number, do they? So then, why require it?

~~~
hristov
Most serious investors consider this number very important when making
decisions. By this number i mean the amount of reserves. Yes, some of the
methods of calculating it are a little arbitrary but it is the best
information investors have as to the value of a company's reserves. Thus, it
is very important.

And it is not completely arbitrary. For example the rules are the same for all
oil companies at the same time. So the number is by no means random. And while
the results depend on the price of oil on particular days, everyone knows the
price of oil and what the key days are. So if some investors believe oil will
climb back up, they can do some math and arrive with a number that better
suits their view of the future.

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tim333
The article's a bit melodramatic about what is everyday accounting. The price
of oil always fluctuates so accountants have to use some historical price for
calculating reserves so the figure will always be off at a later date when the
price has moved. Pretty much anyone capable of reading and understanding the
accounts of oil companies will know that.

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cpwright
Its useful to point out that although the standard accounting method was used
for the official numbers, at least one of the drilling companies in this
article also included the impact of current prices on their reserves.
Investors care about this, know about it, and at least some of the the
companies give them information so it can be properly priced in.

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Animats
Accounting usually tends to trail events. That's not a bad thing. More
problems come from valuations of future events.

Oil may go up tomorrow. The short-term price is driven more by political
events than drilling activity.

