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Honsoku -> RE: Gas prices dropping a little? (8/23/2008 9:11:47 AM)
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ORIGINAL: TNstepsout
Not to mention that part of the reason the dollar has risen in value in recent weeks is because other currencies have dropped in value, not necessarily because the US Dollar has become stronger. Which means we aren't getting any stronger, they are just getting weaker so we are levelling the playing field. So where are investors going to put their money if the world wide economy is sagging? In commodities! Which in uncertain economic times retain a baseline value.
There is no difference between the dollar getting stronger and the other currencies getting weaker. Currencies are valued relative to each other, there isn't some independent marker by which one measures currency value.
Actually, if the global economy tanks, people will just pull their money out of all markets that don't have guaranteed return. This is why you have been seeing the "flight to quality" in the bond market.
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ORIGINAL: Alumbrado
'Could have' is leaving out one very important factor...customers.
Without a captive market, gas can be priced at $900 a gallon tomorrow, and the oil companies will lose money as people have no choice but to start walking.
Or it could be priced at 10 cents a gallon, and companies will go broke while being flooded with customers.
Misguided point. Price can only be at what people are both willing to buy and sell at. Obviously, gas companies wouldn't sell at ten cents at gallon (assuming current costs) as it would cost them more to sell than to acquire. Same in reverse of $900 dollars a gallon tomorrow. It doesn't qualify as a price if no trading occurs at it.
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In between is a realistic profit range where price hikes can only occur up to a certain point... when that point is reached, prices adjust, and companies that don't, will lose customers to those companies who do drop prices.
Again, over simplified. First, that is assuming that all products are perfect substitutes for each other (which is fine for refined gasoline). It also assumes that more customers equals more profit, which is decidedly untrue (see your previous bit on 10ยข a gallon gasoline). Net income = profit margin*customers. If you cut prices by 1% and the amount you sell doesn't increase by more than 1%, you haven't made any more money. It depends on how much demand is sensitive to price differences and how good customer information is on prices available. Thirdly, it assumes no change in the supply/demand of what's being sold.
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The gas wars proved that over and over again, as people got rich undercutting prices against their competition across the street
Only for a short period. Eventually, that process would lead to no profit as the competition will start cutting their prices as well. Only the customer wins when a price war happens.
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The oil futures that people think dictate prices, are reactive and speculative... i.e. gambling on some number randomly produced, not by throwing a die, but by attempting to match an unpredictable future number... the stock market no more controls such things than the players at a slot machine control their winnings.
Every market is reactive, because people are reactive. It is just random behavior to act without basis, and people don't like doing that with their money. Second, you misunderstand the futures market if you think the number is totally unpredictable or that it is driven by speculators.
1: The futures market isn't the stock market. In the stock market, all you are generally buying and selling are voting rights. Yes, you technically buy a piece of the company, but barring huge stock purchases or company liquidation, you can't do anything with that piece besides selling it to someone else and casting votes with it. In the futures market you are literally buying an amount of the underlying commodity (be it a ton of corn or a barrel of oil) to be delivered on a certain date. If you hold a futures contract to maturity, you will own that amount of the underlying commodity.
2: The big players in the futures market aren't the speculators, they are people who buy and sell the product seeking to hedge against future price changes (for example: about 80% of Southwest's oil purchases are hedged through futures and options contracts on oil). In turn, people look to the futures prices as a guide to what current prices should be. The futures price becomes the current price as contracts which expire today means that goods can be exchanged at that price. In order to maximize profit you have to consider what other people are selling at. The futures market becomes a poll of how the major players in the market view the underlying commodity.
3: The future value of a commodity isn't totally unpredictable. Commodity values tend to follow relevant factors. I can be reasonably certain that a bushel of wheat will cost tomorrow about what it costs today. Of course, the farther out you go, the less predictable it will be.
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