To: SampleMan
The example here would be to contract the coal-oil for delivery at $55 a barrel in a large enough quantity to recoup for your capitalization costs.
Plus enough to recoup the cost of providing the oil itself. If it ends up costing you $52/bbl to provide the coal-gas oil once you're in production, you're only recouping your capitalization cost at $3/bbl.
And as a buyer, I have to take the chance that you'll default. Even if I don't have to pay the full price up front (and I realize it's a margin buy), I still stand to lose a substantial amount, especially in comparison to other ways I could have invested that money. So, the price has to be low enough to cover the buyer's risk that the seller will default, as well as the typical commodities risks.
44 posted on
04/19/2006 9:00:23 AM PDT by
Gorjus
To: Gorjus
I think that we are in agreement and the exact numbers aren't really that important to the argument.
The principle point is that OPEC has had a habit of purposely dropping prices to avoid alternative competition. The capital markets know this, and thus some inventive hedging is required to entice the market.
Again, wind power electricity is doing gangbusters business right now, as it is cheaper than fossil fuel at current prices. Established utilities are having great luck pricing it separately for future delivery contracts, despite the fact that it all flows into the same grid. The could just be taking additional profit right now, but instead, they are insuring their investment and building more.
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