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A useful definition of commodity

Commodity – something where the producers don’t have pricing power. Not a complete description but a useful one:

The reality is that few real shortages were in fact created by the war in Ukraine, whilst Covid supply chains have long since been resolved (chips apart). There were no real reasons for price increases in that case bar one thing, and that was the profiteering from fear that was exploited by many suppliers of basic commodities, like oil companies.

Since many oil, gas, food and construction raw material costs are now back at pre-war prices the idea that there was a fundamental cost increase as a result of it that they needed to cover by increasing prices is shown to be wrong: they simply profiteered at cost to society at large, as Shell’s profits clearly demonstrated yesterday.

Crude oil is a commodity. Shell doesn’t have pricing power.

24 thoughts on “A useful definition of commodity”

  1. The original investment decision will be based on the answer to the question “Can we make a profit from this oilfield / mine / agricultural land?” If so, go ahead.

    Once the decision is made, you’re at the mercy of the market. And market prices for commodities are quite volatile.

  2. “construction raw material costs are now back at pre-war prices”

    Lockdown created an awful lot of bottlenecks in the production and supply chains. Cost of timber went through the bloody roof late 2020 onwards. The idea of “pre-war prices” is useless. 2018 prices would be far more useful for the comparison.

  3. The reality is that few real shortages were in fact created by the war in Ukraine

    Obviously Spud is high on bum drugs or something, but what’s more worrying is the number of supposedly responsible adults who share his delusions.

    The energy crisis has already cost Europe $1 Tn according to Bloomberg, and the Net Zero party’s just getting started. We’re also gearing up for more war in the not too distant, this time against China.

    Supply chain disruption, withering energy costs and the serious risk of power cuts in the dead of winter will be with us for years. The only way out of this trap was made illegal by Rashee Soonak and his associates.

  4. A useful rule of thumb: he who writes “profiteering” is a foolish and ignorant twat – or a political propagandist.

  5. Given he evinces no understanding of a concept as fundamental to economics as inflation asking Murphy to understand commodity Markets is like asking the man in the street to whistle Beethoven’s 5th symphony – he would be all at sea.

    Moscow- based or not It is hard to gain say Steve’s analysis. When I look at the shambles in Europe and the reliance on ‘muddling through’ with no evidence of long term planning beyond wishful thinking which is being codified by mindblowingly bad legislation (even by EU standards) on Carbon emissions and ESG, you realise there’s a song which summarises the situation by Bachman Turner Overdrive…

    And as he concludes correctly -This is the future. As seen by the defenestration of Truss, the likes of Schwab and others of that ilk have determined the future – and it is one of power cuts, poverty and scarcity. Your desires are not relevant.

  6. I want to know why those evil corporations weren’t profiteering before, and why have they stopped? Bastards.

  7. What DuckyMcDuckface said. Prices may be back to where they were pre-Ukraine, but they were already way above the pre covid levels. It was in 2021 that prices really hit the afterburners, as all the printed money hit the supply issues caused by covid. Concrete, steel, timber are all far higher than they were in 2019/20.

  8. Um, didn't OPEC drive prices up and down and up again?

    If I’m Aramco why shouldn’t I sell long oil calls? If spot drops, can I buy them back lower? If spot rises, do I not profit?

  9. Plus, seen elsewhere – some government nerk is recommending tariffs up to 73% on steel from the Chinee.

  10. Dicaprio, why can't i just deliver my oil at the higher spot?

    Also, have you read Blair Fix on the Totem of Supply and Demand?

    《Take, for example, the supposed trade-off between growth and inflation. Where does it come from? Not from any empirical evidence. No, it comes from the totem of the Macro, illustrated in Figure 7. [..] Here, we have the familiar crossed sticks. Sloping downward are two ‘aggregate demand’ sticks, AD0 and AD1. Sloping upward, we have a ‘short-run aggregate supply’ stick, SRAS0. Finally, we have a vertical stick labeled LRAS, which means ‘long-run aggregate supply’.

    With their sticks in hand, the Econ gather in a circle and perform their ceremony. When the economy ‘runs hot’, the high priest says, the AD stick moves up and to the right. That leads to greater Y. The Econ celebrate. But wait, the priest continues. When the AD stick shifts, it also leads to higher P. That’s bad. The ceremony concludes with a sober reminder: there is always a trade off between Y and P.

    (Never mind that the sticks stand for concepts that cannot be observed. This heady thought would poor cold water on the Econ ritual.)》

  11. You get your profit from the sale of the option. The person who exercises the option doesn’t pay you again

  12. Bloke in the Fourth Reich

    Governments as the ultimate “producers” as they claim to own mineral rights can however control prices.

    Essay for you: all government market intervention increases prices. Discuss.

  13. @? Um, didn’t OPEC drive prices up and down and up again?

    Didn’t you read the article? OPEC had pricing power. That is until the US started fracking. They have pricing power again thanks to creepy Emperor Joe Palpateen abandoning fracking.

    Are you really that stupid?

  14. Err, yes. The entire De Beers effort was in turning gemstone diamonds into a not-commodity where they did have pricing power. Well done, not the first time you’ve missed the point.

  15. Dicaprio, why can’t i just deliver my oil at the higher spot?
    Because you already sold it (in the call option), didn’t you?

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