tag:blogger.com,1999:blog-3621026.post3807526851357218060..comments2024-03-28T10:25:22.825+01:00Comments on Robert's Stochastic thoughts: Roberthttp://www.blogger.com/profile/14455788499385673507noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-3621026.post-55545002463594501562008-06-29T03:29:00.000+02:002008-06-29T03:29:00.000+02:00The benefit from leaving oil in ANWR, which I ment...The benefit from leaving oil in ANWR, which I mentioned, is not a convenience yield. It is noting that one plus the return is greater than zero, not claiming that one plus the return is greater than one. <BR/><BR/>Although I did not say so in the post cited by ddt, I happen to think that the return on unlocated oil in ANWR and off shore is likely to be much higher than zero. That is my guess of the speculative yield. <BR/><BR/>A convenience yield is a yield from having oil some *place* other than the place named in futures contracts. Given the way futures contracts are defined, I would guess that the convenince yield of oil in the ground in most fields is negative. I'm sure this is true of ANWR.<BR/><BR/>The correct comparison of the return on oil, given futures markets, is the nominal interest rate. If you insist on correcting for inflation, then you must subtract inflation from the future price of oil (it's a number of dollars) as well as from the nominal yield on bonds. <BR/><BR/>Inflation can make it wise to leave oil under ground *and* to pay a lot of dollars for a futures contract. It can't do one without doing the other even if people have different forecasts of inflation. If an oil pumper thinks inflation will be really high, he can do better by pumping and selling oil and buying oil futures which sell for fewer dollars than the oil. This would be a pure arbitrage gain with no risk yielding the same claim on future oil and some cash.Roberthttps://www.blogger.com/profile/14455788499385673507noreply@blogger.comtag:blogger.com,1999:blog-3621026.post-35328231613415778092008-06-28T18:16:00.000+02:002008-06-28T18:16:00.000+02:00"the point is that storing oil under the ground do..."the point is that storing oil under the ground doesn't have a storage cost (you even save the interest on the cost of pumping it if you pump it later) but it does have an interest cost and it doesn't have a convenience yield."<BR/><BR/>What if the interest cost is negative? ie you have a better chance of preserving value by keeping oil in the ground rather than exchanging it for dollars that yield a negative return after inflation.<BR/><BR/>If keeping oil in the ground has no storage cost, then whether the expected return on dollars is negative or positive would play a large role in determining whether or not it is in your best interest to keep oil in the ground.<BR/><BR/>The presence of negative real interest rates throughout the world would seem to provide a reason for keeping oil in the ground.<BR/><BR/>Also oil in the ground does have a small convenience yield. You just appealed to the convenience yield of leaving ANWR oil in the ground in your latest post.bzzzhttps://www.blogger.com/profile/03569048670467499565noreply@blogger.com