Back when I was taking an MBA class in finance and getting into option trading, I came across something I thought was bizarre.
When placed lowest to highest, gas prices were very evenly distributed around the globe in a totally uniform manner.
And still are to this day:
Now why is this odd?
When I grew up. My mom and dad favored my youngest brother. I did not like it at first, but over time I came to respect it and them, they were entitled to their favorites and I was fine with that.
When I make consumer purchases. I don’t always purchase based on price, I tend to purchase based on favorites.
And I would think, the leaders of OPEC being human and all, would take into consideration Global Politics and Global Political Economics with as much as the news claims they bicker about controlling and rationing supply.
Yet with a completely even distribution, there’s absolutely no evidence of favoritism.
In statistical analysis we would say there is absolutely“no statistical evidence that OPEC has any power.”
So just two days ago, Saudi Arabia and Russia announced an ‘oil freeze’ to drive the prices of oil higher as it’s been falling.
This is where the lessons of US airlines come in handy.
Financial analysts working for these firms do something called hedging.
Let’s say you’re Southwest airlines and you want to make sure you can preserve profit on that $100 round trip air fare from Phoenix to Las Vegas. You know you get 2.4 gallons per nautical mile, You know it’s 301 miles to Las Vegas. And right now, it’s $5.21 per gallon for aviation fuel.
Doing the math, you know that’s 722.4 gallons of fuel which will cost $3,763.70 for that flight, which, let’s just say for purposes of illustration it’s running at a 90% occupancy – that is 124 paying passengers (out of 137). So splitting that cost between the passengers is $30.35 per person for fuel alone.
Reversing the math, an easier way of saying this all is it takes 5.83 gallons per passenger to get to Vegas on a 90% full flight.
A problem airlines have with forecasting is with fuel, as it can be so volatile, and the 4% profit they turn on a trip can quickly turn into no profit if the fuel rises up to – say $6 a gallon, where the per person cost is now 5.83 * 6 = $34.95, and the $5 bucks they were making per passenger is now lost.
Unless they mitigate the risk to their pricing strategies.
This is the beauty of options. An airline will purchase an option to preserve the fuel cost at $5.21 per gallon at the time of their passenger pricing, and the option is ONLY good for the length of time agreed on with the option.
This option costs a little money, as it is effectively a wager being placed against the price of fuel rising where someone invariably has to be willing to take that wager. And should you lose, you lose the wager, which obligates those who took a position against you to pay the difference.
So now. Southwest purchases an option for fuel at the time of setting their prices at 0.50 cents per ticket. If fuel prices sink, this is like an insurance policy and the option becomes worthless. However, if fuel prices rise to $6.00 and the option is at $5.25, those who supplied the option now owe 75 cents per gallon for each option purchased.
Yep. It’s much like going to the track and betting on lucky #7.
But the cool thing is – it works wonders for demolishing cartels and monopolies without having to leverage law, and here’s why.
Typically, those who control supply which has high demand toy with markets based on favoritism and other highly personal biases.
This is something I noticed while traveling with a friend from Guatemala in Europe.
I was being charged $200 a month for unlimited data and global roaming, PLUS a surcharge PER MINUTE based on the country I was in. My bill for two weeks in Europe was $476, and I didn’t use the phone much at all.
Meanwhile, Ricardo (my Guatemalan friend) – was paying $35 USD a month with global roaming with no surcharges.
I strongly considered getting a phone from Guatemala as I traveled, but had it not been for a Guatemalan number which would have cost my friends and family in the US money to call me, it as a non decision.
Now here’s the thing I realized after investigating this and other pricing strategies.
If you trace ownership of cell phone and mobile companies, you’ll find two primary equity holders who leverage something called dark pool money to diminish the publicity of their ownership.
Money influences energy and the decisions individuals make within a corporation, to some degree usurping this thing called free will.
(and perhaps the origin of the saying ‘money is the root of all evil’)
Those who finance through these mechanisms are keenly aware of this.
This effects pricing, globally, and those who control the money reinforce economies and communities they are interested in.
And other economies see a degradation of products and services supplied by these individuals and organizations.
THIS is how cartels naturally function, and since cartels have historically received so much negative publicity, they have moved ‘underground’ with their methods which makes the real trick nowadays in detecting monopoly and cartel manipulation.
Opec (The Oil Cartel) And Debeers (the Diamond Cartel) are old school.
They work through marketing and publicity, focused largely on image and public propaganda announcing their power, a true throwback to the Machiavellian roots they originated from, but as they flail for control, they are losing their ground as organizations and may soon find themselves…
After all, with companies such as US airlines demonstrating how easy it is to go around the controls Opec nations have put in place to limit supply by dealing with companies and countries leveraging simple options and market oriented economics, as Opec freezes output, they simply shift their business to those who supplied the option.
The proof is in the chart. An even pricing distribution suggests any attempts at favoritism and controls OPEC is putting in place is being flattened out.
Lessons learned from Warren Buffet.
While promoting your public image and leveraging an extensive network of shells to do your dirty work may earn you a few billion.
You’ll never be #1 with that mentality.