Oil price — how the deep fall of crude oil raises the question of value
Many rubbed their eyes in amazement when history was made on the stock exchanges just over a week ago: The price of WTI oil fell negative for the first time. Although the price of a barrel of WTI oil has quickly climbed back into positive territory, the significance of the fall into the previously unknown negative should not be underestimated. The low fall of oil not only poses challenges for companies and speculators, but also questions the actual value of black gold. How valuable is oil anyway? How does value come about and what does the fall in oil mean for other valuables such as real estate?
Intrinsic values — How does value come about?
In order to understand how the value of oil actually comes about, you have to understand what value actually is. Because how we define what is valuable and what is worthless is not always completely self-evident. Gold, for example, is generally considered very valuable and was the basis of the value of our currencies for a long time. However, most currencies are no longer linked to a direct gold equivalent. The only thing that makes it valuable is that governments accept it as a form of payment. Not only does gold no longer have any direct monetary value, it also has only minor industrial uses, is only conditionally suitable as production material and involves enormous extraction costs. Nevertheless, this relatively useless precious metal is one of the most valuable materials we know. But precisely because it is so difficult to mine, process and then process gold for socially relevant goods such as jewelry, it has a high intrinsic value.
The intrinsic value of a property, for example, is higher than the pure value of the costs of the materials used and the work required to build it. The intrinsic value of a building results primarily from the potential for future revenue generation. By renting, leasing or reselling a property, you can regularly earn income. In addition, factors such as the location of the property or the general demand for housing virtually increase the material value of the property. The intrinsic value of real estate per se and real estate as an asset class is therefore very high.
The intrinsic value of crude oil can be determined in a similar way. Pumping, transporting, refining and temporarily storing oil from the ground is technically extremely complex. At the same time, oil has enormous benefits. Almost every branch of industry depends on petroleum products in one form or another. As a car driver, you regularly rely on crude oil refined in the form of gasoline. The intrinsic value of oil is correspondingly high. And how could it happen that the price of oil not only crashed, but also completely collapsed?
Disastrous inelastic markets
The oil market is relatively inelastic because oil is an essential product that consumers depend on. This means that regardless of whether oil prices rise or fall, customers continue to buy it as usual. If the price of gas rises, you are annoyed as a car driver, but you have to bite the bullet and still refuel in order to move around and get to work. This inelasticity has now been the undoing of the oil price during the corona crisis. The economy produces less, car drivers stay at home, and the world simply needs less oil. However, producers of black gold cannot simply shut down their boreholes and stop production in the short term. So they keep producing and fighting price wars with their competitors. Before they even get rid of their oil, they undercut the competition and prefer to sell at a cheaper price. As a result, the price of oil is constantly tumbling downwards.
If speculators are now added to the stock exchanges, the conditions are in place for a “perfect storm”: Speculators buy the cheap oil and hold it — on paper — for some time in the hope of being able to make resale profits through rising prices. But since prices only knew the way down and the deadline was approaching, by which speculators would actually have had to buy their purchased oil barrels, they tried to get rid of their oil in blind panic. A nightmare, because it effectively meant that they paid their buyers to take the oil from them.
Asset-backed tokens as the future of money
The fall in the price of oil shows how great the risks are for investors and how quickly the intrinsic value of a good can be speculated away on the stock exchanges. In the future, blockchain technology could enable new and, above all, secure investments and investments. So-called asset-backed tokens are issued to investors by start-ups as part of an initial coin offering. When you invest in the company, you receive a token that is linked to a real tangible asset. Unlike cryptocurrencies such as Bitcoin, asset-backed tokens are linked to real values. As a start-up investor, you then hold small mini shares of real estate, gold or other assets.
Asset backed tokens thus eliminate the problem of the intrinsic worthlessness of cryptocurrencies. After all, currencies such as Bitcoin only have a purely speculative value. Bitcoins are particularly valuable when buying interest is high. If interested parties are prepared to pay huge amounts of “real” money in exchange for bitcoins, speculative bubbles form completely detached from the intrinsic worthlessness of the coins — similar to the Dutch tulip fever in the 17th century. Asset backed tokens, on the other hand, have a direct equivalent value and can be valued on the assets on which they are based.
