I'm a finance neophyte, so forgive the ignorance, but isn't it possible to buy and sell futures contracts without worrying about storage of the commodity? (Not all that many pork bellies stored in the Chicago Board of Trade)
It seems like that mechanism would allow for speculators to raise the price of oil, regardless of oil storage issues.
There are certainly some mixed messages out there. I've seen reports of a drop in available tankers because a portion of the fleet is being leased to store crude rather than for immediate shipping but it also seems to be the case that some of those tankers, including a significant % in Iran, are anchored because the oil in them can not be sold at a sufficient price (Iranian oil is not high quality and apparently there are better alternatives at current prices, at least the Chinese seem to think so).
Not a clear signal as far as I can tell but I am inclined to doubt that speculation is the bigger part of the story: among other problems I haven't heard of a plausible mechanism explaining how oil spot prices converge to the price of future contract rather than the usual causal scenario where supply/demand dictates spot price and futures converge to that.
I'm just happy that we are getting the experience of peak oil, while not
actually at peak oil yet. Means if we pay attention we have time to devise alternatives. But prices have to stay high enough for long enough to drive down SUV production and convince the stupids among us that this is not a fluke.
rich, I suggest Krugman's pieces (linked in post) on this issue - or Hamilton's paper. As Krugman noted:
One of the things I find puzzling about the whole oil market discussion is how complicated people seem to make it. They get all wrapped up in stuff about forward markets, hedge funds, etc., and lose sight of the fundamental fact that there are only two things you can do with the worlds oil production: consume it, or store it.
I'd add - don't produce is - leave it in the ground (a type of storage).
ac, prices only tell you the price has gone up. Are the prices detached from fundamentals (supply and demand)? Is there evidence of speculation? I think the answer is yes ... but I don't think it's as clear as for housing.
There a number of links in this post, because there has been so much written on this subject!
In my humble experience, oil producers tend to over estimate their reserves. Doing so attracts capital. Simplistically I would compare it to the definition of a gold mine. A hole in the ground with a lier on top.
I'll have to throw in with T Bone. He has been right so far. Fact is we won't know til it happens and that's down the road a piece. In the meantime, His Royal Majesty PRICE will be the default rationer. There will always be hydrocarbons, at a price.
Having said that, I have no clue if this is a bubble or not. In any event, it is a good thing if it forces the world to come to grips with our funding of such great world citizens as Russia, Venezuala, Saudi Arabia, Iran, Nigeria, etc. We couldn't have picked a worse bunch to send our money to.
During the tech stock bubble and the housing bubble, there always seemed to be "experts" who could explain why seemingly irrational price spikes were actually based on solid fundamentals.
Is there really a clear dividing line between fundamentals and speculation? If fundamentals drive the price of a thing up, then speculators always show up to cash in on the trend, and in so doing, they push the price higher, attracting more speculators. The question is not, "Is speculation going on?" (of course it is) but how much, and how big a factor in the current price? I don't think we have clarity.
It's also apparent that the price of petroleum is a lot more important than the price of tech stocks and the price of houses. If the supply of petroleum is really going to be seriously constrained, we need to react to that as a mortal threat to our civilization. One hopes we react by working together to conserve and find alternatives--not by fighting over the remaining oil in the ground.
At current prices no-one has any incentive to under-produce - so my "best" guess would be that the current oil market dynamic is a good old-fashioned supply crunch. The most recent leg up in the price has mirrored, somewhat uncannily, the increase in US refinery inputs from 14 million to 15 million barrels per day.
Mexican production? Plummeting due to a 200kbpd per year depletion rate at Cantarell.
North Sea production? Past peak - the UK is now becoming a net importer.
Russian production? After a decade of unbroken increases, production is plateauing.
Iraqi production? Increasing, but still lower than pre-invasion ( although since 2004, Iraq has come from nowhere to become the 6th biggest exporter to the US - whodathunkit? ).
US production? Continues its graceful glidepath downwards. In spite of a drilling boom over the past few years, c'n'c production is down 150 million barrels per year over the past 5-6 years. Whilst it's certainly true that demand has grown globally, it's one hell of a PR coup to have so effortlessly convinced the world that Chindia is the demand driver, rather than the US sucking up ever more imports.
Nigeria? Combination of MEND attacks and industrial action continues to knock output.
Iran? Probably could increase output over the medium term if only the US would stop threatening international oil companies such as Shell and Total with punitive action over proposed new investments in the Iranian hydrocarbon sector.
Mr. Market is telling the US to stop overconsuming.
The rise in oil prices means an enormous transfer of wealth out of the importers into the economies of the exporters. Couple that with the wealth destruction due to subprime and all its corollaries and it is difficult to be optimistic re the US economic outlook. That is to say the idea that the recession will be short and mild seems to have completely disappeared. I suspect even CR has given it up, or has he?
I'm not sure this is an either-or question. I think that there a number of things in the world today that are controlled by a sort of cartel-of convenience.. a de-facto monopoly by common but unspoken agreement of those who profit. Nobody would dispute that DeBeers or Microsoft are monopolies. It is less obvious with oil, but Texaco really does profit when Chavez does something threatening or stupid. Why not go along and not rock the boat? To undercut the future prices with spot price bargains is the same as throwing money away. Futures go up? Raise your spot price and profit from it.
rich- we have a fairly consistent commenter (definitely not a neophyte) who already uses rich as his handle, please spare the rest of us confusion and differentiate your handle. Thanks.
ac, prices only tell you the price has gone up. Are the prices detached from fundamentals (supply and demand)? Is there evidence of speculation? I think the answer is yes ... but I don't think it's as clear as for housing.
One thing I personally try to do is make an exercise out of intentionally taking a simple minded stance because I know from experience I have a tendency to over-complicate and over-analyze things. I've actually found this to be surprisingly useful, especially when markets are concerned -- I think people deliberately try to mislead you with the details.
In this case the guiding principle is "a pitcher is worth a thousand words". I've seen that "image" I linked to many times before in recent years. IMO it looks exactly like the dot.com stocks.
Whether or not the price is justified, the movement in oil prices suggests to me that the leveraged hoards have moved their eyes from mortgage bonds and domestic corporate stocks/bonds to commodities.
In other words, even if we are approaching peak oil, the near term driver here is credit being heaped into a market where it wasn't before.
This doesn't mean that oil prices won't legitimately be $200/bbl two years from now.
But I think it does mean that this market will be distorted by credit just like so many other markets.
Easy credit means anyone can buy huge amounts of something even if a) they don't need it and b) they can't pay for it.
I personally buy stuff that I can't pay for all the time with my margin account. I'm am routinely astounded by the amount of stuff a guy with my net worth and my salary can buy. The easy credit is still there.
When the financial industry invents new instruments to allow household pets and barnyard animals to buy stuff (with some guidance from their owners) that only a heavily capitalized company should be buying (because they can actually pay for it), you get this massive artificial, unsustainable demand that drives prices to a different universe.
That's been going on for at least a decade now.
The bankers are to afraid to stop it outright for what might happen.
Again, however, some of those people from the 30s may have be right in their assessment:
It is my opinion that current oil prices are experiencing a bubble. But I don't have any idea why they are experiencing a bubble. I have heard many knowledgable people comment that speculators are driving the market, but those people never adequatelly explain how speculators could drive such a large market. I have no answers, I just wanted to say that.
I have heard many knowledgable people comment that speculators are driving the market, but those people never adequatelly explain how speculators could drive such a large market.
I've read in recent articles that the commodity markets are actually comparatively quite small (presumably in comparison to the markets for equities).
I get the feeling that oil was underpriced and a run up was expected. The question is: have the current prices inflated beyond the rational rate, and how much larger the bubble will go, i.e., if it's not a bubble yet, it surely will keep going until it is.
It might be that oil is in the early stage of a bubble. Clearly, the oil markets are reflecting the belief that central banks will be successful in preventing a major global recession. They may also be reflecting a belief that there will ultimately be substantial speculation in oil. If both of these come to pass then there may very well be another huge runup in prices.
I don't know how much evidence there is for peak oil. The U.S. is a good ways on the the downslope of its Hubbard curve. The Saudis may be somewhere close to their Hubbard peak. But the disconcerting tendency to find significant hydrocarbon reserves in previously inaccessible places (e.g. offshore Brazil) or for previously uneconomical reserves to become more attractive as prices go up (Alberta tar sands) has gone on for an awful long time and shows no signs of abating (unless you confine you search to geologically mature provinces).
What is new is the recent ability of hundreds of millions of people in Asia to join the energy economy, and participate in global energy demand on a scale somewhere between, say, the Japanese and the Americans. How that will impact global energy markets is pretty unclear. Since the organization of Royal Dutch Shell in the early 20th century and the operation of the Rockefeller's Standard Oil monopoly, the big problem to be solved has been an excess of demand over supply.
Americans complain about the OPEC keeping the oil prices high. Actually, for the last quarter century OPEC has generally benefited from a lower oil price, which tended to diminish capex in the energy sector with the effect of protecting their monopoly position (a Saudi strategic imperative to protect the long term monopoly generally trumping any short term profit maximization desires of more populous but less central cartel members). What we are currently seeing in the oil price is what the market will do without the moderating efforts of the monopolist to protect their monopoly by shearing, rather than slaughtering, their customer sheep. It's not pretty, and Americans are left in the uncomfortable position of energy pigs at a luau (or, to keep the culture references straight, a source of mutton at an Arab banquet).
One thing missing from the debate is the speed at which prices have risen. I think that is indicative of a "piling in" strategy which is a good bubble catalyst. One thing's for sure: it's hard to separate speculative demand from real demand where futures are concerned, but increased prices are driving (no pun intended) fundamental changes in US car purchasing habits. That could decrease demand over a long period.
I was surprised Krugman chose over and over to revisit the oil price thing and make what looks like a cover, similar to:
"The alternative to speculation is that oil prices being driven by the fundamentals of supply and demand - with strong growth in global demand, even as demand weakens in the U.S. - and suppliers are struggling to keep up." -- CR
But clearly we have both the possibility of near peak or peak oil, and an unambiguous clear speculation.
My guess is the speculation raised the current price above supply and demand at least $30/barrel, and probably more.
I am surprised to see the repeated answer to folks point out the clear speculation in oil with all the speculation about peak oil. heh heh
I get the feeling that oil was underpriced and a run up was expected.
One problem I have with oil being "underpriced" is that at prices much in excess of where they are now, is that too much industry may become un-viable. Especially here in the US you might get substantial demand destruction that drives prices right back down or starts a (successful) flight to alternatives.
In other words, at a certain price oil turns to glue for the economic engine and just won't be used in large enough quantities to sustain that price.
One bright spot of an oil bubble might be that it scares us away from fossil fuels before they become a real crisis.
Re the inventory. Also why in the world do folks point out official inventories that do not include all the kinds of storage? It's curious.
Its expected and obvious that people have responded to rising prices by filling their car tanks more often, gradually raising the average tank fullness, a truly huge amount of inventory. China stockpiled for the Olympics, etc., etc.
This sounds like the housing bubble talk in 2004 and oil will follow that boom bust path. It will be a bubble. It will come down like a ton of crap. May take a couple of years but greed, leverage and stupidity always meet.
I remember I read at the Oil Drum site about hom much the Saudi was drilling new wells.
The investment they are making drilling new wells don't appear to me be investment at oil bellow the soil. To me, appear be an effort to mantain production to fall. Like Texas at the 70's... exactly the time Hubbert predicted they were to peak.
"Chris - You'll do anything to pump SW FL real estate. ;>"
Outsider | 05.26.08 - 2:45 pm |
Outsider,
I have mentioned the oil industry to the county before when they bitch about no good jobs in the area. Talk about stirring up a shitstorm...
But seriously,people need to look at Thunderhorse as a outstanding example of the tech. Drill wells underwater. Connect to a rig 40+ miles away. You never see anything from the coast. Pipe from there to refinerys On the south Gulf coast...
"The King Abdullah's comment reminded me of a what an old petroleum engineer working for the Queen (Shell Oil) told me in the mid 70's. There was an oversupply of oil production at that time and his first overseas job was prospecting for oil in Iran. The Shah let the contract; but made it clear that if Shell found any new oil fields, the company would immediately lose the contract. So Shell's PE's explored and found nothing.
Krugman sees normal oil inventories as a sign that there is no speculation. Not exactly.
My guess is that normal inventories are a sign that the oil companies are as baffled as everyone else. If they thought prices were going up because of fundamental market factors, they would in fact be stockpiling to sell later at a profit. If they thought there was a bubble, surely they would be drawing down inventories so as to avoid being stuck with a lot of expensive oil in a declining market.
If oil company analysts who deal with this on a daily basis, apparently aren't sure what is going on, what hope is there for the rest of us?
Spot prices, contract prices, future trading and roll over are all part of the oil trading complex today. If you focus on only certain part say the long end of the curve gives one a different view then spot or cotract pricing. 85 billion bls a year is really the issue, doubt that will decline very much even with a world wide ecomomic slowdown. The president of Shell at their conf call mentioned the cost per bl of oil from a new field was at least $80 at the well head!.
It seems the key question is: Are the oil exporting countries producing as much as possible - or are they investing by cutting oil extraction (and leaving the oil in the ground)?
Yup. Nothing doubles in price in one year, for no apparent reason, unless its supply and its demand are extremely inelastic... Or a speculative bubble is forming.
So, are the producers unable to increase production (i.e., facing inelastic supply), or unwilling to increase production (i.e., voluntarily leaving oil in the ground because futures prices have gone parabolic)? Both explanations are plausible. But where can we look to answer the question?
Is there really a clear dividing line between fundamentals and speculation?
Yes: Other People's Money, a.k.a. borrowing.
Real bubbles almost always happen when people buy assets on borrowed money based on extreme speculations about the value of such assets, and not so much sober understandings of the underlying cash flow.
Chris, I think the U.S. will allow more offshore drilling in the future, but the political will to do so won't develop until world oil supply starts to decrease.
Thunder Horse, though, doesn't strike me as the model when you consider it was almost wiped out by a hurricane in 2005. I still remember the photo of it listing badly. I gather it's been repaired since then.
Thunderhorse may be a great piece of technology, but it got flipped on its side by a nasty hurricane in 2005, and is currently producing nothing apart from huge, huge repair bills.
The best estimate is that it may start producing in late 2008, weather permitting.
Sportsfan hit the nail on the head, if you adjust the price of oil to account for the dollar's decline the increase is not as spectacular. It makes the case for a bubble much harder to argue as well. Here is a link to a good article in the WSJ concerning the linkage-http://online.wsj.com/article/SB121150088368615927.html?mod=opinion_main_commentaries
Thunderhorse may be a great piece of technology, but it got flipped on its side by a nasty hurricane in 2005, and is currently producing nothing apart from huge, huge repair bills.
dan | 05.26.08 - 3:05 pm | #
dan/sportsfan,
Yep,luckily it didn't tip. It actually wasn't the hurricane that did it in. A small 6" pipe that connected 2 ballast tanks was built without a valve. All the ballast water rushed to one side. Almost a monster ooooops. One of those topics that could go on a "Engineering disasters show" on Discovery.
BTW,the pics of it leaning are downright freaky...
As a expert in the fuel consumption market, the supply is meeting demand and thensome. Data is telling us most of the current pricing is due to speculation. Gas is currently available at the pump and Chrysler is even manipulating the commodities market with their $2.99/gal promotion.
Re inventories, my calculation for US is on the order of 3-5 days of oil imports could be extra gasoline levels in US autos. This is neither huge nor is it small. But in the world as a whole, autos being fuller has probably accounted for some of the extra inventory.
The EIA lists US inventory at 1.7B barrels. Compare to imports of about 10M barrels a day, for roughly a 170 days supply at typical rate of use, presuming the rate of use isn't actually declined significantly in the last few months. We know its likely down by 7% or more actually.
IMO it started out as dollar weakness, picked up steam due to supply constraints, and is now subject to considerable speculation.
Will the prices come down significantly? Even if you could nix the speculation it would still be over $100. However, the dollar isn't going to strengthen much and, well, the difference between supply and demand is negligible and likely to stay that way.
A lot of people disbelieve the Saudis, but their statements do make a plausible storyline. And I don't think their statements have ever really been disproved.
It's more we doubt them because they don't fit our suspicions.
I think that is something to be cautious about ... when you start to filter information based on your conclusions.
Low interest rates + liquidity injected into banks that has nowhere to go because most are insolvent.
You think you can sell financial shit to the world? The oil price is the giant middle finger you get in return.
Geopolitics? You want more war? How are you going to pay for it? Especially once formerly productive middle class people give you the finger and no longer provide tax revenue? and the lowlife's cry for government cheese?
I think the old adage: "high prices fix high prices and low prices fix low prices" is coming into play. Even when the bubble bursts, it is unlikely that oil will fall to levels of the past due to global demand and lack of investment. I wouldn't be surprised to see large increases in capital investment by the oil cos. going forward as they raise their target price levels.
hidden inventory in oil is huge. Many analysts are mistaking the published data as their reason to feel that oil inventory (published) is peaking..
expect spectacular crash in many commodities incl oil.
If there was so much oil why would the Saudis leave any in the ground in the first place. That is why talk of conservation if they think oil is infinite.
That said I think we have too many calling commodities a bubble. Why is not AAPL, GOOG, or RIMM in a bubble at p/es of 30-50. I mean these guys could fall off the face of the earth and tomorrow life could go o
In this case, the futures market provides the equivalent of storage.
That's not how it works. If speculation drives the futures price up to where it is greater than the current price + the cost of storage, then its profitable to store more oil rather than sell. This in turn drives up the spot price. But if more oil is not put into storage, then there is no effect on the spot price. Bottom line, if there isn't a rise in inventories, then speculation on futures does not explain the price rise.
Chris, the Sleipner platform loss is one of the reasons there will be a floor under the price of oil. The cost of finding and extracting new supplies is huge.
Sure, Petrobras had a big discovery recently, but there just haven't been many big discoveries in the last decade or so. As the Ghawars of the world continue to decline, it's gonna get tougher and tougher to replace the lost production.
Untill we are willing to duscuss the effects of the drop in LT capital gains tax rates and the non short term taxation of hedge funds and private equity. We can not adequately dicuss the speculative effects on investment whether it be housing, commodities or gold fish. Taxes have and do have an effect on investment decisions. Right now there is two much money on the table as reflective in the growth of M3.
This froth needs to be taken off the table so that sanity can be brought back into investment decision making. Not once has this forum ever dicussed the effect of taxes on investment.
Too any dollars are chasing to few goods. Thus inflation and speculation.
I think the Asian subsides are a big factor in the recent oil price run-up. I see a lot of irony there. 1. If China et al had not been subsidizing at the $70/barrel level, demand would have been reduced, and consequently, prices would not have gotten anywhere near where they are now. 2. China's subsidy of oil at the $70 level no doubt significantly increases oil use and world CO2 levels, but almost nobody is critical of China for this.
In 1990 oil was around $10.00 a barrel. Now it is $130.00
Does this really make sense? I doubt it. Either tremendous buying, stockpiling or speculation....or oil producers selling less.... or some combination.
If you were a major oil exporter having 1300% more in oil revenue (more or less) seems to be a problem for long term planning.
Is it possible that full production of oil occurs at the cheapest price and at the higher prices production has been scaled back?
Follow the link on the right to naked capitalism's "The Economist Has No Clothes" about economic navel gazing. Supply, demand, peak oil - is that all there is?
I have heard many knowledgable people comment that speculators are driving the market, but those people never adequatelly explain how speculators could drive such a large market.
I've read in recent articles that the commodity markets are actually comparatively quite small (presumably in comparison to the markets for equities).
Anyone know if this is right?
Maybe more importantly is that ICE + NMX is worth more than NYX.
Some posters here have predicted that when the Fed holds/raises rates, oil will drop. It will be intersting to see if that happens.
Outsider | 05.26.08 - 2:45 pm | #
The real issue is time. EVENTUALLY high oil prices will stimulate the development of alternatives. In the meantime though, none of them are ready. As for new finds, I'm not sure all of them together replace the decline in Cantarell, Mexico's largest field.
I'm seeing the term bubble thrown around much too much. It should be reserved for things that are WAY beyond fundamental value. Tulips? Sure. pets.com? Sure, since its fundamental value was zip. Houses? Not so sure, since even in the most over-priced areas they weren't more than 50% over-valued and much less than that elsewhere. Oil? If the fundamental value is near $100, is $130 a bubble? Probably not.
The main thing is that while you could always float more shares of dot.coms and build more houses, finding oil isn't so easy.
U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Federal Reserve Board Governor Ben S. Bernanke, Deflation: Making Sure "It" Doesn't Happen Here
Nemo, thanks for the link. That is quite illuminating testimony, indeed.
I'm still of two minds on what the real cause of the oil/food price runup is.
On the one hand, there can be no doubt that investors are chasing the hot money, aided and abetted by modern innovations like commodities ETFs. There is a veritable alphabet soup of funds now for the retail investor to play in; DBA, DBC, USO, MOO, the list goes on and on. Twenty years ago the only way to ride the wave was to get a license to trade in the pits.
But on the other hand, at least in theory the futures markets and the cash markets should converge to reality at some point. If not, the arbitrageurs should step in and make a killing off the imbalances. And the fact is, speculators are just responding to bad monetary policy by the Fed. Pension funds looking for higher returns face limited options in stocks and bonds.
If Bernanke had the guts to keep rates higher, oil would be trading under $100 a barrel and we'd be talking about something else today, perhaps the Dow at 10000 instead of 12400.
What Krugman can not reveal nor say:
The oil futures market is being used to drive Republicans from government.
The rest of the discussion washes away as mere bubble talk, just like NAR on home prices.
I expect that oil will break at that time that someone has sufficient clarity about who will be the President (which party and which candidate does not matter). 'Sufficient clarity' may well equal 'been long long enough, let's bail out with our profits'.
They will be the first to go short on oil.
Confirmation will come about when significant players reveal their wonderful profits which they will need to absolutely crow about. They will be so proud of themselves that concealing their manipulations will be impossible.
I expect oil to be under $90 by June 2009 on its way to $31 by April 2010.
In 1990 oil was around $10.00 a barrel. Now it is $130.00
Does this really make sense? I doubt it.
Sure it does. Oil is energy and energy is a consumer good.
How much is it worth to you to fly to NJ to Grandma's? To drive to work instead of taking the bus?
Oil was underpriced given the good it provides and the lack of subsitution. Now that supply is tracking demand (if that) suppliers are free to raise their prices to the point of demand destruction.
The reason Gold prices closely track oil prices is because the largest single $$ factor in obtaining Gold out of the ground is the cost of the Diesel fuel to mine and process it.
The declining dollar is only responsible for less than 25% of the rise in oil prices during the past 8 years.
One thing I personally try to do is make an exercise out of intentionally taking a simple minded stance because I know from experience I have a tendency to over-complicate and over-analyze things.<
Good point ac .... Agree with the conclusion also.
We are back to the 80's when commodities are becoming a 'must have' asset class.
So if this is where the hot money is flowing, it's only logical that it is having an impact on prices.
tj-Then your LA condo complex may well have been in a bubble. For the "average" house that may have been at most 20-30% above fudamental values based on price/income at the absolute paek moment, I don't know if the term bubble is really accurate.
By the way, I agree with you on oil (will wonders never cease!). Yes it's up 13x, but $10/barrel was WAY below its fundamental value, based on extraction costs everywhere except perhaps Saudi Arabia.
By the way, we just did a 500 mile round trip. Sure gas cost $60-70, but the cheapest alternative (bus or train) for 3 people would have cost $300 and taken twice as long. Flying-probably $ 1500 and we might not have saved more than 1 hour each way.
I don't believe that people are reacting to rising prices by keeping their tanks more full. Lately, when I've filled up, the previous customer's total has, more often than not, been a nice round number indicative of someone deciding to spend $x rather than fill the tank. And hey, years ago I thought to myself "buying $x at a time rather than filling the tank would be dollar cost averaging, and should save me money" but life's too short even for a cheap bastard such as myself to spend more time pumping gas than necessary. The class of people who used to fill only partway because they had more time than money, but who are now micro-speculators (and whose literal carrying cost includes reduced mileage) is vanishingly small.
Leaving it in the ground? I doubt it. In countries without reliable, public, audited inventory numbers, there's no way of getting credit for your decision (but you always get credit for a barrel pumped, sold, spent, and memorialized at a ribbon cutting ceremony). Plus your subjects are poor and uneducated, and economists say oil wealth is a curse rather than a blessing.
Not that it has any bearing on whether we're actually in a bubble, but does affect people's opinions: Admitting that oil will always remain above $100 is admitting that a large percentage of America's municipal planning and infrastructure doesn't make sense and is worthless, that bad decisions were made (like maybe your last choice of vehicle and house location), and that there will be a long period of painful economic dislocation, with a lot of your hard-earned money going to some undeserving, unamerican person somewhere else, and it'll be he that's driving the Escalade and filling it to the brim. Much easier to call it a temporary, speculative blip that we'll have to get through, a bit of short term pain to endure before we can get back to our exurban, king-of-the-road lifestyle.
I'm more worried about the effects of having to restructure the entire economy, getting off the "sprawlconomy" that relied on cheap oil and figuring out how to create economic value that doesn't depend on asset bubbles. That is what we need to worry about, not just where the latest bubble is, but how to break the bubble economy cycle and produce real value once again.
The speculation, if there is any going on, is the slosh of too much money looking for higher return, and nothing of real future value to invest in. That is our current true crisis...
All the other bubbles I can think of were essentially financial instruments.
South Seas bubble was about monetizing government debt.
Tulipmania, well, self-explanatory.
More recently, Nasbubble and China were about pieces of paper representing dreams of avarice.
Nikkei was about the rise of offshore manufacturing and commercial real estate in an island nation.
1970s oil was about deliberately withholding supply. Everyone knew the taps could be turned on again in an instant. That's unclear here.
70s gold was about mistrust of the currency after Nixon left the gold standard. Really, oil was about the same thing.
If you look at the magnitude of these moves, they work out to be around a factor of 20, plus or minus. South Seas was almost precisely a factor of 20. Gold ran from 35 - 800, Nasdaq was 300 to 5100, factor of about 17. China was, again, almost exactly a factor of 20, running from 300 to about 6000.
It would imply that oil might be expected to run to about 250, picking my starting point as the fall, 1999 Economist magazine cover "A World Awash in Oil."
But I don't know that we've ever seen a bubble in something the world relies upon for its continued existence. The closest analog I can think of is the Peruvian sardine crisis (I can't even remember whether that was in the 70s or the early 80s) that led to fertilizer shortages.
My inclination, seeing things like the CNBC "Special Report: America's Oil Crisis" and the latest BenSteinery from Friday, plus looking at the ag and basic materials charts, is to say that we'd see a goodly pullback here. But I'd be a buyer in the 90s, with the expectation that we'd see something like 250 crude at the end of the decade trade.
The declining dollar is only responsible for less than 25% of the rise in oil prices during the past 8 years.
JD, I don't know about that. It looks like 50% or more based on a comparison to the euro.
But even the link posted by Interesting Times shows the recent increase in WTI relative to gold.
OMG, it now takes 4.5 grams to get a barrel of WTI. It must be a bubble. Where o' where did the good old days go when a troy ounce could get you a full 10 barrels or more?
As to the cost of energy to produce gold, while that is certainly a factor, virtually all the gold ever produced is still above ground since, unlike oil, it is not consumed in the classic sense. Yet all that gold still doesn't buy as much oil as it used to buy.
The easily pumped, light, sweet crude is what gets pumped first. That 'peaked' in 1999. Right now, the oil that's out there is harder to find and harder to refine. The low-hanging fruit got picked, and it is harder to get to the other stuff. Lately, oil production has been basically flat, even including weird stuff like tar sands that no oil man would touch if there was better stuff out there.
Now add the fact that oil-extracting countries are using more of their own stuff each year, and exports are falling. Sure, some old wells are still extracting, and the owners are making money hand over fist. But at $130 plus a barrel, pretty much everyone is pumping flat out. Ten thousand barrels is worth 1.3 million! It's not credible to think that, to those who the dollar is god and how to get it their religion, are going to save even one drop. Make the money now!
theoildrum.com GraphOilogy check out this guy's 'Export Land Model,' which, unlike the Wright Model B, actually makes testable (and proven) predictions.
First, the price for oil/gas has never reflected the true cost (externalities) for health impacts, environmental, etc.
Second, did I miss it, or is it true that no one here mentions climate change/warming. Can there be a legitimate discussion around oil/gas without factoring in the issue of climate warming?
Third, and related to both one and two above, the problem is too much oil/gas production/consumption. Thus, drilling more oil is NOT the solution. The solution is about end use, and a great deal more attention to conservation, reduced consumption. But of course a global economy based on continued need to grow and expand cannot provide for such a solution.
And lastly, as for speculation, of course speculation has an effect on current price increases. I could get up first thing tomorrow morning, turn on the computer, and make an "investment" (bet) in the price of oil going up within 1/2 minute of the stock market opening. That it is happening with such volume does it effect price. In fact, if I did this, I'd be betting on prices going up, and it would have absolute no bearing on storage of oil, in the ground or above the ground.
Lets keep in mind that bubbles (and add to that a declining dollar, lower interest rates, the price of gold, etc., etc.,) is a symptom, not a cause. When things reverse and the movement is from quantity to quality, then the bubble bursts and everyone attributes the consequences to bubble formation, forgetting to explain, systemically, why bubbles repeatedly form in the first place.
but the free boob massages surely are worth something?
Troy | 05.26.08 - 6:13 pm | #
My goodness, what airline do you fly?
zackattack-I tend to agree with you. There will be corrections along the way (probably one very soon), but barring the totally unexpected discovery of another monster field like Ghawar, the long-term trend is up. Until the perpetual motion machine in my basement is ready (news at 11).
Someone asked up top about the futures contract. I've tracked the open interest of the NYMEX crude oil futures contracts open interest since last September and watched the rise and fall. Keep in mind, that this contract delivers to Cushing when assigned and from what I've read Cushing can only handle 40M bbl/month. (I also posted this in comments at TBP.)
So what does it mean? Lots of people will point to this as sure evidence of speculation. I've tried to approach it from a few points - hedgers, speculators, manipulators. There's also the idea that extra supply (of contracts) should smooth out price volatility and vice-versa but there doesn't seem to be all that much evidence of that.
I've been trying to make sense of this for awhile. Any thoughts?
Troy writes:
"The thought that rich people are using the oil market to drive themselves out of power is . . . really really stupid."
Troy | 05.26.08 - 4:56 pm | #
Thanks. I got a good laugh out of your comment.
Denial, wishful thinking, avoidance, procrastination and compartamentalized thinking: these are people's first line of defense against facing the consequences of something as unpleasant as the end of cheap energy.
Peak Oil is a fact. Petroleum is a resourse of finite quantity. With the lead times required to find and adjust to different ways of doing things, does it really matter if peak oil is upon us today or will visit us in 20 years? Let's just hope to God that it isn't upon us today.
And when it comes to energy issues, could we have three bigger morons running for president?
Reducing production to increase pricing is a cartel problem, not a speculation problem, but hey, let's just classify producers as "speculators," the better to inflame the public with the charge that "speculators" are making a killing.
JD, I don't know about that. It looks like 50% or more based on a comparison to the euro.
Using your posted numbers in this thread (primarily because I am too lazy to confirm them):
2001 2008
$.85/E $1.55/E a 82% change
$22/bbl $132/bbl a $110 increase in oil price/bbl
$22*182%= $40/bbl that is an $18/bbl increase due to the decline in the $$
$18/$110= 16.3%, percentage of increase in oil prices due to decline in the dollar
Sportsfan writes " "As to the cost of energy to produce gold, while that is certainly a factor, virtually all the gold ever produced is still above ground since, unlike oil, it is not consumed in the classic sense. Yet all that gold still doesn't buy as much oil as it used to buy.""
If we still have all the gold but not all the oil, didn't you answer your own speculation? There is much less oil, but all the gold is still there....
"There will be corrections along the way (probably one very soon), but barring the totally unexpected discovery of another monster field like Ghawar, the long-term trend is up."
We burn oil for energy. At $100 a barrel oil energy is very very expensive to all sorts of other energy. While the process will be slow the end effect will be to substiture other forms of energy for fossil fuel energy.
It would take about 1000 gigawatts of nuke power or about 700 new plants to easily replace the energy content of US energy consumption from oil. Cost would be about $1 trillion. No more political crap, no more global warming. 8% of GDP for one year. 1.5 times the annual trade deficit.
We are setting up for another great long term bull market in non fossil fuel energy, which is going to be the electrification of the planet. When oil makes its specultive peak which could be tomorrow a week from now or a year from now ( or it could have been last week) it will NEVER on a relative basis ever get there again. Think whale oil.
Although it's fun to say that $x/barrel of the price is due to speculation, the only way to verify the number is to find an alternate universe which is exactly the same, but no speculation occurred. Not an easy task.
I'd argue that the most persuasive argument of the "no bubble" proponents is this: there's no inventory buildup even after the price run up. Therefore the markets are in balance and just doing their job to balance supply and demand. And I would have to agree that this is what the data say (whether the data are wrong is another story).
However, the oil prices people talk about are usually futures prices. And the name is important - it is the price of future delivery. A lot of the recent runup will not be reflect the actual prices paid by customers. In the OECD countries, gasoline prices have not risen as much as crude; and in the non-OECD countries, governments have generally not yet raised fixed energy prices.
Thus the risk to oil longs is that at some point in time, crude prices will overshoot too high and the demand destruction may not be apparent in inventory builds until it is too late.
Is the oil volume that can be carried by tankers material as compared with other containers used for holding oil inventory?
Do published inventory estimates include this capacity? Might a tight supply of oil tanker available for lease point to another component of oil inventory that could be used to "squeeze" futures market participants who bet on lower prices?
So, when California was going through its energy crisis, many of the same arguments are the ones that are being used today to explain the run-up of oil: increased demand by Silicon Valley, environmental regulations that prevented needed generators from being built, etc. Yet, by the time the smoke cleared, the answer was that Enron had been manipulating the prices all along.
As someone ignorant in the actual mechanism of the sale and delivery of oil, can someone address the following situation for me?
Let's say oil today is 135/bbl, and a speculator purchases a July future for 140/bbl. So, the speculator would get busted would be if the price was below 140, because the speculator would either have to store the oil or sell it for a loss. However, what it was a petro-SWF that bought the contract? It doesn't need to hoard or store the oil, waiting for the higher price. When it sells the 140 oil at a "loss" at 135, it's still making money because the sale price is much higher the cost of production. It would seem the only way to bust the SWF-speculator would be if supply increased more than that coverable by the SWFs; with OPEC refusing to increase supply and new reserves taking years to tap, this scenario seems unlikely in the short-term.
With an estimated 3 trillion in reserves in the petro-SWF, and another 2 trillion in China, it seems that the SWF's could re-create the 1970s without screwing with the supply. Putin must be laughing at the Reagan boast that it was the superiority of American capitalism that bankrupted the Soviet Union.
"Let's say oil today is 135/bbl, and a speculator purchases a July future for 140/bbl. So, the speculator would get busted would be if the price was below 140, because the speculator would either have to store the oil or sell it for a loss. However, what it was a petro-SWF that bought the contract? It doesn't need to hoard or store the oil, waiting for the higher price. When it sells the 140 oil at a "loss" at 135, it's still making money because the sale price is much higher the cost of production. It would seem the only way to bust the SWF-speculator would be if supply increased more than that coverable by the SWFs;"
It is worse than that in the commodity future market. If you are holding the July contract, it will stop trading in mid-June and you need to be prepared to take delivery of the crude. There is a schedule every month after the front month contract expire to let you counter party know where to ship the oil and all the detail arrangement of shipping oil around. This is the part that is significantly different than buy stock option. As the oil contract expire every months, all the oil represented by the contracts get delivered to someone. They are either refinaries (the only user of the crude oil.. Who else use crude oil?) or speculators. And if speculation is the reason for all the high oil price, someone is holding all the excess oil in storage each month in order to drive up the price. Getting oil storage is not an easy or cheap proposition. There are only so many permanent storage facility around the world that are not belong to refinaries or oil producing companies. The only practical way is to rent some oil tankers to store the oil. Given the going rate of tanker, one can go broke easy by holding oil in VLCC and wait for oil price to go up. This is one reason that speculator in commodity market tend to get killed by the phsical users (your lovely oil producing companies and refinaries in oil market who physical produce or use the oil). All the refinaries need to do is wait until each month contract getting closer and closer to stop trading and bid what price they want for the oil. For the speculator who is holding the contract, they have to decide if they want to go through the hassel and expense of getting some broker to arrange for the oil delivery and rent some VLCC to store the oil or sell the contract at the price that refinaries want. And next month our speculator will have to start selling the oil contract in the future market and pay for the delivery of the oil etc to avoid more storage cost.
The point on all this discussion is that (a) it is a very costly propositon to "hoard" oil. So oil must raise a lot each month to justify doing that (b) it is very easy to detect oil "hoarding" if someone is storing large amount of oil somewhere to drive up the price. (c) refinaries are the buyer of oil and their appetitie of buying oil depend on the gasoline and distillate demand. If the demand is not there or the crack spread (the price difference between the end product (gasoline etc.) and the crude oil) is not good enough, refinaries will slow down or stop the buying of crude from the open market. And this is the reason CR mention about the relationship between storage and speculation. No storage because of "hoarding" mean no speculation.
As to whether oil producing naton "hoard" the oil by leaving it in the ground. I think it is an academic discussion. It is not how much oil is in the ground, it is how fast we can draw them out of the ground and different type of oil. i.e. Saudi can have 2MM BBl of spare capacity (and do we really know that? Saudi claimed 2MM bbl/b of spare capacity for the last 4-5 years and no one call their bluff until now), but is it the type of oil the the world refinaries fleet can use (they are sour/heavy oil not the WTI variety) and they may take 9-12 months to deliver 300Kbbl a day..
(cont.) they may take 9-12 months to deliver an additional 300Kbbl a day. But by then the depletion of existing field and natural increase in demand may already eat up the addtional 300Kbbl new supply...
The only real cure of the oil price right now looks to be a worldwide recession that will slow down the oil demand in the short term and in the longer term conservation and some form of alternate energy (coal, nuclear, electric car etc.. NG, solar, wind, ethanol are too small to make any difference)
CR-
"Speculation requires storage - something that was obvious in the housing bubble, but isn't so obvious for oil."
When you mention storage in the housing case, are you referring to the practice of holding/hoarding for the purpose of waiting for a higher offer? In my experience, the entire process of land development is speculative. And hoarding by existing raw land owners is well established practice and expected on the buy side.
I'm not involved in the finished product side (the home itself), so the flipper/ "retail speculator" phenomenon was remote to me. Did you mean the ad hoc auctions where there would be lines to buy at new developments and daily escalations in contract prices for new homes? IOW- Hoarding by builders?
Could you please expand your thoughts? Specifically, how was there "storage" in housing in your view?
Those Iranian tanker contracts are interesting - actually, I think they are a sort of insurance policy, on several levels -
A nation like China (or to a lesser extent, India) could be paid in black gold for whatever help is rendered in a crisis. It may be interesting to speculate just how much help 20 million barrels worth of oil buys at this time.
The tankers could be destroyed in a way that ensures maximum problems for both Iran's neighbors, and the oil importers of the world. For example, such sunk tankers could not only block the Straights of Hormuz, the spilled and leaking oil could be set afire, thus keeping salvage work from being performed for an extended period of time.
Though related in spirit to 1., the tankers represent truly liquid assets beyond the reach of American economic sanctions, much like South African gold in the apartheid era. The Iranians could buy a lot on a barter basis, without the West's financial system getting any cut at all. And as the price rises, the Iranians are simply watching their equity grow.
And on a related level - that much oil placed on the market at one time could produce some fascinatingly unpredictable results - and when practicing asymetric warfare, unpredictability is a major factor in succeeding.
The Iranians have a real sense of humor - getting Bush, Cheney, and Rice (oilman, oil services man, oil tanker namesake) to destroy a day's worth of American oil consumption in a few minutes of bombing would make a fine joke. And would likely double or treble the value of Iran's oil reserves, thus making sure that the joke is on us. Thus proving the point about the Iranians' sense of humor.
Iran has been preparing the Straits as a killing ground for probably 30 years now.
Currently, it's sown with Chinese-made rocket-propelled antiship mines. You're all aware of the hundreds of Chinese-made Silkworm missiles, but they may also have as many as 300 SS-N-22 Sunburn missiles in emplacements in the rugged hills ringing Bandar Abbas.
If you want to get a little concerned, go google "SS-N-22 Iran."
Consider that they don't have to hit a US ship, just threaten tanker traffic.
They don't have to win a battle, in any conventional sense, they just have to keep the pressure up for 30, 60 days until $8 gasoline does its handiwork.
No, there's no upside to initiating hostilities with Iran.
Oil is a deep, dirty cyclical. It's still subject to the business cycle. However, I expect higher lows and higher highs for the rest of our natural lives, until a scalable replacement is found.
It's worth noting that Jimmy Carter has just intentionally slipped out that Israel has 150 nukes in a bookfair event in the UK. The UK media (BBC) caried out this story at once, but media in Poland and the US (more J+) are silent.
Later the Carter story was removed from the RSS feed and first page of the BBC pretty quick.
My speculation is that this is a attempt of Carter to get some media attention against the plan of a US+Israel joint strike on Iran. The oil price is telling enough though.
So everbody is ABSOLUTELY sure there is mimimal/no oil off the west coast of Florida?
There may be some--but the chances of a Ghawar (or even an East Texas) are roughly zip.
How about the deepwater gulf(Thunderhorse is just the beginning)?
Ditto. Oh, and realize that (a) the media estimates for Thunderhorse are highly "best case"; and (b) that it lies in a structure that has been known since the 1930s.
How about all of the continental shelfs of of both coasts?
Lots more exploration has taken place on the shelves than the media recognizes. Most are not promising. Again, there's no Ghawar hiding there.
The reason that China, Vietnam, and the Phillipines are quarreling over the Spratly Islands is not that these flyspecks of land would be great places for seaside condos. They're about the last place you could hide a supergiant field.
ANWR?
Maybe (maybe!) as much as 30 billion bbls, which would help but is hardly a ticket to energy independence.
And maybe zero. The Beaufort Sea back in the early 80s was supposed to be the next Prudhoe Bay, and as close to a sure thing as you find in this business.
The structure contained brine instead of oil. Most expensive dry hole in history (~$2 billion in 1982 dollars.)
Interior US(deepwells)?
Zero. You don't find oil by going deeper! The Swedes found that out (expensively) at Siljan.
How about some of the newest deepwater drill ships in 7k plus feet of water?
Depends on the rock they're drilling into. Most of the deep sea is not oil prospective. Only that around the periphery of the continents.
Realize too that you need to find big reservoirs with that whizbang technology. You can bring in 5 million bbl in the Overthrust or the Austin Chalk and make money. 5 million bbl in 7K feet of water is just hazmat.
When we have drilled exploration wells in all the areas and NO oil is found then I will start to worry.
Right now the US consumes ~7.5 billion bbl a year. That's more than twice what we ever produced, and that was back in 1970.
More. Than. Twice.
There is simply no prospect of producing that much oil from domestic sources. If you're not worried, you're simply not paying attention.
Folks, geologists have been looking for oil for something over a century now. An enormous amount has been learned, and we do have a very good idea of the sorts of geologic settings that host oil. If you want to believe that the professionals don't know what they're doing, and want to hare off after crackpottery like abiogenic oil or whatever--well, go spud some hole and show us how it's done. It's your money.
But you're going to get a very expensive reality check.
Several people have commented here on the speed of the price increase being a sign of a bubble. I remind everyone that a large chunk of that price increase is USD related... if you plot the price of oil in Euros it is much less bubblicious (although the recent run to 135 is still pretty crazy.)
Chris asks: "are you SURE they won't find oil in Florida/ANWR/under the White House lawn". My answer would be, yes, they'll probably find some oil in those places and develop the tech to extract, but I am also sure that existing fields will continue to decline.
I think the "energy accounting" crowd is misguided, but we should spare a thought to EROEI when thinking about future development. If oil goes to $300, that does wonders for the revenues of your oil project... what does it do to your costs? If it takes a barrel of oil to get a barrel of oil, you're toast (construction of platforms, ferrying workers around, etc), and the complexity of these new projects may someday approach that.
Commodities including oil ARE in a speculative-driven bubble very similar to what happened in the housing market. It's funny how some who claimed to have seen the latter bubble are having problems seeing the former.
For confirmation, simply stop by the CBOT and ask some commodity floor traders. They're pretty open about how most of the price rises we've seen are NOT tied to fundamentals.
When the debt markets froze and Bernanke started cutting rates, hot money flowed into this area looking for yield. With debt markets still not back to normal, this area is flush with excess investment money. Many producers and end users have been reluctant to use futures because of the increased price, risk, and volatility. There's always been speculators playing futures, but they've literally hijacked them. They turned what was primarily a risk management tool into speculative investment.
The price of oil is going up. The price of oil IN DOLLARS is going up much more rapidly than in other currencies. The jacked up supply of dollars is what's causing most of the sticker shock at the pump.
The problem with equating "leaving it in the ground" with "storage" is that it can take years for oil to come out of such storage. In the meantime, existing oil fields will continue to deplete and global demand will continue to grow (according to the latest estimates from the EIA, global demand is expected to grow at twice the rate of supply this year, even with a small decline in the U.S.).
The bottom line, as far as I see it, is that oil prices may be lower than they are today in, say, 10 years. But they'll almost assuredly be much higher in 5.
"And on a related level - that much oil placed on the market at one time could produce some fascinatingly unpredictable results - and when practicing asymetric warfare, unpredictability is a major factor in succeeding"
heh heh, I wouldn't worry about Iran wanting to dump these oil onto the market. It has the same problem as the new Saudi oil, it is sour and heavy. There are only a subset of refinaries that can process those oil.. So if Iran bring those tankered oil into the market, it will destroy the sour/heavy market but the WTI and Brent of the world is going to continue to march on.. As of now the Mexica Maya oil discount is already at $22, an all time hight. I think the point is that there are multiple oil segment and the headline only reflect the WTI and Brent oil which are light/sweet oil and all the "new discovery" are really the sour/heavy variety which a lot less refinaries can process. That make the supply/demand dynmic very different than if we were to have only one grade of crude oil...
"When the debt markets froze and Bernanke started cutting rates, hot money flowed into this area looking for yield. With debt markets still not back to normal, this area is flush with excess investment money. Many producers and end users have been reluctant to use futures because of the increased price, risk, and volatility"
I don't think I understand the comment at all.. As a producer, you eithter has a long term contract with refinanries and deliver the oil at a perdetermined price (or follow some kind of index) or sell the excess oil in the future and spot market. That is the function of the commodity market. So why would a producer avoid the market because of more speculator???? They certainly will benefit from the high price. How would they sell their excessive oil production (those that is above exisiting contract) otherwise? And how would speculator force refinaries pay higher price than end consumer is willing to pay (as reflect in loss of crack spread)? When refinaries is not willing to pay, speculator need to store the oil somewhere. Did anyone come up where those oil are stored outside of what Iran do? I think you are applying the stock trading mania scneario to commodities.. It works mostly but you need to figure out the storage problem when stock don't have. And storage for oil in a massive scale is such a hugh issue that the market should easily track it. So far there is no wall of oil store somewhere.. So what magic did speculator do to drive price higher???
In May 2007, the work of Stuart Staniford and Euan Mearns culminated in a new and unprecedented assessment of oil reserves in Ghawar, the world's largest oil field. This article (also written in May 2007 and well overdue for TOD posting) combines their assessment with additional information sources, to produce a revised estimate of reserves in Saudi Arabia and the other OPEC countries.
"isn't any "easily" with respect to 700 nuclear plants - in materials, construction or operations"
Absolutely. Even if all political constraints on nukes were removed, 1,000 plants would be 50/year for 20 years. And other countries are building them too. Wouldn't uranium become limiting at some point? How much is there in the world?
Absent the political constraints and the supply of uranium, we haven't been training nuclear engineers in this country - the bottlenecks that would emerge as the entire planet strained to ramp up would beggar the bubbles we see in materials commodity prices we see today.
There. are. no. easy. answers. There ARE answers, it is doable but the idea that is airily asserted that we will do this all easily is a grave disservice.
Worker shortages are an issue for oil as well. They are a major factor slowing tar sands development in Alberta. Now, admittedly, the 50 below winters and blackfly-plagued summers don't help in attracting workers, but very high paying positions are going begging.
Fact is, this is about oil speculation. How else could oil go from $60 to $140 in less than a year? Lets not be niave, folks. This goes back to greed.
And the more GREED we see in this country, the more government regulation we end up needing. Just look at the bank scandle under Reagan and Sr Bush. The speculation of oil and the mortgage fiasco now is a perfect example of the problems caused by this crazy dream of "easy money" in the so-called "free market" of commodity trading. So many "investors" and get-rich-schemes and not enough hard-working Americans making money the old-fashioned way (ie hard work), if you ask me. Why dont these "organizations" that invest in mortgage backed securities and now commodities, as well as all the banks, Enrons execs and other yo-yo's go back to school and get real jobs that require real work and build something that adds value, rather than moving money around on a computer screen.
If you ask me the problem is that all the people that had over-invested in realestate began to shift their dollars into commodities, in a panic for returns on investment.
The relationship of the current price of gas and oil is this: Everyone in the food chain, except the consumer, makes a profit when oil goes up....OPEC, producers, refiners, sellers, etc. Period. The wild card is demand. That isnt going away and increasing, but can slow, and will as oil increases in price. As soon as that levels off (as its seems to have), there is no place for investors to run to for returns, so they will sell to make their money. As they do, refiners will ease back buying oil again, and supply increases, and prices go down and consumers return. But guess what....because investors "have" in contrcats, 70% of the world's oil on paper, they now control the price folks. Refiners may be in control of how oil is supplied, and producers how much is pumped out of teh ground and delivered, as long as people HAVE to buy oil to survive in this world, the price will be high from here on.....UNTIL, some regulation steps in and shuts off the speculation valve, and move the buy/sell back to the refiners and oil companies. Thats what the Saudi's are trying to tell Bush's cronies, but his Energy Sect cant seem to figure that out.
Of course it has a lot to do with speculation. in January 2006, the Bush Administration's CFTC permitted the Intercontinental Exchange (ICE), the leading operator of electronic energy exchanges, to use its trading terminals in the United States for the trading of US crude oil futures on the ICE futures exchange in London.
Leading the way to ENRON type speculation. A glance at the price for Brent and WTI futures prices since January 2006 indicates the remarkable correlation between skyrocketing oil prices and the unregulated trade in ICE oil futures in US markets. Keep in mind that ICE Futures in London is owned and controled by a USA company based in Atlanta Georgia.
Oil prices aren't an obvious bubble like housing or tech stocks.
Hmmmm...
I'm a finance neophyte, so forgive the ignorance, but isn't it possible to buy and sell futures contracts without worrying about storage of the commodity? (Not all that many pork bellies stored in the Chicago Board of Trade)
It seems like that mechanism would allow for speculators to raise the price of oil, regardless of oil storage issues.
Thanks...rich
IMO, at over $130/barrel, the oil producting countries aren't leaving the black stuff in the ground.
There are certainly some mixed messages out there. I've seen reports of a drop in available tankers because a portion of the fleet is being leased to store crude rather than for immediate shipping but it also seems to be the case that some of those tankers, including a significant % in Iran, are anchored because the oil in them can not be sold at a sufficient price (Iranian oil is not high quality and apparently there are better alternatives at current prices, at least the Chinese seem to think so).
Not a clear signal as far as I can tell but I am inclined to doubt that speculation is the bigger part of the story: among other problems I haven't heard of a plausible mechanism explaining how oil spot prices converge to the price of future contract rather than the usual causal scenario where supply/demand dictates spot price and futures converge to that.
"Speculation requires storage..."
In this case, the futures market provides the equivalent of storage.
Gosh, first?
keep it in your . . ground
Not first.
I'm just happy that we are getting the experience of peak oil, while not
actually at peak oil yet. Means if we pay attention we have time to devise alternatives. But prices have to stay high enough for long enough to drive down SUV production and convince the stupids among us that this is not a fluke.
rich, I suggest Krugman's pieces (linked in post) on this issue - or Hamilton's paper. As Krugman noted:
One of the things I find puzzling about the whole oil market discussion is how complicated people seem to make it. They get all wrapped up in stuff about forward markets, hedge funds, etc., and lose sight of the fundamental fact that there are only two things you can do with the worlds oil production: consume it, or store it.
I'd add - don't produce is - leave it in the ground (a type of storage).
ac, prices only tell you the price has gone up. Are the prices detached from fundamentals (supply and demand)? Is there evidence of speculation? I think the answer is yes ... but I don't think it's as clear as for housing.
There a number of links in this post, because there has been so much written on this subject!
Best to all.
Best to all.
Errata: According to John Mauldin it is the Indian refiners who currently appear uninterested in Iranian oil.
In my humble experience, oil producers tend to over estimate their reserves. Doing so attracts capital. Simplistically I would compare it to the definition of a gold mine. A hole in the ground with a lier on top.
I'll have to throw in with T Bone. He has been right so far. Fact is we won't know til it happens and that's down the road a piece. In the meantime, His Royal Majesty PRICE will be the default rationer. There will always be hydrocarbons, at a price.
Nothing ever looks like a bubble until it bursts!
Having said that, I have no clue if this is a bubble or not. In any event, it is a good thing if it forces the world to come to grips with our funding of such great world citizens as Russia, Venezuala, Saudi Arabia, Iran, Nigeria, etc. We couldn't have picked a worse bunch to send our money to.
Chickens - they are a roosti
Thomas Friedman of the NYTimes has long written about Petropolitics and how it is bad for freedom.
Foreign Policy: Error
During the tech stock bubble and the housing bubble, there always seemed to be "experts" who could explain why seemingly irrational price spikes were actually based on solid fundamentals.
Is there really a clear dividing line between fundamentals and speculation? If fundamentals drive the price of a thing up, then speculators always show up to cash in on the trend, and in so doing, they push the price higher, attracting more speculators. The question is not, "Is speculation going on?" (of course it is) but how much, and how big a factor in the current price? I don't think we have clarity.
It's also apparent that the price of petroleum is a lot more important than the price of tech stocks and the price of houses. If the supply of petroleum is really going to be seriously constrained, we need to react to that as a mortal threat to our civilization. One hopes we react by working together to conserve and find alternatives--not by fighting over the remaining oil in the ground.
"Speculation requires storage..."
In this case, the futures market provides the equivalent of storage.
Exactly.
At current prices no-one has any incentive to under-produce - so my "best" guess would be that the current oil market dynamic is a good old-fashioned supply crunch. The most recent leg up in the price has mirrored, somewhat uncannily, the increase in US refinery inputs from 14 million to 15 million barrels per day.
Mexican production? Plummeting due to a 200kbpd per year depletion rate at Cantarell.
North Sea production? Past peak - the UK is now becoming a net importer.
Russian production? After a decade of unbroken increases, production is plateauing.
Iraqi production? Increasing, but still lower than pre-invasion ( although since 2004, Iraq has come from nowhere to become the 6th biggest exporter to the US - whodathunkit? ).
US production? Continues its graceful glidepath downwards. In spite of a drilling boom over the past few years, c'n'c production is down 150 million barrels per year over the past 5-6 years. Whilst it's certainly true that demand has grown globally, it's one hell of a PR coup to have so effortlessly convinced the world that Chindia is the demand driver, rather than the US sucking up ever more imports.
Nigeria? Combination of MEND attacks and industrial action continues to knock output.
Iran? Probably could increase output over the medium term if only the US would stop threatening international oil companies such as Shell and Total with punitive action over proposed new investments in the Iranian hydrocarbon sector.
Mr. Market is telling the US to stop overconsuming.
Silver was in short supply in the 70's, at least that is what Bunker said.
Double or triple the margin requirements, do whatever it takes for 90 days and let's see what happens.
If speculation is not a problem the price will be steady.
JL
Of course there's been speculation in oil, but IMO the fundamentals have had the greater impact on current pricing.
The IEA is out of its mind if it thinks this world will ever produce more than 100mmbbls/d. It will lucky to ever reach that point.
On the possibility of storage by non-extraction, I'd say Matt Simmons proved years ago that you can't believe a word that comes out of Saudi Arabia.
Yes, this is Peak Oil here and now. Get used to it.
The rise in oil prices means an enormous transfer of wealth out of the importers into the economies of the exporters. Couple that with the wealth destruction due to subprime and all its corollaries and it is difficult to be optimistic re the US economic outlook. That is to say the idea that the recession will be short and mild seems to have completely disappeared. I suspect even CR has given it up, or has he?
I'm not sure this is an either-or question. I think that there a number of things in the world today that are controlled by a sort of cartel-of convenience.. a de-facto monopoly by common but unspoken agreement of those who profit. Nobody would dispute that DeBeers or Microsoft are monopolies. It is less obvious with oil, but Texaco really does profit when Chavez does something threatening or stupid. Why not go along and not rock the boat? To undercut the future prices with spot price bargains is the same as throwing money away. Futures go up? Raise your spot price and profit from it.
rich writes:
I'm a finance neophyte,
rich- we have a fairly consistent commenter (definitely not a neophyte) who already uses rich as his handle, please spare the rest of us confusion and differentiate your handle. Thanks.
ac, prices only tell you the price has gone up. Are the prices detached from fundamentals (supply and demand)? Is there evidence of speculation? I think the answer is yes ... but I don't think it's as clear as for housing.
One thing I personally try to do is make an exercise out of intentionally taking a simple minded stance because I know from experience I have a tendency to over-complicate and over-analyze things. I've actually found this to be surprisingly useful, especially when markets are concerned -- I think people deliberately try to mislead you with the details.
In this case the guiding principle is "a pitcher is worth a thousand words". I've seen that "image" I linked to many times before in recent years. IMO it looks exactly like the dot.com stocks.
Whether or not the price is justified, the movement in oil prices suggests to me that the leveraged hoards have moved their eyes from mortgage bonds and domestic corporate stocks/bonds to commodities.
In other words, even if we are approaching peak oil, the near term driver here is credit being heaped into a market where it wasn't before.
This doesn't mean that oil prices won't legitimately be $200/bbl two years from now.
But I think it does mean that this market will be distorted by credit just like so many other markets.
Easy credit means anyone can buy huge amounts of something even if a) they don't need it and b) they can't pay for it.
I personally buy stuff that I can't pay for all the time with my margin account. I'm am routinely astounded by the amount of stuff a guy with my net worth and my salary can buy. The easy credit is still there.
When the financial industry invents new instruments to allow household pets and barnyard animals to buy stuff (with some guidance from their owners) that only a heavily capitalized company should be buying (because they can actually pay for it), you get this massive artificial, unsustainable demand that drives prices to a different universe.
That's been going on for at least a decade now.
The bankers are to afraid to stop it outright for what might happen.
Again, however, some of those people from the 30s may have be right in their assessment:
"It takes a crash to stop the speculators."
dan | 05.26.08 - 2:11 pm | #
You got it.
It is my opinion that current oil prices are experiencing a bubble. But I don't have any idea why they are experiencing a bubble. I have heard many knowledgable people comment that speculators are driving the market, but those people never adequatelly explain how speculators could drive such a large market. I have no answers, I just wanted to say that.
I have heard many knowledgable people comment that speculators are driving the market, but those people never adequatelly explain how speculators could drive such a large market.
I've read in recent articles that the commodity markets are actually comparatively quite small (presumably in comparison to the markets for equities).
Anyone know if this is right?
I get the feeling that oil was underpriced and a run up was expected. The question is: have the current prices inflated beyond the rational rate, and how much larger the bubble will go, i.e., if it's not a bubble yet, it surely will keep going until it is.
It might be that oil is in the early stage of a bubble. Clearly, the oil markets are reflecting the belief that central banks will be successful in preventing a major global recession. They may also be reflecting a belief that there will ultimately be substantial speculation in oil. If both of these come to pass then there may very well be another huge runup in prices.
I don't know how much evidence there is for peak oil. The U.S. is a good ways on the the downslope of its Hubbard curve. The Saudis may be somewhere close to their Hubbard peak. But the disconcerting tendency to find significant hydrocarbon reserves in previously inaccessible places (e.g. offshore Brazil) or for previously uneconomical reserves to become more attractive as prices go up (Alberta tar sands) has gone on for an awful long time and shows no signs of abating (unless you confine you search to geologically mature provinces).
What is new is the recent ability of hundreds of millions of people in Asia to join the energy economy, and participate in global energy demand on a scale somewhere between, say, the Japanese and the Americans. How that will impact global energy markets is pretty unclear. Since the organization of Royal Dutch Shell in the early 20th century and the operation of the Rockefeller's Standard Oil monopoly, the big problem to be solved has been an excess of demand over supply.
Americans complain about the OPEC keeping the oil prices high. Actually, for the last quarter century OPEC has generally benefited from a lower oil price, which tended to diminish capex in the energy sector with the effect of protecting their monopoly position (a Saudi strategic imperative to protect the long term monopoly generally trumping any short term profit maximization desires of more populous but less central cartel members). What we are currently seeing in the oil price is what the market will do without the moderating efforts of the monopolist to protect their monopoly by shearing, rather than slaughtering, their customer sheep. It's not pretty, and Americans are left in the uncomfortable position of energy pigs at a luau (or, to keep the culture references straight, a source of mutton at an Arab banquet).
One thing missing from the debate is the speed at which prices have risen. I think that is indicative of a "piling in" strategy which is a good bubble catalyst. One thing's for sure: it's hard to separate speculative demand from real demand where futures are concerned, but increased prices are driving (no pun intended) fundamental changes in US car purchasing habits. That could decrease demand over a long period.
Our explanation: importers bidding for declining net oil exports.
For more information on our work, do a Google Search for: Net Oil Exports + Jeffrey Brown.
When considering pricing, let's not ignore currency values.
Oil is priced in U.S. dollars.
Today, the Canadian dollar is worth more than the USD and the Australian dollar and Swiss franc are almost at parity with the USD.
Remove a 40% devaluation in the USD over the past 6 or 7 years and the price increase in oil over that period of time is not so dramatic.
ac-- good chart. The conclusion is obvious.
I was surprised Krugman chose over and over to revisit the oil price thing and make what looks like a cover, similar to:
"The alternative to speculation is that oil prices being driven by the fundamentals of supply and demand - with strong growth in global demand, even as demand weakens in the U.S. - and suppliers are struggling to keep up." -- CR
But clearly we have both the possibility of near peak or peak oil, and an unambiguous clear speculation.
My guess is the speculation raised the current price above supply and demand at least $30/barrel, and probably more.
I am surprised to see the repeated answer to folks point out the clear speculation in oil with all the speculation about peak oil. heh heh
So everbody is ABSOLUTELY sure there is mimimal/no oil off the west coast of Florida?
How about the deepwater gulf(Thunderhorse is just the beginning)?
How about all of the continental shelfs of of both coasts?
ANWR?
Interior US(deepwells)?
How about some of the newest deepwater drill ships in 7k plus feet of water?
Oh and the Dems just blocked any exploration of the Colorado oil shale...
When we have drilled exploration wells in all the areas and NO oil is found then I will start to worry.
Just remember,we are doing things that were TOTALLY impossible 10-15 years ago.
Chris
I get the feeling that oil was underpriced and a run up was expected.
One problem I have with oil being "underpriced" is that at prices much in excess of where they are now, is that too much industry may become un-viable. Especially here in the US you might get substantial demand destruction that drives prices right back down or starts a (successful) flight to alternatives.
In other words, at a certain price oil turns to glue for the economic engine and just won't be used in large enough quantities to sustain that price.
One bright spot of an oil bubble might be that it scares us away from fossil fuels before they become a real crisis.
Chris - You'll do anything to pump SW FL real estate. ;>
Some posters here have predicted that when the Fed holds/raises rates, oil will drop. It will be intersting to see if that happens.
Re the inventory. Also why in the world do folks point out official inventories that do not include all the kinds of storage? It's curious.
Its expected and obvious that people have responded to rising prices by filling their car tanks more often, gradually raising the average tank fullness, a truly huge amount of inventory. China stockpiled for the Olympics, etc., etc.
Amen, ac
I was surprised Krugman chose over and over to revisit the oil price thing and make what looks like a cover, similar to:
Maybe he wants an oil bubble to drive us to fossil fuel alternatives and discredit the Bush administration.
I would have to concede that these motives have a certain appeal.
This sounds like the housing bubble talk in 2004 and oil will follow that boom bust path. It will be a bubble. It will come down like a ton of crap. May take a couple of years but greed, leverage and stupidity always meet.
I remember I read at the Oil Drum site about hom much the Saudi was drilling new wells.
The investment they are making drilling new wells don't appear to me be investment at oil bellow the soil. To me, appear be an effort to mantain production to fall. Like Texas at the 70's... exactly the time Hubbert predicted they were to peak.
So, good luck with your "speculation" meme.
"Chris - You'll do anything to pump SW FL real estate. ;>"
Outsider | 05.26.08 - 2:45 pm |
Outsider,
I have mentioned the oil industry to the county before when they bitch about no good jobs in the area. Talk about stirring up a shitstorm...
But seriously,people need to look at Thunderhorse as a outstanding example of the tech. Drill wells underwater. Connect to a rig 40+ miles away. You never see anything from the coast. Pipe from there to refinerys On the south Gulf coast...
Chris
"The King Abdullah's comment reminded me of a what an old petroleum engineer working for the Queen (Shell Oil) told me in the mid 70's. There was an oversupply of oil production at that time and his first overseas job was prospecting for oil in Iran. The Shah let the contract; but made it clear that if Shell found any new oil fields, the company would immediately lose the contract. So Shell's PE's explored and found nothing.
Krugman sees normal oil inventories as a sign that there is no speculation. Not exactly.
My guess is that normal inventories are a sign that the oil companies are as baffled as everyone else. If they thought prices were going up because of fundamental market factors, they would in fact be stockpiling to sell later at a profit. If they thought there was a bubble, surely they would be drawing down inventories so as to avoid being stuck with a lot of expensive oil in a declining market.
If oil company analysts who deal with this on a daily basis, apparently aren't sure what is going on, what hope is there for the rest of us?
Spot prices, contract prices, future trading and roll over are all part of the oil trading complex today. If you focus on only certain part say the long end of the curve gives one a different view then spot or cotract pricing. 85 billion bls a year is really the issue, doubt that will decline very much even with a world wide ecomomic slowdown. The president of Shell at their conf call mentioned the cost per bl of oil from a new field was at least $80 at the well head!.
It seems the key question is: Are the oil exporting countries producing as much as possible - or are they investing by cutting oil extraction (and leaving the oil in the ground)?
Yup. Nothing doubles in price in one year, for no apparent reason, unless its supply and its demand are extremely inelastic... Or a speculative bubble is forming.
So, are the producers unable to increase production (i.e., facing inelastic supply), or unwilling to increase production (i.e., voluntarily leaving oil in the ground because futures prices have gone parabolic)? Both explanations are plausible. But where can we look to answer the question?
P.S. No set of links on this topic is complete, I think, without Michael Masters's recent Senate testimony
.
Is there really a clear dividing line between fundamentals and speculation?
Yes: Other People's Money, a.k.a. borrowing.
Real bubbles almost always happen when people buy assets on borrowed money based on extreme speculations about the value of such assets, and not so much sober understandings of the underlying cash flow.
Chris, I think the U.S. will allow more offshore drilling in the future, but the political will to do so won't develop until world oil supply starts to decrease.
Thunder Horse, though, doesn't strike me as the model when you consider it was almost wiped out by a hurricane in 2005. I still remember the photo of it listing badly. I gather it's been repaired since then.
Chris
Thunderhorse may be a great piece of technology, but it got flipped on its side by a nasty hurricane in 2005, and is currently producing nothing apart from huge, huge repair bills.
The best estimate is that it may start producing in late 2008, weather permitting.
Sportsfan hit the nail on the head, if you adjust the price of oil to account for the dollar's decline the increase is not as spectacular. It makes the case for a bubble much harder to argue as well. Here is a link to a good article in the WSJ concerning the linkage-http://online.wsj.com/article/SB121150088368615927.html?mod=opinion_main_commentaries
Thunderhorse may be a great piece of technology, but it got flipped on its side by a nasty hurricane in 2005, and is currently producing nothing apart from huge, huge repair bills.
dan | 05.26.08 - 3:05 pm | #
dan/sportsfan,
Yep,luckily it didn't tip. It actually wasn't the hurricane that did it in. A small 6" pipe that connected 2 ballast tanks was built without a valve. All the ballast water rushed to one side. Almost a monster ooooops. One of those topics that could go on a "Engineering disasters show" on Discovery.
BTW,the pics of it leaning are downright freaky...
Chris
As a expert in the fuel consumption market, the supply is meeting demand and thensome. Data is telling us most of the current pricing is due to speculation. Gas is currently available at the pump and Chrysler is even manipulating the commodities market with their $2.99/gal promotion.
Re inventories, my calculation for US is on the order of 3-5 days of oil imports could be extra gasoline levels in US autos. This is neither huge nor is it small. But in the world as a whole, autos being fuller has probably accounted for some of the extra inventory.
The EIA lists US inventory at 1.7B barrels. Compare to imports of about 10M barrels a day, for roughly a 170 days supply at typical rate of use, presuming the rate of use isn't actually declined significantly in the last few months. We know its likely down by 7% or more actually.
Downright freaky:
http://www.rigzone.com/images/news/library/other/1/2247.jpg
Yeah, that would have qualified for an engineering diaster show.
There's no ONE explanation.
IMO it started out as dollar weakness, picked up steam due to supply constraints, and is now subject to considerable speculation.
Will the prices come down significantly? Even if you could nix the speculation it would still be over $100. However, the dollar isn't going to strengthen much and, well, the difference between supply and demand is negligible and likely to stay that way.
A lot of people disbelieve the Saudis, but their statements do make a plausible storyline. And I don't think their statements have ever really been disproved.
It's more we doubt them because they don't fit our suspicions.
I think that is something to be cautious about ... when you start to filter information based on your conclusions.
"Chris - You'll do anything to pump SW FL real estate. ;>"
Outsider | 05.26.08 - 2:45 pm | #
Oh,I forgat to shill the local RE.
Through the 25th of this month...
590 total sales.
Approx 100 of those were tax lien sales.
Another 260 actual sales.
That means we had approx 230 FC's through the 25th.
This could end up like month 10 or 11 with as many FC's to sales, WOOOT!!!!
Chris
Lots of cards in play.
Low interest rates + liquidity injected into banks that has nowhere to go because most are insolvent.
You think you can sell financial shit to the world? The oil price is the giant middle finger you get in return.
Geopolitics? You want more war? How are you going to pay for it? Especially once formerly productive middle class people give you the finger and no longer provide tax revenue? and the lowlife's cry for government cheese?
I think the old adage: "high prices fix high prices and low prices fix low prices" is coming into play. Even when the bubble bursts, it is unlikely that oil will fall to levels of the past due to global demand and lack of investment. I wouldn't be surprised to see large increases in capital investment by the oil cos. going forward as they raise their target price levels.
sportsfan | 05.26.08 - 3:17 pm |
How about the Sleipner oil platform sinking? 700M right down to the bottom of the bay. All on a miscalculation of stresses in a area...
The sinking of the Sleipner A offshore platform
Luckily nobody was killed.
Chris
hidden inventory in oil is huge. Many analysts are mistaking the published data as their reason to feel that oil inventory (published) is peaking..
expect spectacular crash in many commodities incl oil.
If there was so much oil why would the Saudis leave any in the ground in the first place. That is why talk of conservation if they think oil is infinite.
That said I think we have too many calling commodities a bubble. Why is not AAPL, GOOG, or RIMM in a bubble at p/es of 30-50. I mean these guys could fall off the face of the earth and tomorrow life could go o
Speculation requires storage..."
In this case, the futures market provides the equivalent of storage.
That's not how it works. If speculation drives the futures price up to where it is greater than the current price + the cost of storage, then its profitable to store more oil rather than sell. This in turn drives up the spot price. But if more oil is not put into storage, then there is no effect on the spot price. Bottom line, if there isn't a rise in inventories, then speculation on futures does not explain the price rise.
hidden inventory in oil is huge
Yeah, and it's hidden for a reason -- WE CAN'T GET TO IT OR GET IT OUT. Might as well be on the moon.
If the Asian subsidies begin to lessen much, that could have quite an effect on $100+ prices.
Asian countries test the waters of raising fuel prices - The New York Times
Chris, the Sleipner platform loss is one of the reasons there will be a floor under the price of oil. The cost of finding and extracting new supplies is huge.
Sure, Petrobras had a big discovery recently, but there just haven't been many big discoveries in the last decade or so. As the Ghawars of the world continue to decline, it's gonna get tougher and tougher to replace the lost production.
Untill we are willing to duscuss the effects of the drop in LT capital gains tax rates and the non short term taxation of hedge funds and private equity. We can not adequately dicuss the speculative effects on investment whether it be housing, commodities or gold fish. Taxes have and do have an effect on investment decisions. Right now there is two much money on the table as reflective in the growth of M3.
This froth needs to be taken off the table so that sanity can be brought back into investment decision making. Not once has this forum ever dicussed the effect of taxes on investment.
Too any dollars are chasing to few goods. Thus inflation and speculation.
I think the Asian subsides are a big factor in the recent oil price run-up. I see a lot of irony there. 1. If China et al had not been subsidizing at the $70/barrel level, demand would have been reduced, and consequently, prices would not have gotten anywhere near where they are now. 2. China's subsidy of oil at the $70 level no doubt significantly increases oil use and world CO2 levels, but almost nobody is critical of China for this.
In 1990 oil was around $10.00 a barrel. Now it is $130.00
Does this really make sense? I doubt it. Either tremendous buying, stockpiling or speculation....or oil producers selling less.... or some combination.
If you were a major oil exporter having 1300% more in oil revenue (more or less) seems to be a problem for long term planning.
Is it possible that full production of oil occurs at the cheapest price and at the higher prices production has been scaled back?
Remove a 40% devaluation in the USD over the past 6 or 7 years and the price increase in oil over that period of time is not so dramatic.
sportsfan,
You might want to check your math:
European Tribune - Community, Politics & Progress.
Sorry, meant oil was at $10.00 barrel in 1999.
Follow the link on the right to naked capitalism's "The Economist Has No Clothes" about economic navel gazing. Supply, demand, peak oil - is that all there is?
AndyS writes:
"Speculation requires storage..."
In this case, the futures market provides the equivalent of storage.
Agreed.
ac writes:
Oil prices aren't an obvious bubble like housing or tech stocks.
Hmmmm...
Look at the volume on that chart. Nuff said.
ac writes:
I have heard many knowledgable people comment that speculators are driving the market, but those people never adequatelly explain how speculators could drive such a large market.
I've read in recent articles that the commodity markets are actually comparatively quite small (presumably in comparison to the markets for equities).
Anyone know if this is right?
Maybe more importantly is that ICE + NMX is worth more than NYX.
Some posters here have predicted that when the Fed holds/raises rates, oil will drop. It will be intersting to see if that happens.
Outsider | 05.26.08 - 2:45 pm | #
That will certainly be the ultimate test.
ac writes:
I was surprised Krugman chose over and over to revisit the oil price thing and make what looks like a cover, similar to:
Maybe he wants an oil bubble to drive us to fossil fuel alternatives and discredit the Bush administration.
I would have to concede that these motives have a certain appeal.
Agreed.
The real issue is time. EVENTUALLY high oil prices will stimulate the development of alternatives. In the meantime though, none of them are ready. As for new finds, I'm not sure all of them together replace the decline in Cantarell, Mexico's largest field.
I'm seeing the term bubble thrown around much too much. It should be reserved for things that are WAY beyond fundamental value. Tulips? Sure. pets.com? Sure, since its fundamental value was zip. Houses? Not so sure, since even in the most over-priced areas they weren't more than 50% over-valued and much less than that elsewhere. Oil? If the fundamental value is near $100, is $130 a bubble? Probably not.
The main thing is that while you could always float more shares of dot.coms and build more houses, finding oil isn't so easy.
U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Federal Reserve Board Governor Ben S. Bernanke, Deflation: Making Sure "It" Doesn't Happen Here
Works every time.
It's the tanking dollar that's creating the illusion of high oil prices.
Oil priced in Gold chart
Crude Oil
Thanks.
Nemo, thanks for the link. That is quite illuminating testimony, indeed.
I'm still of two minds on what the real cause of the oil/food price runup is.
On the one hand, there can be no doubt that investors are chasing the hot money, aided and abetted by modern innovations like commodities ETFs. There is a veritable alphabet soup of funds now for the retail investor to play in; DBA, DBC, USO, MOO, the list goes on and on. Twenty years ago the only way to ride the wave was to get a license to trade in the pits.
But on the other hand, at least in theory the futures markets and the cash markets should converge to reality at some point. If not, the arbitrageurs should step in and make a killing off the imbalances. And the fact is, speculators are just responding to bad monetary policy by the Fed. Pension funds looking for higher returns face limited options in stocks and bonds.
If Bernanke had the guts to keep rates higher, oil would be trading under $100 a barrel and we'd be talking about something else today, perhaps the Dow at 10000 instead of 12400.
One more point-not all oil is the same. WTI and Brent do not equal high-sulphur heavy oil.
What Krugman can not reveal nor say:
The oil futures market is being used to drive Republicans from government.
The rest of the discussion washes away as mere bubble talk, just like NAR on home prices.
I expect that oil will break at that time that someone has sufficient clarity about who will be the President (which party and which candidate does not matter). 'Sufficient clarity' may well equal 'been long long enough, let's bail out with our profits'.
They will be the first to go short on oil.
Confirmation will come about when significant players reveal their wonderful profits which they will need to absolutely crow about. They will be so proud of themselves that concealing their manipulations will be impossible.
I expect oil to be under $90 by June 2009 on its way to $31 by April 2010.
So sayeth No Frog Speak. Remember this.
In 1990 oil was around $10.00 a barrel. Now it is $130.00
Does this really make sense? I doubt it.
Sure it does. Oil is energy and energy is a consumer good.
How much is it worth to you to fly to NJ to Grandma's? To drive to work instead of taking the bus?
Oil was underpriced given the good it provides and the lack of subsitution. Now that supply is tracking demand (if that) suppliers are free to raise their prices to the point of demand destruction.
Houses? Not so sure, since even in the most over-priced areas they weren't more than 50% over-valued and much less than that elsewhere.
AOTC, prices in my L.A. area condo complex were up over 350%.
n its way to $31 by April 2010.
LOL. You'd be a rich frog if you put your money where your mouth is in the futures market.
The thought that rich people are using the oil market to drive themselves out of power is . . . really really stupid.
Interesting Times writes:
It's the tanking dollar that's creating the illusion of high oil prices.
Oil priced in Gold chart
Crude Oil
Thanks.
Interesting Times | 05.26.08 - 4:33 pm | #
The reason Gold prices closely track oil prices is because the largest single $$ factor in obtaining Gold out of the ground is the cost of the Diesel fuel to mine and process it.
The declining dollar is only responsible for less than 25% of the rise in oil prices during the past 8 years.
IMO, at over $130/barrel, the oil producting countries aren't leaving the black stuff in the ground.
This commenter hasn't a clue in the world. No clue.
Good point ac .... Agree with the conclusion also.
We are back to the 80's when commodities are becoming a 'must have' asset class.
So if this is where the hot money is flowing, it's only logical that it is having an impact on prices.
tj-Then your LA condo complex may well have been in a bubble. For the "average" house that may have been at most 20-30% above fudamental values based on price/income at the absolute paek moment, I don't know if the term bubble is really accurate.
By the way, I agree with you on oil (will wonders never cease!). Yes it's up 13x, but $10/barrel was WAY below its fundamental value, based on extraction costs everywhere except perhaps Saudi Arabia.
By the way, we just did a 500 mile round trip. Sure gas cost $60-70, but the cheapest alternative (bus or train) for 3 people would have cost $300 and taken twice as long. Flying-probably $ 1500 and we might not have saved more than 1 hour each way.
Some thoughts:
I don't believe that people are reacting to rising prices by keeping their tanks more full. Lately, when I've filled up, the previous customer's total has, more often than not, been a nice round number indicative of someone deciding to spend $x rather than fill the tank. And hey, years ago I thought to myself "buying $x at a time rather than filling the tank would be dollar cost averaging, and should save me money" but life's too short even for a cheap bastard such as myself to spend more time pumping gas than necessary. The class of people who used to fill only partway because they had more time than money, but who are now micro-speculators (and whose literal carrying cost includes reduced mileage) is vanishingly small.
Leaving it in the ground? I doubt it. In countries without reliable, public, audited inventory numbers, there's no way of getting credit for your decision (but you always get credit for a barrel pumped, sold, spent, and memorialized at a ribbon cutting ceremony). Plus your subjects are poor and uneducated, and economists say oil wealth is a curse rather than a blessing.
Not that it has any bearing on whether we're actually in a bubble, but does affect people's opinions: Admitting that oil will always remain above $100 is admitting that a large percentage of America's municipal planning and infrastructure doesn't make sense and is worthless, that bad decisions were made (like maybe your last choice of vehicle and house location), and that there will be a long period of painful economic dislocation, with a lot of your hard-earned money going to some undeserving, unamerican person somewhere else, and it'll be he that's driving the Escalade and filling it to the brim. Much easier to call it a temporary, speculative blip that we'll have to get through, a bit of short term pain to endure before we can get back to our exurban, king-of-the-road lifestyle.
I'm more worried about the effects of having to restructure the entire economy, getting off the "sprawlconomy" that relied on cheap oil and figuring out how to create economic value that doesn't depend on asset bubbles. That is what we need to worry about, not just where the latest bubble is, but how to break the bubble economy cycle and produce real value once again.
The speculation, if there is any going on, is the slosh of too much money looking for higher return, and nothing of real future value to invest in. That is our current true crisis...
Remove a 40% devaluation in the USD over the past 6 or 7 years and the price increase in oil over that period of time is not so dramatic
sportsfan,
You might want to check your math:
Mike in AZ, I don't get your point, at least not from the link that you posted from 2007.
The euro was worth $0.85US in 2001-02 and is now around $1.55US 6 or 7 years later.
If oil was around $22/bbl in 2001 and is now $132, that $110 increase is equal to 500% of the 2001 price.
If oil was around E25,88 in 2001 and is now E85,16, that E59,28 increase is equal to 230% of the 2001 price.
I'm saying a 230% increase is not as dramatic as a 500% increase.
All the other bubbles I can think of were essentially financial instruments.
South Seas bubble was about monetizing government debt.
Tulipmania, well, self-explanatory.
More recently, Nasbubble and China were about pieces of paper representing dreams of avarice.
Nikkei was about the rise of offshore manufacturing and commercial real estate in an island nation.
1970s oil was about deliberately withholding supply. Everyone knew the taps could be turned on again in an instant. That's unclear here.
70s gold was about mistrust of the currency after Nixon left the gold standard. Really, oil was about the same thing.
If you look at the magnitude of these moves, they work out to be around a factor of 20, plus or minus. South Seas was almost precisely a factor of 20. Gold ran from 35 - 800, Nasdaq was 300 to 5100, factor of about 17. China was, again, almost exactly a factor of 20, running from 300 to about 6000.
It would imply that oil might be expected to run to about 250, picking my starting point as the fall, 1999 Economist magazine cover "A World Awash in Oil."
But I don't know that we've ever seen a bubble in something the world relies upon for its continued existence. The closest analog I can think of is the Peruvian sardine crisis (I can't even remember whether that was in the 70s or the early 80s) that led to fertilizer shortages.
My inclination, seeing things like the CNBC "Special Report: America's Oil Crisis" and the latest BenSteinery from Friday, plus looking at the ag and basic materials charts, is to say that we'd see a goodly pullback here. But I'd be a buyer in the 90s, with the expectation that we'd see something like 250 crude at the end of the decade trade.
The declining dollar is only responsible for less than 25% of the rise in oil prices during the past 8 years.
JD, I don't know about that. It looks like 50% or more based on a comparison to the euro.
But even the link posted by Interesting Times shows the recent increase in WTI relative to gold.
OMG, it now takes 4.5 grams to get a barrel of WTI. It must be a bubble. Where o' where did the good old days go when a troy ounce could get you a full 10 barrels or more?
As to the cost of energy to produce gold, while that is certainly a factor, virtually all the gold ever produced is still above ground since, unlike oil, it is not consumed in the classic sense. Yet all that gold still doesn't buy as much oil as it used to buy.
The easily pumped, light, sweet crude is what gets pumped first. That 'peaked' in 1999. Right now, the oil that's out there is harder to find and harder to refine. The low-hanging fruit got picked, and it is harder to get to the other stuff. Lately, oil production has been basically flat, even including weird stuff like tar sands that no oil man would touch if there was better stuff out there.
Now add the fact that oil-extracting countries are using more of their own stuff each year, and exports are falling. Sure, some old wells are still extracting, and the owners are making money hand over fist. But at $130 plus a barrel, pretty much everyone is pumping flat out. Ten thousand barrels is worth 1.3 million! It's not credible to think that, to those who the dollar is god and how to get it their religion, are going to save even one drop. Make the money now!
theoildrum.com
check out this guy's 'Export Land Model,' which, unlike the Wright Model B, actually makes testable (and proven) predictions.
GraphOilogy
First, the price for oil/gas has never reflected the true cost (externalities) for health impacts, environmental, etc.
Second, did I miss it, or is it true that no one here mentions climate change/warming. Can there be a legitimate discussion around oil/gas without factoring in the issue of climate warming?
Third, and related to both one and two above, the problem is too much oil/gas production/consumption. Thus, drilling more oil is NOT the solution. The solution is about end use, and a great deal more attention to conservation, reduced consumption. But of course a global economy based on continued need to grow and expand cannot provide for such a solution.
And lastly, as for speculation, of course speculation has an effect on current price increases. I could get up first thing tomorrow morning, turn on the computer, and make an "investment" (bet) in the price of oil going up within 1/2 minute of the stock market opening. That it is happening with such volume does it effect price. In fact, if I did this, I'd be betting on prices going up, and it would have absolute no bearing on storage of oil, in the ground or above the ground.
Lets keep in mind that bubbles (and add to that a declining dollar, lower interest rates, the price of gold, etc., etc.,) is a symptom, not a cause. When things reverse and the movement is from quantity to quality, then the bubble bursts and everyone attributes the consequences to bubble formation, forgetting to explain, systemically, why bubbles repeatedly form in the first place.
The closest analog I can think of is the Peruvian sardine crisis
if you are a woman, may I marry you???
Flying-probably $ 1500 and we might not have saved more than 1 hour each way.
but the free boob massages surely are worth something?
If I were China or Japan, I would use my dollar reserve to buy oil future contracts.
The betting on oil may actually force a short Iran war so that some up-betters may not go bankrupt.
but the free boob massages surely are worth something?
Troy | 05.26.08 - 6:13 pm | #
My goodness, what airline do you fly?
zackattack-I tend to agree with you. There will be corrections along the way (probably one very soon), but barring the totally unexpected discovery of another monster field like Ghawar, the long-term trend is up. Until the perpetual motion machine in my basement is ready (news at 11).
Someone asked up top about the futures contract. I've tracked the open interest of the NYMEX crude oil futures contracts open interest since last September and watched the rise and fall. Keep in mind, that this contract delivers to Cushing when assigned and from what I've read Cushing can only handle 40M bbl/month. (I also posted this in comments at TBP.)
NYMEX Crude OI-Price Chart
So what does it mean? Lots of people will point to this as sure evidence of speculation. I've tried to approach it from a few points - hedgers, speculators, manipulators. There's also the idea that extra supply (of contracts) should smooth out price volatility and vice-versa but there doesn't seem to be all that much evidence of that.
I've been trying to make sense of this for awhile. Any thoughts?
Troy writes:
"The thought that rich people are using the oil market to drive themselves out of power is . . . really really stupid."
Troy | 05.26.08 - 4:56 pm | #
Thanks. I got a good laugh out of your comment.
Denial, wishful thinking, avoidance, procrastination and compartamentalized thinking: these are people's first line of defense against facing the consequences of something as unpleasant as the end of cheap energy.
Peak Oil is a fact. Petroleum is a resourse of finite quantity. With the lead times required to find and adjust to different ways of doing things, does it really matter if peak oil is upon us today or will visit us in 20 years? Let's just hope to God that it isn't upon us today.
And when it comes to energy issues, could we have three bigger morons running for president?
Mike in AZ, I don't get your point
If oil was around E25,88 in 2001 and is now E85,16, that E59,28 increase is equal to 230% of the 2001 price.
My point was that oil has gone up an insane amount without taking the dollar drop in account. (thanks for making it for me;^)
Unless policymakers understand the disruptive real effects of overly expansionary monetary policy, the energy and food crisis may worsen beyond manageable limits and put at risk millions of lives. Addressing inflationary expectations is not costless. World energy and food markets can be stabilized, but only when the Fed renounces interest rates control and reins in monetary and credit expansion to a stable range. This is exactly what Paul Volcker did successfully during his tenure as Fed chairman.
Reducing production to increase pricing is a cartel problem, not a speculation problem, but hey, let's just classify producers as "speculators," the better to inflame the public with the charge that "speculators" are making a killing.
sportsfan writes:
JD, I don't know about that. It looks like 50% or more based on a comparison to the euro.
Using your posted numbers in this thread (primarily because I am too lazy to confirm them):
2001 2008
$.85/E $1.55/E a 82% change
$22/bbl $132/bbl a $110 increase in oil price/bbl
$22*182%= $40/bbl that is an $18/bbl increase due to the decline in the $$
$18/$110= 16.3%, percentage of increase in oil prices due to decline in the dollar
I think it's the stretching out of a diminishing commodity. Oil prices could drop-to $60-$100 a bbl, before they rise to $300.
Is oil in a bubble?
I think so. High global monetary growth is contributing to higher GDP growth than that which would otherwise be expected.
This creates more demand than we would otherwise expect.
Without the stimulus of unsustainable monetary growth over the last 6 years we would definitely have lower prices.
Sportsfan writes " "As to the cost of energy to produce gold, while that is certainly a factor, virtually all the gold ever produced is still above ground since, unlike oil, it is not consumed in the classic sense. Yet all that gold still doesn't buy as much oil as it used to buy.""
If we still have all the gold but not all the oil, didn't you answer your own speculation? There is much less oil, but all the gold is still there....
What is the production cost of a barrel of oil?
"There will be corrections along the way (probably one very soon), but barring the totally unexpected discovery of another monster field like Ghawar, the long-term trend is up."
We burn oil for energy. At $100 a barrel oil energy is very very expensive to all sorts of other energy. While the process will be slow the end effect will be to substiture other forms of energy for fossil fuel energy.
It would take about 1000 gigawatts of nuke power or about 700 new plants to easily replace the energy content of US energy consumption from oil. Cost would be about $1 trillion. No more political crap, no more global warming. 8% of GDP for one year. 1.5 times the annual trade deficit.
We are setting up for another great long term bull market in non fossil fuel energy, which is going to be the electrification of the planet. When oil makes its specultive peak which could be tomorrow a week from now or a year from now ( or it could have been last week) it will NEVER on a relative basis ever get there again. Think whale oil.
Although it's fun to say that $x/barrel of the price is due to speculation, the only way to verify the number is to find an alternate universe which is exactly the same, but no speculation occurred. Not an easy task.
I'd argue that the most persuasive argument of the "no bubble" proponents is this: there's no inventory buildup even after the price run up. Therefore the markets are in balance and just doing their job to balance supply and demand. And I would have to agree that this is what the data say (whether the data are wrong is another story).
However, the oil prices people talk about are usually futures prices. And the name is important - it is the price of future delivery. A lot of the recent runup will not be reflect the actual prices paid by customers. In the OECD countries, gasoline prices have not risen as much as crude; and in the non-OECD countries, governments have generally not yet raised fixed energy prices.
Thus the risk to oil longs is that at some point in time, crude prices will overshoot too high and the demand destruction may not be apparent in inventory builds until it is too late.
You pays your money, you takes your chances.
Didn't see any mention of this, but perhaps I missed it:
One of John Mauldin's recent pieces referred to an odd spiking of oil tanker lease rates, as Iran appeared to be loading up on tankers to hold oil they could not, or did not want to, sell at present.
Whither the Price of Oil? - Thoughts From The Frontline - InvestorsInsight.com | Financial Intelligence, Advice & Research / Investment Strategies & Planning for Individual Investors.
Is the oil volume that can be carried by tankers material as compared with other containers used for holding oil inventory?
Do published inventory estimates include this capacity? Might a tight supply of oil tanker available for lease point to another component of oil inventory that could be used to "squeeze" futures market participants who bet on lower prices?
So, when California was going through its energy crisis, many of the same arguments are the ones that are being used today to explain the run-up of oil: increased demand by Silicon Valley, environmental regulations that prevented needed generators from being built, etc. Yet, by the time the smoke cleared, the answer was that Enron had been manipulating the prices all along.
As someone ignorant in the actual mechanism of the sale and delivery of oil, can someone address the following situation for me?
Let's say oil today is 135/bbl, and a speculator purchases a July future for 140/bbl. So, the speculator would get busted would be if the price was below 140, because the speculator would either have to store the oil or sell it for a loss. However, what it was a petro-SWF that bought the contract? It doesn't need to hoard or store the oil, waiting for the higher price. When it sells the 140 oil at a "loss" at 135, it's still making money because the sale price is much higher the cost of production. It would seem the only way to bust the SWF-speculator would be if supply increased more than that coverable by the SWFs; with OPEC refusing to increase supply and new reserves taking years to tap, this scenario seems unlikely in the short-term.
With an estimated 3 trillion in reserves in the petro-SWF, and another 2 trillion in China, it seems that the SWF's could re-create the 1970s without screwing with the supply. Putin must be laughing at the Reagan boast that it was the superiority of American capitalism that bankrupted the Soviet Union.
Thanks for the link to the Mauldin article. I found it educational and credible.
"Let's say oil today is 135/bbl, and a speculator purchases a July future for 140/bbl. So, the speculator would get busted would be if the price was below 140, because the speculator would either have to store the oil or sell it for a loss. However, what it was a petro-SWF that bought the contract? It doesn't need to hoard or store the oil, waiting for the higher price. When it sells the 140 oil at a "loss" at 135, it's still making money because the sale price is much higher the cost of production. It would seem the only way to bust the SWF-speculator would be if supply increased more than that coverable by the SWFs;"
It is worse than that in the commodity future market. If you are holding the July contract, it will stop trading in mid-June and you need to be prepared to take delivery of the crude. There is a schedule every month after the front month contract expire to let you counter party know where to ship the oil and all the detail arrangement of shipping oil around. This is the part that is significantly different than buy stock option. As the oil contract expire every months, all the oil represented by the contracts get delivered to someone. They are either refinaries (the only user of the crude oil.. Who else use crude oil?) or speculators. And if speculation is the reason for all the high oil price, someone is holding all the excess oil in storage each month in order to drive up the price. Getting oil storage is not an easy or cheap proposition. There are only so many permanent storage facility around the world that are not belong to refinaries or oil producing companies. The only practical way is to rent some oil tankers to store the oil. Given the going rate of tanker, one can go broke easy by holding oil in VLCC and wait for oil price to go up. This is one reason that speculator in commodity market tend to get killed by the phsical users (your lovely oil producing companies and refinaries in oil market who physical produce or use the oil). All the refinaries need to do is wait until each month contract getting closer and closer to stop trading and bid what price they want for the oil. For the speculator who is holding the contract, they have to decide if they want to go through the hassel and expense of getting some broker to arrange for the oil delivery and rent some VLCC to store the oil or sell the contract at the price that refinaries want. And next month our speculator will have to start selling the oil contract in the future market and pay for the delivery of the oil etc to avoid more storage cost.
The point on all this discussion is that (a) it is a very costly propositon to "hoard" oil. So oil must raise a lot each month to justify doing that (b) it is very easy to detect oil "hoarding" if someone is storing large amount of oil somewhere to drive up the price. (c) refinaries are the buyer of oil and their appetitie of buying oil depend on the gasoline and distillate demand. If the demand is not there or the crack spread (the price difference between the end product (gasoline etc.) and the crude oil) is not good enough, refinaries will slow down or stop the buying of crude from the open market. And this is the reason CR mention about the relationship between storage and speculation. No storage because of "hoarding" mean no speculation.
As to whether oil producing naton "hoard" the oil by leaving it in the ground. I think it is an academic discussion. It is not how much oil is in the ground, it is how fast we can draw them out of the ground and different type of oil. i.e. Saudi can have 2MM BBl of spare capacity (and do we really know that? Saudi claimed 2MM bbl/b of spare capacity for the last 4-5 years and no one call their bluff until now), but is it the type of oil the the world refinaries fleet can use (they are sour/heavy oil not the WTI variety) and they may take 9-12 months to deliver 300Kbbl a day..
(cont.) they may take 9-12 months to deliver an additional 300Kbbl a day. But by then the depletion of existing field and natural increase in demand may already eat up the addtional 300Kbbl new supply...
The only real cure of the oil price right now looks to be a worldwide recession that will slow down the oil demand in the short term and in the longer term conservation and some form of alternate energy (coal, nuclear, electric car etc.. NG, solar, wind, ethanol are too small to make any difference)
CR-
"Speculation requires storage - something that was obvious in the housing bubble, but isn't so obvious for oil."
When you mention storage in the housing case, are you referring to the practice of holding/hoarding for the purpose of waiting for a higher offer? In my experience, the entire process of land development is speculative. And hoarding by existing raw land owners is well established practice and expected on the buy side.
I'm not involved in the finished product side (the home itself), so the flipper/ "retail speculator" phenomenon was remote to me. Did you mean the ad hoc auctions where there would be lines to buy at new developments and daily escalations in contract prices for new homes? IOW- Hoarding by builders?
Could you please expand your thoughts? Specifically, how was there "storage" in housing in your view?
Thanks and regards.
Those Iranian tanker contracts are interesting - actually, I think they are a sort of insurance policy, on several levels -
Iran has been preparing the Straits as a killing ground for probably 30 years now.
Currently, it's sown with Chinese-made rocket-propelled antiship mines. You're all aware of the hundreds of Chinese-made Silkworm missiles, but they may also have as many as 300 SS-N-22 Sunburn missiles in emplacements in the rugged hills ringing Bandar Abbas.
If you want to get a little concerned, go google "SS-N-22 Iran."
Consider that they don't have to hit a US ship, just threaten tanker traffic.
They don't have to win a battle, in any conventional sense, they just have to keep the pressure up for 30, 60 days until $8 gasoline does its handiwork.
No, there's no upside to initiating hostilities with Iran.
Oil is a deep, dirty cyclical. It's still subject to the business cycle. However, I expect higher lows and higher highs for the rest of our natural lives, until a scalable replacement is found.
It's worth noting that Jimmy Carter has just intentionally slipped out that Israel has 150 nukes in a bookfair event in the UK. The UK media (BBC) caried out this story at once, but media in Poland and the US (more J+) are silent.
Later the Carter story was removed from the RSS feed and first page of the BBC pretty quick.
My speculation is that this is a attempt of Carter to get some media attention against the plan of a US+Israel joint strike on Iran. The oil price is telling enough though.
"and when practicing asymetric warfare, unpredictability is a major factor in succeeding."
Sometimes when you are practicing asymetric warfare the party on the other side of the asymetry just steps on you...
Cobradriver wrote:
So everbody is ABSOLUTELY sure there is mimimal/no oil off the west coast of Florida?
There may be some--but the chances of a Ghawar (or even an East Texas) are roughly zip.
How about the deepwater gulf(Thunderhorse is just the beginning)?
Ditto. Oh, and realize that (a) the media estimates for Thunderhorse are highly "best case"; and (b) that it lies in a structure that has been known since the 1930s.
How about all of the continental shelfs of of both coasts?
Lots more exploration has taken place on the shelves than the media recognizes. Most are not promising. Again, there's no Ghawar hiding there.
The reason that China, Vietnam, and the Phillipines are quarreling over the Spratly Islands is not that these flyspecks of land would be great places for seaside condos. They're about the last place you could hide a supergiant field.
ANWR?
Maybe (maybe!) as much as 30 billion bbls, which would help but is hardly a ticket to energy independence.
And maybe zero. The Beaufort Sea back in the early 80s was supposed to be the next Prudhoe Bay, and as close to a sure thing as you find in this business.
The structure contained brine instead of oil. Most expensive dry hole in history (~$2 billion in 1982 dollars.)
Interior US(deepwells)?
Zero. You don't find oil by going deeper! The Swedes found that out (expensively) at Siljan.
How about some of the newest deepwater drill ships in 7k plus feet of water?
Depends on the rock they're drilling into. Most of the deep sea is not oil prospective. Only that around the periphery of the continents.
Realize too that you need to find big reservoirs with that whizbang technology. You can bring in 5 million bbl in the Overthrust or the Austin Chalk and make money. 5 million bbl in 7K feet of water is just hazmat.
When we have drilled exploration wells in all the areas and NO oil is found then I will start to worry.
Right now the US consumes ~7.5 billion bbl a year. That's more than twice what we ever produced, and that was back in 1970.
More. Than. Twice.
There is simply no prospect of producing that much oil from domestic sources. If you're not worried, you're simply not paying attention.
Folks, geologists have been looking for oil for something over a century now. An enormous amount has been learned, and we do have a very good idea of the sorts of geologic settings that host oil. If you want to believe that the professionals don't know what they're doing, and want to hare off after crackpottery like abiogenic oil or whatever--well, go spud some hole and show us how it's done. It's your money.
But you're going to get a very expensive reality check.
Several people have commented here on the speed of the price increase being a sign of a bubble. I remind everyone that a large chunk of that price increase is USD related... if you plot the price of oil in Euros it is much less bubblicious (although the recent run to 135 is still pretty crazy.)
Chris asks: "are you SURE they won't find oil in Florida/ANWR/under the White House lawn". My answer would be, yes, they'll probably find some oil in those places and develop the tech to extract, but I am also sure that existing fields will continue to decline.
I think the "energy accounting" crowd is misguided, but we should spare a thought to EROEI when thinking about future development. If oil goes to $300, that does wonders for the revenues of your oil project... what does it do to your costs? If it takes a barrel of oil to get a barrel of oil, you're toast (construction of platforms, ferrying workers around, etc), and the complexity of these new projects may someday approach that.
fruitcake: "If you are holding the July contract, it will stop trading in mid-June and you need to be prepared to take delivery of the crude. "
Isn't cash settlement possible? IIRC the open interest in futures is way larger than the volume consumed?
Commodities including oil ARE in a speculative-driven bubble very similar to what happened in the housing market. It's funny how some who claimed to have seen the latter bubble are having problems seeing the former.
For confirmation, simply stop by the CBOT and ask some commodity floor traders. They're pretty open about how most of the price rises we've seen are NOT tied to fundamentals.
When the debt markets froze and Bernanke started cutting rates, hot money flowed into this area looking for yield. With debt markets still not back to normal, this area is flush with excess investment money. Many producers and end users have been reluctant to use futures because of the increased price, risk, and volatility. There's always been speculators playing futures, but they've literally hijacked them. They turned what was primarily a risk management tool into speculative investment.
The price of oil is going up. The price of oil IN DOLLARS is going up much more rapidly than in other currencies. The jacked up supply of dollars is what's causing most of the sticker shock at the pump.
The problem with equating "leaving it in the ground" with "storage" is that it can take years for oil to come out of such storage. In the meantime, existing oil fields will continue to deplete and global demand will continue to grow (according to the latest estimates from the EIA, global demand is expected to grow at twice the rate of supply this year, even with a small decline in the U.S.).
The bottom line, as far as I see it, is that oil prices may be lower than they are today in, say, 10 years. But they'll almost assuredly be much higher in 5.
"And on a related level - that much oil placed on the market at one time could produce some fascinatingly unpredictable results - and when practicing asymetric warfare, unpredictability is a major factor in succeeding"
heh heh, I wouldn't worry about Iran wanting to dump these oil onto the market. It has the same problem as the new Saudi oil, it is sour and heavy. There are only a subset of refinaries that can process those oil.. So if Iran bring those tankered oil into the market, it will destroy the sour/heavy market but the WTI and Brent of the world is going to continue to march on.. As of now the Mexica Maya oil discount is already at $22, an all time hight. I think the point is that there are multiple oil segment and the headline only reflect the WTI and Brent oil which are light/sweet oil and all the "new discovery" are really the sour/heavy variety which a lot less refinaries can process. That make the supply/demand dynmic very different than if we were to have only one grade of crude oil...
http://media.corporate-ir.net/media_files/IROL/10/100647/custom/Crude_051908.pdf
"When the debt markets froze and Bernanke started cutting rates, hot money flowed into this area looking for yield. With debt markets still not back to normal, this area is flush with excess investment money. Many producers and end users have been reluctant to use futures because of the increased price, risk, and volatility"
I don't think I understand the comment at all.. As a producer, you eithter has a long term contract with refinanries and deliver the oil at a perdetermined price (or follow some kind of index) or sell the excess oil in the future and spot market. That is the function of the commodity market. So why would a producer avoid the market because of more speculator???? They certainly will benefit from the high price. How would they sell their excessive oil production (those that is above exisiting contract) otherwise? And how would speculator force refinaries pay higher price than end consumer is willing to pay (as reflect in loss of crack spread)? When refinaries is not willing to pay, speculator need to store the oil somewhere. Did anyone come up where those oil are stored outside of what Iran do? I think you are applying the stock trading mania scneario to commodities.. It works mostly but you need to figure out the storage problem when stock don't have. And storage for oil in a massive scale is such a hugh issue that the market should easily track it. So far there is no wall of oil store somewhere.. So what magic did speculator do to drive price higher???
Oil Reserves: Where Ghawar goes, the rest of OPEC follows
Posted by Phil Hart on May 27, 2008 - 10:00am in TOD: Australia/New Zealand
In May 2007, the work of Stuart Staniford and Euan Mearns culminated in a new and unprecedented assessment of oil reserves in Ghawar, the world's largest oil field. This article (also written in May 2007 and well overdue for TOD posting) combines their assessment with additional information sources, to produce a revised estimate of reserves in Saudi Arabia and the other OPEC countries.
[snip]
Thanks slg - and david, there isn't any "easily" with respect to 700 nuclear plants - in materials, construction or operations.
"isn't any "easily" with respect to 700 nuclear plants - in materials, construction or operations"
Absolutely. Even if all political constraints on nukes were removed, 1,000 plants would be 50/year for 20 years. And other countries are building them too. Wouldn't uranium become limiting at some point? How much is there in the world?
aotc,
Absent the political constraints and the supply of uranium, we haven't been training nuclear engineers in this country - the bottlenecks that would emerge as the entire planet strained to ramp up would beggar the bubbles we see in materials commodity prices we see today.
There. are. no. easy. answers. There ARE answers, it is doable but the idea that is airily asserted that we will do this all easily is a grave disservice.
Worker shortages are an issue for oil as well. They are a major factor slowing tar sands development in Alberta. Now, admittedly, the 50 below winters and blackfly-plagued summers don't help in attracting workers, but very high paying positions are going begging.
but very high paying positions are going begging.
How high paying?
Fact is, this is about oil speculation. How else could oil go from $60 to $140 in less than a year? Lets not be niave, folks. This goes back to greed.
And the more GREED we see in this country, the more government regulation we end up needing. Just look at the bank scandle under Reagan and Sr Bush. The speculation of oil and the mortgage fiasco now is a perfect example of the problems caused by this crazy dream of "easy money" in the so-called "free market" of commodity trading. So many "investors" and get-rich-schemes and not enough hard-working Americans making money the old-fashioned way (ie hard work), if you ask me. Why dont these "organizations" that invest in mortgage backed securities and now commodities, as well as all the banks, Enrons execs and other yo-yo's go back to school and get real jobs that require real work and build something that adds value, rather than moving money around on a computer screen.
If you ask me the problem is that all the people that had over-invested in realestate began to shift their dollars into commodities, in a panic for returns on investment.
The relationship of the current price of gas and oil is this: Everyone in the food chain, except the consumer, makes a profit when oil goes up....OPEC, producers, refiners, sellers, etc. Period. The wild card is demand. That isnt going away and increasing, but can slow, and will as oil increases in price. As soon as that levels off (as its seems to have), there is no place for investors to run to for returns, so they will sell to make their money. As they do, refiners will ease back buying oil again, and supply increases, and prices go down and consumers return. But guess what....because investors "have" in contrcats, 70% of the world's oil on paper, they now control the price folks. Refiners may be in control of how oil is supplied, and producers how much is pumped out of teh ground and delivered, as long as people HAVE to buy oil to survive in this world, the price will be high from here on.....UNTIL, some regulation steps in and shuts off the speculation valve, and move the buy/sell back to the refiners and oil companies. Thats what the Saudi's are trying to tell Bush's cronies, but his Energy Sect cant seem to figure that out.
Thank you for that great article. This article was exactly what I was searching for? Could I link to this?
Of course it has a lot to do with speculation. in January 2006, the Bush Administration's CFTC permitted the Intercontinental Exchange (ICE), the leading operator of electronic energy exchanges, to use its trading terminals in the United States for the trading of US crude oil futures on the ICE futures exchange in London.
Leading the way to ENRON type speculation. A glance at the price for Brent and WTI futures prices since January 2006 indicates the remarkable correlation between skyrocketing oil prices and the unregulated trade in ICE oil futures in US markets. Keep in mind that ICE Futures in London is owned and controled by a USA company based in Atlanta Georgia.