We’ve all engaged in the speculation wars as to the reason for oil prices’ astronomical rise in such a short time. The four most common arguments are:
1: questionable speculators activity
2: decreasing supply and increasing demand – and peak oil theories
3: Iraq or Middle East conflicts and terrorism
4: falling value of US dollar
I’m neither an accomplished economist, nor an oil expert. But I’m one curious individual, so I set out to see if I could shed some light how just what to believe. There’s considerable amount of data here (meaning long! a week’s worth!) but I’ll share my research on the four issues mentioned above… and my attempt to put it all into perspective…. sans politics. (the “gasps” abound, no doubt…)
To agree on a solution, we need to know the cause of the problem.
The article that sparked my increased motivation and quest came from Australia’s Herald Sun yesterday, Speculators to blame, says OPEC”.
The monarch, who said Saudi Arabia would give $US1.5 billion ($1.57bn) to efforts to ease energy shortages in poor nations, told the 36-nation summit his country was “very concerned” about consumers worldwide.
He blamed increased oil consumption and taxes on fuel, but said: “Among other factors behind this unjust increase in oil prices is the abhorrent act of speculators acting for their own selfish interests”.
The most common thought on the speculators is that the buying frenzy is creating a positive feedback look, driving the prices artificially high and creating an economic bubble – much as was done with the housing prices in both the UK and USA. Along that line of thought, Congress is busy crafting legislation aimed at regulating speculators, while McCain has called for “thorough and complete investigation of speculators” to see if they’ve driven up oil prices.
Alan Reynolds termed this knee jerk reaction as a “witch hunt that’s clearly about oil” in an article that ran in the NY Sun June 20th, titled “Scapegoating the Speculators”, and was reproduced on the Cato Institute site.Reynold’s debates OPEC’s accusation. Speculators, purchase the contracts and sell those before their expiration date, in the hopes of making profits. Sometimes this entails betting the prices goes down instead of up. Or as he puts it, Guess wrong on the direction, and you lose money.
John Maynard Keynes (in The General Theory of Employment, Interest, and Money) offers this definition of speculation:
Speculation: The activity of forecasting the psychology of the market.
Speculative motive: The object of securing profit from knowing better than the market what the future will bring forth.
Keeping that definition in mind, Reynolds believes speculators are betting prices will be going down.
Purely financial speculators needn’t play futures at all. They can simply buy (or short) the exchange-traded US Oil Fund, which tracks the price of West Texas crude. And The Wall Street Journal reports that short interest in that fund is up 140 percent since January, outnumbering long bets by two to one.
Speculators, in other words, are increasingly leaning toward betting the price of oil will go down, not up. So they’re unlikely villains if prices do keep rising.
According to an excerpt from Martin Fridson, “Exactly What Do You Mean By Speculation?” Journal of Portfolio Management, Fall 1993, Reynold’s theory that current speculation is a bet that prices will be going down actually holds water.
Taking the debate a step further, Fridson suggested viewing speculation in the context of “Modern Portfolio Theory.” Building on the work of Harry Markowitz, William Sharpe, and others, Fridson concluded that “The common thread between speculation (as currently defined) and transactions that seem speculative, yet fail to satisfy all the established criteria, is that they are all bets against the consensus view.”
I think we can all safely concur that betting oil prices will decline is not the consensus…. Certainly speculative buying can inflate the real value of a product by simply increasing the demand for that product (which in this case is contracts only, not the delivery of oil) in the extreme. However some competitive speculation often results in an efficient and healthy market.
As for the more logical idea of betting on further price increases, Reyolds counters with:
Yes, if the price of next month’s oil futures goes up, that can encourage producers to slow their sales on the spot market. And a higher price for next month’s oil can encourage refiners to buy more now rather than later. Both reactions could push the cash price up.
But they would also cause oil inventories to rise. [Mata Note: Keep this inventory… aka stock on hand = less demand, translating to more supply available to sell… in mind for info about China further down.] And rising inventories always bring the price back down. Yet US oil inventories appear modest at present – so there’s little evidence that speculation had much to do with recent prices (aside from one-day spikes from scary rumors or news).
Economic bubbles and artificallyinflated prices can, as we again know with the housing markets, lead to quick, and possibly steep declines. The steepest decline would, of course, be recognized as a crash… which is George Soros prediction.Sorosis one of those, along with OPEC, that blame speculators.
There are few western media publications that do not blame speculators. But because I can see Reynold’s legitmate point, I’ll have to put the speculators in the “contributing to the problem” column. But I don’t see it as the primary driving force.
This seques us easily to the supply and demand argument. It cannot be questioned that the world is increasing it’s consumption (demand), so that only leaves us with the supply question. Is oil output sufficient for the demand?
Again we find a mixed bag. The Saudis insist they have enough oil to sustain needs for decades to come, and capitulated to US demands on the second request. They did, however, refuse the 1st request from GWB just a month earlier, saying it wasn’t a supply issue since no customers were asking for more oil.
The US was not alone in putting pressure on OPEC. British PM Brown flew to the summit with the same request… pump more. See OPEC chief dismisses Brown’s call to boost productions as “irrational”And like the Saudi’sfirst meeting with GWB, they refused. Cost of living in the UK has risen to a 16 year high of 3.3%.
Yet is it irrational? And if so, why the change of heart by the Saudis?
According to MarketWatch on June 19th, China’s reduction of subsidies, which precipitated their price hike to consumers, resulted in oil prices down $4.75… all based on “concern” for a slowdown in demand.
Translation? The Chinese nailed their population with a hefty price increase instantly following removing subsidies. The market anticipated the Chinese, not an affluent people, would decrease their demand which would increase available supply of marketable oil on the world market.
Note: The assumption of more available oil supply because of less Chinese demand resulted in drop in barrel prices.
But that oil per barrel price didn’t last when reality set in, and they didn’t see the Chinese running in droves from the pump.
Oil rose by more than $4 a barrel today as dealers reassessed their view about a fuel price increase in China announced by Beijing earlier this week. After a $5 fall yesterday, speculation that Chinese demand might rise pushed the price of both US and Brent crude above $136 a barrel, within sight of the record of just under $140 a barrel briefly reached earlier in the week.
The Chinese found themselves in the real shock and awe price moment. The government had been holding the prices down (for 8 months) with price caps until they were forced to remove them by the state-owned oil companies who had been functioning in the red for selling to China at a loss. Prices jumped 18% virtually overnight. Add’l pressure was put on China by foreign governments who argue that subsidised Chinese fuel is keeping global prices high.
What about the other 93% of the worlds current oil reserves, owned or controlled by governments? Are their subsidies also affecting oil prices?
Also an issue is the oil output declines by the state owned oil reserves. The absence of private investors in state owned oil producers – and the inability for a socialist country to improve it’s own production output with dwindling public funds – factors heavily in their decline of oil production. This is a situation that, as their economy declines with their oil income, they become another China – dependent upon oil production that runs in the red…. until it can’t any longer.
All these factors and events make me believe that supply vs demand is not meriting the attention it deserves by Congress and the western media.
As a side bar to supply/demand, comes the peak oil debate… or, per the liberal site, The Oil Drum, the limitations of natural production of oil by Mother Nature. But even these environmentalists admit oil’s still prevalent. They just claim it will be cost prohibitive to pump it.
Also on the same site, and from another very liberal/environmental source, the APSO, is a guest post by Rembrandt Koppelaar, Chairman of ASPO Netherlands.Mr. Koppelaar offers a very valuable lesson when reading about peak oil reports. Ala how do they figure “decline” – net or gross – when reading media reports and source material?
Gross decline rate – the drop in production that would occur if oil companies would not try to halt declines, or the natural decline level. Decline can be halted by introducing new techniques / workovers / drilling more wells and so forth.
Net Decline rate – the drop in production that occurs when the efforts by oil companies to halt decline are included.
Koppelaar has lots of charts and pictures to entertain. He even points out that between 2001 and 2006, there has not been a decline in the “liquids” production. But what is the most important point to take away from informative post is the fact studies upon which many rely (like Congress…..) are:
1: dealing with existing oil fields and not necesarily future oil fields
2: perhaps not taking into account that the oil supply is not being drained, but is requiring more drilling to extract the still existing oil
3: as our technology improves, the “cost prohibitive factor” becomes less relevant
Because of the vagueness and disclosures on most links about peak oil, I’m going to say that peak oil – in the context of the doom’n’gloom apocolyptic end to oil available – is a highly debatable subject…. all which can change depending on technology, and exploration and development of new oil fields.
That said, I’ll put supply and demand into a “definitely a factor” column.
As for refining – it is a separate issue known already to affect US prices. Our prices at the pump are in direct response to our refinining limitations and interruptions… i.e. hurricanes/Mother Nature damaging for our coastal refineries, and federal mandates forcing different mixtures twice a year. Refining is definitely an issue, but one that comes into play between the price per barrel and the gas pump. But it is always worth noting that the head of OPEC cites refining limitations as a factor of the price per barrel.
Oddly enough, many of the articles morph right from the supply/demand issue into the conflicts/terrorism effect. But not in the direction most would think.
The Saudis (only) agreed to increase oil output at the summit – despite their claims “no one was asking for more oil”. Yet still the prices surged in the wake of that announcement, with light sweet crude at over $135 and $136 a barrel the following days. (Note: light sweet crude is the least expensive to refine). Why?
Terrorism… but not Iraq. The hotbead area directly affecting prices is one where the US has no military conflict – Nigeria’s sweet crude fields that remain under constant and deliberate assault from Emancipation of the Niger Delta (MEND) since their formation in March 2006.
Nigeria is the world’s eighth largest oil exporter and the fifth largest supplier of crude to the US. MEND’s recent sabotage of pipelines and other oil facilities has so far shut off over a fifth of the country’s oil output, steadily driving up world oil prices.
The above quote was from 2006, however their terrorists antics, designed to slice away at Nigeria’s oil income, remains an ongoing influence today. Again, from the CNN article just yesterday, about prices rising in the wake of the Saudi output increase:
Oil prices rose Monday as investors shrugged off Saudi Arabia’s pledge to increase its oil production if needed, focusing instead on disruptions to Nigerian supply and heightened Middle East tensions.
snip
Royal Dutch Shell PLC said Friday that it cannot meet contractual obligations to export oil from a Nigerian oil field following a militant attack Thursday. Nigerian oil workers also reportedly decided to strike at a Chevron Corp. facility beginning Monday.
But oil prices might find some relief from Sunday’s announcement by Nigeria’s main militant group that it would halt attacks starting at midnight Tuesday. The Movement for the Emancipation of the Niger Delta declared a unilateral cease-fire, saying elders in the restive southern region had asked the fighters to allow peace efforts to go ahead.
The group’s attacks have sliced about one quarter from Nigeria’s normal oil daily oil output, helping buoy crude prices in international markets.
“The market will see if indeed that cease-fire holds for a bit of time,” Shum said.
Unlike “concern” about attack on Iran oil fields, which has not happened, Nigeria’s conflicts are real… not speculation. This again sidles right back into the supply/demand argument. When looking at the terrorism/war effects on oil, it was an interesting trip thru memory lane in the media.
From a Feb 2007 Vanity Fair article by Sebastian Junger – “Blood Oil: Politics & Power” – Nigeria figured prominently even prior.
On June 23, 2005, a group of high-ranking government officials were convened in a ballroom of the Four Seasons Hotel in Washington, D.C., to respond to a simulated crisis in the global oil supply. The event was called “Oil ShockWave,” and it was organized by public-interest groups concerned withenergy policy and national security. Among those seated beneath a wall-size map of the world were two former heads of the C.I.A., the president of the Council on Foreign Relations, and a member of the Joint Chiefs of Staff. The scenario they were handed was this:
Civil conflict breaks out in northern Nigeria—an area rife with Islamic militancy and religious violence—and the Nigerian Army is forced to intervene. The situation deteriorates, and international oil companies decide to end operations in the oil-rich Niger River delta, resulting in a loss of 800,000 barrels a day on the world market. Since Nigerian oil is classified as “light sweet crude,” meaning that it requires very little refining, this makes it a particularly painful loss to the American market. Concurrently, in this scenario, a cold wave sweeping across the Northern Hemisphere boosts global demand by 800,000 barrels a day. Because global oil production is already functioning at close to maximum capacity (around 84 million barrels a day), small disruptions in supply shudder through the system very quickly. A net deficit of almost two million barrels a day is a significant shock to the market, and the price of a barrel of oil rapidly goes to more than $80.
What follows is almost comical considering today’s reality of oil at over $135 per barrel. Talk of how the US could sustain $80 per oil almost “indefinitely”, but that demand would decline. The Oil ShockWave panel suggested a scenario of near “simultaneous” terrorist attacks on oil supplies worldwide that could “easily send prices to $120 a barrel, and those prices, if sustained for more than a few weeks, would cascade disastrously through the American economy.”
Slowdown in the economy, yes. Evidently not quite disastrous… but certainly, if unable to stablize prices, ultimately could be disastrous not only for the US economy, but the global economy. The US marketplace is, afterall, the centerpiece for most of the world’s goods. When we can no longer afford to “go to the mall”, the effect will be felt like a shot heard round the world.
What I found was most interesting was Junger stated the last two US recessions were spiked by 1: an increase in oil prices and 2: unrest in Nigeria.
Because Nigerian oil is so vital to the American economy, President Bush’s State Department declared in 2002 that—along with all other African oil imports—it was to be considered a “strategic national interest.”
Even today, on The Oil Drum, Nigeria is raised as the main issue for terrorist disruption of the world’s oil supply.
On the heels of this weekend’s Saudi Oil summit, Nigerian production has dropped to the lowest level in 25 years. This was in part because militant attacks shut in as much as 345,000 barrels per day of Nigerian production in the past few days. The Nigerian militant group MEND (Movement for the Emancipation of the Niger Delta) has demonstrated a continuing ability to interrupt production from Nigeria’s mature, onshore fields. However, the future promise of Nigerian oil is not onshore. Rather, it is the 1.25 million barrels per day of offshore production scheduled to come on line in the next 6 years. Analysts previously believed these offshore facilities were out of MEND’s reach.
The beauty of this particular post and source link is that offshore production… by someone, and hopefully private firms… can promise a more stable supply of Nigeria’s crude. But is anyone addressing this?
As for the rest of the Middle East conflicts? Israel vs “fill in the blank” has been going on for half a century. The US has been present in Saudi since the early 90s. In short, nothing has caused this much of a steady, sustained and leap of pricing. In light of this history and the constant state of middle eastern unrest for centuries, I’ll place conflicts and terrorism effect into possible, but not as likely column, and Nigeria’s situation under the supply/demand column.
Which bring us last to the falling of the US dollar. Certainly this decline affects more than just oil in the US economy, and the decline did not start with the rise in oil prices.
In 2007, the US trade deficit was “$708.5 billion, which is $1.6 trillion in exports minus $2.2 trillion in imports. The deficit improved by $50 billion in 2007, thanks to higher exports, a result of the declining dollar. (Source: U.S. Bureau of Economic Analysis, “U.S. International Trade in Goods and Services,Exhibit 1″, March 11, 2008).” fast source here w/links to spreadsheets)
Again, contrary to the US citizens common belief, this is not attributable to Iraq war debt. The deficit is divided into two categories – petroleum related and consumer products. Together these categories equal 87% of the total national debt.
The trade deficit by category was:
$293 billion for petroleum related products,
$328 billion for consumer products,
$193 billion for all other goods,
$107 billion in surplus for services.
(See spreadsheet in Google Docs)
In a Cleverwithcash.com article,discussing subprimeloans, the US dollar and oil prices, they point out that both China and Japan are financing a great part of the US debt, holding US Treasuries. Their economy is effectively tied to ours.
To we laymen, on the surface it appears to be a bottomless feeding frenzy cycle… As US Dollar goes down, oil prices go up. As oil price increases, the US trade deficit goes up further for our petroleum related products, causing a lower dollar.
Yet why is it that Europe is also suffering from the interminably high prices with their Euro? According to Martin Feldstein,:
Because the oil market is global, with its price in different places virtually identical, the price reflects both total world demand for oil and total supply by all of the oil-producing countries. The primary demand for oil is as a transport fuel, with lesser amounts used for heating, energy, and as inputs for petrochemical industries like plastics. The increasing demand for oil from all countries, but particularly from rapidly growing emerging-market countries like China and India, has therefore been, and will continue to be, an important force pushing up the global price.
The thinking behind the question of whether oil would cost less today if it were priced in euros seems to be that, since the dollar has fallen relative to the euro, this would have contained the rise in the price of oil. In reality, the currency in which oil is priced would have no significant or sustained effect on the price of oil when translated into dollars, euros, yen, or any other currency.
Feldstein (a professor of economics at Harvard, former Chairman of President Reagan’s Council of Economic Advisors, and President of the National Bureau for Economic Research) concurs that while the decline of the dollar doesn’t affect the rise in oil prices, the rise in oil does contribute to the deficit… which affects the dollar’s value. Thus, it is a separate issue to be reckoned with for the overall health of the US economy, and our continuation as the quintessential, coveted market globally. Based on this, I’ll place the falling dollar into the “not applicable” column for oil prices.
Which brings me at long last to digest all I’ve learned in the past week. A tenative summary about a very complex subject… one truly beyond most of us, and most certainly me. But in light that we have a Congress about to intercede, and media proclaiming they “know”, it behooves us all to have a more informed perspective. I hope this does that for you, as it did for me.
Of the four categories, it appears the most influential on oil prices is the oil supply/demand theory, peppered by refining. It is, however, not the lone culprit. Added to that is a degree of speculation and their effects… in theory and practice, perhaps not long term.
We’ve eliminated the falling dollar as an issue and, other than Nigeria (under supply/demand now), terrorism.
But the solution is as multifaceted as the problem … how to best address supply and demand, avoid legislation that is counterproductive to traditional speculation benefits, and not worsen our national debt with prohibitive trade laws.
Can Congress take off their blinders and abandon their standard tunnel vision? Truly, it’s not their strong suite. Their habits are to find somewhere/someone to assign blame, and reap legislative punishment on that declared scape goat. This is, per WSJ’s Keith Johnson, what they have planned.
In his article “Saudis or Speculators? Oil-Price Finger-Pointing Heats Up”, Congress is set to parade a list of witness that will give the elected elite exactly what they want to hear to push forward their proposed legislation on speculators.
Among the experts: Oppenheimer and Co. oil analyst Fadel Gheit, who famously and furiously blames speculation for the bulk of the price increase, as well as Michael Masters, a Virgin Islands-based fund manager who doesn’t hesitate to point the finger at colleagues. He noted in previous congressional testimony that in the last five years, speculation in crude futures has increased almost as much as physical demand for oil in China, another favorite bete noir. Other energy experts set to testify include speculation alongside a weak dollar, “peak oil” and relentless demand growth as a part of a “perfect storm” that explains today’s high oil prices.
They may convince the nation, after all the western media demonization, that they are correcting the situation. But after all I’ve read, I can’t help but believe they are missing the pulse of the problem. And that does not bode well for us, Joe Blow citizenry.
Vietnam era Navy wife, indy/conservative, and an official California escapee now residing as a red speck in the sea of Oregon blue.
The world is a complex place and as your article demonstrates our oil problem is a complex one. It is not something that can be fixed with just windfall profits taxes or offshore drilling. Niether candidate has proposed any serious solutions. I don’t think this discussion is over the head of the average American, unfortunately people tend to look for easy answers.
Nice writeup. My own slightly shorter take:
1) Supply and demand. World oil production rose fairly steadily from 1990 through 2005 – then it went flat for three years. This is a shortfall of about 1.5 billion barrels from what would have been produced had the supply continued to smoothly increase. With world economies growing at 3-4% (for Euro/US/China/Japan/India in aggregate) this looks like the biggest culprit.
There have been similar dips in world oil production in the past, but generally there has been a lot of unused capacity in those previous cases. While I don’t subscribe to the peak oiler’s apocalyptic predictions, in this case they seem to have been closer to the mark than the optimists (for a laugh, look at the DOE price predictions from 2005 – page 10 of this powerpoint.
2) Speculators have bought up (stockpiled) 1.1 billion barrels of oil. This is an unprecedented amount and definitely contributes to the price rise (it’s almost as big as the production shortfall of the past three years). See here. Notice though that the main culprits are not individual speculators, but governments trying to invest their foreign currency holdings (sovereign wealth funds). The ETFs that are traded on the American stock exchange are not big enough. For example the AMEX ETF for oil only holds about $1 billion of oil, less than 1% of the speculative stockpile.
3) Terrorism and conflicts – I don’t know enough about this, will defer to your viewpoint.
4) Weak dollar – you’ve mischaracterized what Feldstein said. It’s true that pricing oil in Euros would not affect the price we see at all. But the fall of the dollar vis-a-vis the Euro (which is a separate issue than what currency is used to price the oil) definitely makes oil more expensive for us.
You’re correct.
Windfall profits taxes have been proven over and over not to work.
And you veer quickly off course.
There are years and years of increased supply available to us in ANWR as well as offshore.
We will never, no matter how much we may wish it, we will never get away from oil completely. Oil is needed for everything from paint to candy wrappers to fertilizer to plastics to fuel for our vehicles.
Oil is a major component in the engine of our lives and our economy. We will never get away from it completely.
Relieving limited supply issues through additional drilling will help.
American ingenuity and capitalism will lead to alternative energy options. Unfortunately, none of the current alternate energy ideas are ready to be introduced on a widespread basis.
Everyone keeps saying it won’t make any impact for ten years and so we shouldn’t do anything. That’s the same logic that was used when Clinton vetoed our last effort to expand supply…10 years ago.
Now, you and I both know, at least I know, that this argument is false.
McCain has proposed a multi-branched plan which will move onto the road toward energy independence.
Running around in circles and making the same excuses will not resolve a thing.
bbartlog, many thanks for adding another information link to the pile. Per Mish’s trend, they again blame the speculator first, and lay some blame on the devaluation of the dollar.
I’m not comfortable in the commodity/speculator laws… yet, or perhaps ever. I certainly think there is room to examine whether Wall Street, which he apparently believes has hijacked price controls from OPEC, is dangerously skirting regulations by what seems like a bundling of funds to get around caps.
But there’s still a base inherent wisdom that doesn’t follow here in two areas.
1: Speculation driving up the pricing this high, this fast, promotes instability. Creating conditions that can lead to a crash is counter intuitive to a speculator’s aim of making profit. It’s like cutting off your hand, just before you reach for the steak knife.
2: The “stockpiling” of the futures contracts is in essence a build up of inventory. With inventory high – delivered or not to producers, demands for supply go down, and so do the prices. This isn’t following the usual pattern.
Perhaps you can lend your thoughts to my questions, yes?
I’m not sure how I mischaracterized Feldstein. Or perhaps it’s a media mischaracterization of the dollar vs prices. As Feldstein says, the price per barrel is the price per barrel globally. The dollar value isn’t driving the oil price up.
But it’s also true that if the dollar doesn’t go as far, it does purchase less oil. So it does take more dollars to get the same amount of oil. That is not, in effective, driving up the price of oil as a pricing indicator. It is merely the result of a higher deficit, since the major bulk of our national debt is petroleum based products.
So perhaps instead of a mischaracterization, it’s just a perspective as to what is driving what… and the dollar value is not driving the price per barrel. But the price is certainly making the dollar less effective.
LATER ADD: BTW, bbartlog, we do seem to have come to the same conclusion via a slightly different path. You think the supply/demand is the largest culprit, with speculators a contributing cause… as do I.
Fit Fit, in general, I agree with all you said because you added the caveat of “not fixed with *just*….”. I believe the solution will be multifaceted.
What worries me is that, as bbartlog and I both agree, the primary culprit still appears to be supply and demand. Congress is choosing to ignore that prong, and focusing only on speculators…. the secondary and lesser culprit. If they overdo, they can actually cause more damage, as traditional speculation is healthy for the market.
In the long run, the POTUS will have little to do with it but sign or veto Congressional bills. However taking a fast track to increased oil development with known fields will be more possible with Mac than BHO. sorta….
However it’s unlikely a DNC led Congress will address supply/demand at all. So not much of an issue who the POTUS is, right? This is primarily in the hands of Congress. God help us all….
There are two reason why gas is so high:
1. Congress has repeatedly refused to drill in Anwar and off shore thereby making us dependent on foreign oil.
2. Opec controls the amount of oil drilled. When OPEC cuts drilling supply sinks and demand stays the same or rises. Oil is then sold to the highest bidder. Speculators only speculate on this trend. It is OPEC who are trying and succeeding in garnering astronomic prices on oil on the world. This is why they formed this consortium in the first place. The power of oil and the power of money. Saudi Arabia saying that an increase in oil production is a lie. OPEC will continue to sell at these prices as long as countries will pay them and that will be foreveror until an alternative fuel is discovered. This is just a case of OPEC flexing its muscles. It is ridiculous for this country to be sitting on so much oil and still buying it at these prices from foreign, hostile countries. The dimwits have a lot to answer for and this is not the only subject involved.
I don’t have time to read the post carefully – it _is_ long! but have heard two things recently that piqued my interest:
1)the Saudis reduced their oil output early this year. If I remember the numbers anywhere near correctly, the increase they’ve promised returns the level to approximately where it was.
2)In the US, we’re now pumping approximately the same amount of oil that we were in the late 1940s.
The first one is pretty easily researched. The second one though …! I’m not sure where I heard it, and have done a couple of searches and been unable to find any information that allows me to prove it or disprove it. Have you run across any references/sources that might assist with this sort of information?
One more thing – that Canada is drilling across the border, but so close to ANWR as to be effectively drilling in ANWR even if we aren’t. Like allowing the Chinese to drill in the waters off FLA when we can’t…doesn’t that seem pretty stupid(if true)?
All I’m really saying (as regards Feldstein) is that you first mention the falling value of the dollar as a possible factor in high oil prices, then bring out a quote by this guy who says that the currency in which oil is priced/denominated should have no effect on oil prices. These are two separate things. And as far as the world average price of oil is concerned, it’s also true that a weak dollar won’t affect it directly – it may seem more expensive to us, but cheaper to others (who buy using Euros or whatever) at the same time.
However, if we’re looking specifically at US oil prices, a weak dollar definitely will cause them to go up, just as it would any other imported good. Even if all the costs of production are denominated in dollars (possibly true for Aramco, I don’t know), this is still true just because buyers using other currencies now ‘see’ a lower effective price and buy more oil until a new equilibrium is reached. And in fact oil prices have gone up in Europe (because of the other factors), but not nearly as much.
This is still probably in third place (or maybe even fourth) as a driver of high prices, though.
The second one though …! I’m not sure where I heard it, and have done a couple of searches and been unable to find any information that allows me to prove it or disprove it.
It sounds about right. US oil production peaked in 1970 or so and has been declining ever since. Though it doesn’t provide exact numbers, you can see the general outline of US production (along with a bunch of other countries) in this PNG.
two reason why gas is so high:
1. Congress has repeatedly refused to drill in Anwar […]
2. Opec controls the amount of oil drilled.
I agree we should drill in ANWAR – if you’re in a hole, the first thing to do is stop digging. But this alone would not solve the problem.
As for OPEC, they may be contributing to the problem, but the reality is that most of them couldn’t increase oil output even if they wanted to. Look at DOE estimates of spare production capacity, or follow the link above to see how universal the decline in production is. I will grant the Peak Oil guys this: they have identified a problem. And if prices were somehow fixed at only $40 per barrel or so, we would see world oil production continue to slope down (just like US production did after 1970) and we would be screwed.
The thing the peak oil folks only half acknowledge is that the nice production bell curves, that show production increase and then decline, occur in a regime of fairly stable prices. We don’t know what would have happened to US oil production if oil had stayed at the price peak it reached around 1980, or even drifted slowly higher.
But one thing you *can* take away from their arguments is that avoiding a crash in oil production will definitely involve higher prices. Somebody needs to pay for all the new rigs, exploration, horizontal drilling technology etc. etc. etc., and in the end that’s the consumer. Nothing government does can change that (except in ways that make things even worse).
Sorry for the length, Suek. When we embarked on this oil/gas discussion last week, I spent much time researching all the details. Figured I’d put out all the links and stuff to save everyone else some time. But it was hard to pack into a condensed space.
I’m not sure what you mean by “we’re pumping”… or:
But here’s an EIA PDF of petroleum overview in the US from 1949 to 2007. It’s expressed in millions of barrels daily.
In 1949, our production and consumption were about 5 mil daily. Production is the processing of raw crude and natural gas. At that time, our imports were neglible.
By late 70s, our consumption did a peak at about 18 mil daily. Our production capacity was up to about 8 mil, and our imports had risen to about 6.5 mil. Between then and the early-mid 80s, consumption and imports did a parallel drop, while production varied only slightly.
Then, the imports and consumption take a steep rise that almost parallel thru 2007. The production goes on a slow decline.
So I suspect what you meant was we are refining/processing about the same amount we did in 1949, yes?
This does beg the question that if we are not doing all the refining for our useage, who is? And if we’re just refining the same, then that is indeed a cost added to the end user because of limited supply of refined fuels. Also, different oil grades require different processing… i.e. light crude sweet is the oil requiring the least refining, thereby coveted for refining costs. That’s why Nigeria is so important. But you may not have gotten that far in the post.
All that said, refining is the step in between the price per barrel of raw crude, and the gas pumps. So it has little to do with the price of a barrel… the prime discussion here. But yes… our production capacity sucks…
Hey bbartlog… had to dig your two comments out of the spam filter, so they didn’t make it to the thread before I posted #10.
I mentioned the falling dollar as one of the original four because it’s one factor the western media pushes. In the long run, I think we agree… just can’t find the common words.
That’s a good int’l graphic you provided. I think the EIA one I linked to actually addresses Suek’s points.
But it’s interesting there was an int’l decline in usage from late 70s to early-mid 80s. Anybody know what that was???
INRE peak oil and “couldn’t increase oil output even if they wanted to”. I don’t think that is the case. All I’ve read about peak oil is based on existing fields and rigs. Even the peak oil advocates admit there is oil a’plenty left. They are looking at it with a cost v output, based on existing facilities.
They can halt the decline of peak oil in many ways. But most reports I’ve seen are basing their dire results with current fields doing nothing to stop the decline.
Miz Harley, thanks for your efforts in putting this together.
Mentioning “stockpiling” entails consideration of where to keep it. Storage is expensive and limited and means taking delivery [and paying for] millions of barrels of crude. Our own strategic stockpile is in natural caverns, but I doubt there are similar salt domes out there you could just rent.
There has been talk of Iran’s buying old obsolete tankers to fill up and park off their coast, but again, that supply is limited. I reckon that “stockpiling” may just mean leaving it in the ground when it’s near pipelines and ports, while pumping more distant or secondary sources while the high price justifies it.
If stockpiling is indeed a problem, then the day before storage capacity runs out is the day spot prices collapse. I wish my uncle were still alive — he knew all the ins and outs; we need our own expert!
And as far as gasoline prices go, our marginal refining capacity is a major culprit. And don’t forget the harmful effect of States’ mandating different formulations, which mean interrupting production for each change in formula.
Well… found the answer to my own question. The 1979 to 1982 oil crises was in the wake of the Islamic Revoltion in Iran. A brief, and perhaps not the most complete, tutorial here…
You’re welcome, Mr. Harry. But the stockpiling to which I refer isn’t actually physical storage, but oil contracts that can be sold. Gosh darn, what a tank that would be, eh?
But physical storage, indeed even transporting oil in the supertankers… most of which have to round the Cape of Good Hope thru treacherous waters… is quite the big deal. Read a book a long time ago that stuck with me… Supership by Noel Mostert published in 1974, before they had double hulled ships. Amazing book. Somewhat dated, but still very relevant.
As I mentioned near the end of the post and to Suek, refining adds costs to the pump and I do address the lack of processing facilities and mixed fuel. So yes, it is a culprit for our own pump prises. But the price per barrel comes before the refining process. So somewhat unrelated on that level.
#11 But it’s interesting there was an int’l decline in usage from late 70s to early-mid 80s. Anybody know what that was???
I suspect part of it was the infamous “stagflation” of the infamous Carter years.
#13 …the stockpiling to which I refer isn’t actually physical storage, but oil contracts that can be sold.
Then that “stockpiling” is just speculation, plus the ordinary operation of the futures market. That market is absolutely necessary to the orderly supply of commodities to manufacturers. Whoever owns a particular December 2008 crude contract, that oil will not be available before then and it has to be delivered then, whatever the price. The spot market is higher because it is only for those who don’t have enough for current needs.
If we try to eliminate speculation in oil futures, speculators will just move to Dubai. Daniel Yergin just today testified to Congress that speculation is NOT a problem. His book, The Prize, is a must-read for those who want to understand oil.
How quickly will we be lulled into a catatonic stupor by Saudi promises of increased oil output?
Now that we’ve alarmed their obscenely wealthy princes by cutting down on our consumption in the face of budget busting prices, are we going to stick our heads back in the Arabian sand and put our urgency to fund and implement alternative sources of energy on the back burner?
Are we going to drill closer to home instead of innovate? And if we’re going to pay the price to drill, can we use an equal amount of resources to find a way to harness the energies of the sun, the seas, and the subterranean so that we’re not compromised politically and ethically by our need for fossil fuel from people who don’t much care for us or how we express our freedom?
Are we that easy to manipulate?
Are we as intellectually lazy as we’ve shown ourselves to be over the last 8 years, voting for a friendly fella whose idea of research in college was finding out which New Haven 7-Eleven carried Heineken by the case?
Are we ready to wake up?
http://www.loosekannon.com
I heard an interesting discussion on the Sean Hannity show the other day. A caller noted that he signed Sean’s “Drill Here, Drill Now” petition. He then challenged Sean on the certainty of the economic impacts of drilling now. Sean reminded him that it was a simple matter of supply and demand. He noted that if we increase the oil supply with our newly developed resources, the price will go down. [Sidenote: This assumes static demand. When you look at India and China, that doesn’t seem likely]. Then the caller raised this issue: If we raise the supply with our oil, won’t the other oil producers [good capitalists that they are] reduce their production to compensate and thereby keep the price high? Sean then responded that we would keep all the oil drilled in the United States in the United States. Full stop.
How would we do that? How would we induce the oil companies to sell their oil only in America when they can get a higher price elsewhere? Would we appeal to their patriotic duty? Wouldn’t we have to declare that oil pumped from United States territory is United States oil? But wouldn’t that violate free market principles and be in effect the nationalization of our oil reserves?
Dave Noble: Why don’t we just drill here, drill now and find out if your theories are correct?
All I know is that during the decades of you folks denying us the right to drill for our own oil the price has gone up, up and UP!
I find all the excuses you folks have for drilling rather specious. Especially when considering how you demand we should drill on the 68 million acres already leased for oil drilling whether or not there is oil there. If it’s ok to drill there, why not drill everywhere?
P.S. That’s not Sean Hannity’s “Drill here, Drill now” petition. If you had been listening closely, you would have known this idea comes from Newt Gingrich’s American Solutions outfit. And everyone who understands that this is a supply side issue should sign the petition.
If this is the case, why do you call the recent uptick in gas prices the “Pelosi premium?” Come to think of it, until quite recently, the Republicans were in charge of congress for quite a while. I wonder how this problem that is, as you say, decades in the making all gets laid at the doorstep of someone who has been Speaker for well under two years.
But there’s still a base inherent wisdom that doesn’t follow here in two areas.
1: Speculation driving up the pricing this high, this fast, promotes instability. Creating conditions that can lead to a crash is counter intuitive to a speculator’s aim of making profit. It’s like cutting off your hand, just before you reach for the steak knife.
2: The “stockpiling” of the futures contracts is in essence a build up of inventory. With inventory high – delivered or not to producers, demands for supply go down, and so do the prices. This isn’t following the usual pattern.
Perhaps you can lend your thoughts to my questions, yes?
Perhaps there is another component that has not been mentioned yet – intentional market manipulation. Goldman Sachs and Morgan Stanley, two Wall Street firms, are among the biggest cheerleaders for a rising price of oil. They are also, along with OPEC sovereign wealth funds, bigger players than most other players in the market combined. Any “demand” from their buying is of course not real. With just $12 billion, one of these mega-players could buy up a million leveraged futures contracts with a roughly $12,000 initial margin deposit, and control a billion barrels of oil. If Friday July 25 was a typical day for volume, crude oil looks like it had about half a million contracts traded. One could easily imagine one of these mega-funds establishing a leveraged long position, then buying more to tip the balance to buyers over sellers several days in a row and make the price go up to help their already-established positions. The futures market does not distinguish buying for consumption from buying for speculation from buying for manipulation or cornering. The CFTC is of course in charge of stopping such activities, but they only get trader positions and trading activity from the NYMEX and Chicago MERC. As an Asia Times article reported, the door was opened wide to manipulation in 2006 and 2007 when additional exchanges, the London ICE and the Dubai oil exchange, opened up and started trading the same crude oil contract as traded on the NYMEX. The mega-funds could choose to route their orders through those exchanges to avoid detection by the CFTC.
Mega-funds could just keep rolling over their futures contracts, or some might take delivery and need a place to store the oil. Goldman Sachs is said to have rented oil storage facilities all over the world, a curious thing for a supposedly financial firm to be doing. The only country to report oil inventories on a regular basis is the U.S., and the weekly EIA inventory reports only count inventories held by companies in the business of using and refining oil. Inventories held by investment banks, brokers, and floating around the oceans in tankers (“Hide the oil”) are not counted, though they are inventories just the same. Production and consumption in other countries (e.g., Russia and China) can only be guessed at – those two countries even consider their oil figures a state secret.
Another curiosity that would be consistent with big-money firms dominating the market and moving them practically at will is that on June 5, Goldman Sachs announced an asset sale of $28 billion. Frenzied buying moved oil $5 a barrel higher that day, and then another $10+ a barrel the following day. I wonder how much of the buying was by Goldman Sachs with that fresh $28 billion.
Another explanation I have heard is desperation. The really big velocity moves up began last September in the wake of the sub-prime part of the credit crisis. Banks and investment banks got caught with a whole lot of junk derivative debt that they suddenly couldn’t unload, which blew big holes in their balance sheets, and continues to enlarge them to this day. Out of desperation, the financial institutions started to run the commodity markets higher by buying them with all the money they could get their hands on, hoping to make commodity market profits to offset their derivatives losses. We have seen the energies, the metals, the grains, and the “softs” all take off since last fall. Apparently these financial institutions will do ANYTHING in an attempt to survive, even if it means starving the poor of the world with sky-high food prices.
If manipulation (or market cornering) has played a significant part in oil’s price rise, we may only find out for sure if Goldman Sachs, Morgan Stanley, or anyone else involved goes broke the way Bunker Hunt did trying to corner the silver market. The free market seems to have a strong tendency to deal its fiercest vengeance against market manipulators and market cornerers.