Daniel Yergin, Oil Expert, Doesn't Blame Speculators For Oil Prices

CNBC.com:

One of the most dangerous places to be is between a politician and a TV camera. The orgy of self-importance going on in Washington over the role of "speculators" in the energy market has caused a dangerous stampede to get on the air with vehement, if inaccurate, denunciations of the evil folk who trade in the futures market.

At least today, Wednesday, we will see a grown-up take the stand.

Daniel Yergin of Cambridge Energy will appear. In 1991, Yergin wrote the best book I have ever read about the oil industry, called "The Prize."

The New York Times highlighted what will likely be his testimony today. Yergin will say that "the rise in oil prices can be explained by basis economic factors, such as limited growth in supplies in recent years, a weakening dollar, a global surge in energy demand and a string of production disruptions in countries like Nigeria."

Read the whole story: CNBC.com

Comments

[DRaymond]

The current rise in oil prices cannot be explained simply by supply and demand issues The supply hasn't plunged and the demand isn't skyrocketing. Yet the prices are.

Beyond that there is uncertainty, both uncertainty in the value of the dollar and uncertainty about the supply of oil. During uncertain times investors often go after investments of intrinsic worth (traditionally precious metals) and it seems that oil is right there with gold as a commodity of intrinsic worth.

The bigger question isn't whether there is speculation but whether there is market manipulation. You are an oil shiek or a group of them or really any entity with a truly ungodly quantity of money. You put that money into oil futures, The price goes up. You have more money to invest in more futures! Repeat! Now of course that bubble can't go forever, but you don't care because you will be the one with the pin. Your pulling out of the market might cause a collapse, but you, by definition, sold at the peak!

So is there market manipulation going on? We don't know because thanks to the 'enron exception' foreign markets trading in the price of US cride do not have to report who is making market changing size purchases.

[KillTheMessenger]

False premises and shoddy logic. Should I believe the preconceived conclusion? Hardly.

Let me see hard proof for your notion. Then we talk.

[Mike169]

According to OPEC: The Organization of Petroleum Exporting Countries, which supplies about 40 percent of the world's oil, has said it is powerless to stop oil's rise because it's driven by speculators as opposed to demand and supply.

According to Goldman Sachs: Concerns that the gains in prices are part of a speculative bubble are ``unwarranted,'' said Goldman, one of the two biggest oil traders on Wall Street alongside Morgan Stanley. Stockpiles would increase if prices were too high relative to supply and demand, bringing excess supplies to the market, analysts Jeffrey Currie and David Greely said in a report yesterday.

Somewhere there must be an answer to this. If the inability to figure this out is beyond us then everything is beyond us.

[KillTheMessenger]

Did you consider to view OPECs claims in the light that they don't really care what causes the price of oil to rise as long as they profit from it? And that they don't have any self-interest in telling the world the truth if the world does not want to hear the truth? In business the customer is always right. If the customer says it's speculators, so why would a business man inject himself in the customer's reasoning?

Goldman Sachs' "analysis" is just as wrong. It assumes that oil producers will keep pumping like crazy even if demand is not there. In earlier times producing more and creating more demand for a commodity with rock bottom prices would have been correct, but right now the oil in the ground is worth more than the oil in the market.

The correct answer to all of this is that the market hasn't found the real value of oil, yet. My bet is that it will be somewhere in the $200-$400/barrel range. Beyond that replacing equipment that runs on oil with something that runs on electricity is cheaper. Below that it is hard to make the decision to ditch recent capital investments.

The energetic value of oil is $40-60/barrel, by the way. As a chemical feedstock it is probably five times as high.

[KillTheMessenger]

Try this, you will find a lot of people disagreeing with you:

http://europe.theoildrum.com/node/4224#comments_top

[Bobleblah1]

And I don't blame clouds for rain.

[Sundialsvc4]

No, you're right... it can't be explained that way.

Let's say that you walk out onto the playground and there's a bully. From the waist up he's wearing body armor. Impregnable stuff... you didn't know they made atomic bombs that small. Take this guy on in a conventional fight and you're vaporized.

You ask this bully what he wants, and he tells you he wants everything. He wants to build more than sixty military bases in your country alone. Quite clearly, this guy (who is fingering one of those bomb-grenades as he speaks) thinks of himself as He Who Must Be Obeyed.

Your eyes continue to regard him... to look below the waist... where you see his (ahem) and body hair. Absolutely nothing else. Waist-up: body armor. Waist-down: things that do not normally see sunlight in polite company.

Therefore it's almost a re-play of that famous scene in the first Indiana Jones movie. One swift kick... "ooff!" ... and maybe (maybe!) World War III does not happen on-schedule.

This is a country that produces nothing except Dollars, which it prints millions of every single minute and demands that you accept "at par" the world over while openly threatening you with nuclear annihilation. THIS is what the gang of criminals who now run The United States have allowed that country to briefly become.

And this IS what the world is doing in response.

It just .. might .. work.

[Chubbster]

Duh. Only uninformed fools looking for a scapegoat would believe speculators had any effect on the price of oil. Yet so many believe this lie. Get a clue dummies, it is all about supply and demand. The wells are going dry but..... maybe there is oil under the rapidly melting Arctic Ocean.

[vippy]

You are so full of it. The world is swimming in oil currently. Saudi and Iran are storing their
excesses in tankers on the ocean. Read and get educated before shouting off that we are again
in a PEAK OIL Period like we have been told in 1929, then in the 1970s and now again.
Oil is not finite but abionic.

[KillTheMessenger]

What oil? The sour Iranian crude that nobody wants to buy? That's enough for eight hours of world supply. Eight hours. Let that sink in for a moment.

Now about the etymology of "peak oil". Lying does not qualify for research. Not even for a troll, vippy.

[Birdman]

Really? Then explain the 4 million barrel surplus that has accrued over the last 4 years then. If you would care to do some research you will find figures from the oil industry itself shows that they have produced more crude then they have used in the last 4 years. Kind of shoots a hole in the ole supply and demand excuse. Although oil is finite there is plenty at the moment considering even our own industry in this country has turned of producing wells to keep the availability of oil lower then it could be. Still a person would think that a surplus of crude would keep the price low, so what is driving it? What has changed? These are the questions you have to ask and not some half baked idea that it is supply and demand, by that analogy the amount it went up would indicate that use went way up as well when in fact it has dropped off in the last quarter of 2007 and the first quarter of 2008 yet the price keeps going up. We will all wait for your educated response since the rest of use are all dummies at least that is your claim.

[KillTheMessenger]

What surplus? The one that KSA claims but has never proved? Never mind.

And then, you have to keep in mind, it is THEIR oil under THEIR soil. It is not our oil. Which means we have to be prepared for them to shut us off any day. If we don't, shame on us.

President Carter knew that. Since then a lot of people seem to have forgotten about this little fact. And now we are reaping the consequences.

[Vyvjala]

"An expert," isn't that a person who claims to know the price of everything and the value of nothing...­........

[WIpatriot]

Dead on balls accurate!

[RoloTomassi]

Oh no, speculation has nothing to do with this; but isn't it odd that an OPEC representative say the price will likely exceed $150/bbl, and the market immediately reacts by pushing the price to over $140/bbl?

What aspect of supply / demand was it exactly that caused the price to go up? Which tangible catalyst was in play to make that happen?

[KillTheMessenger]

The aspect that Europeans are paying over $8/gallon for gas, which means their effective oil price is far over $200/barrel. You keep forgetting that this market has a low (US) and high (Europe) price indicator. As long as sales in the high price region don't collapse, demand is going to be strong everywhere else. And if you think that market analysts are not making good use of this information, you are probably a little naive about the level of sophistication these people are capable off.

[RoloTomassi]

All of my ignorance on the sophistication that can be attributed to the market analysts aside, you quite purposefully side-stepped the question.

I don't see how this word of mouth reaction in the market has anything to do any tangible factor; this is simply forcing the price higher without any reasonable substance behind it. What kind of analysis can possibly be going on in this scenario?

[ClevelandTom]

Yergin is playing a word game here ...

There is more money in the oil futures market now than there was a year or so ago. New players are buying oil futures as a hedge against the falling value of the dollar against other currencies. I.e., these players are speculating that as the dollar falls, the price of oil will climb at least enough to offset the currency loss.

Say a US company does a deal to sell some foreign comany a $billion dollars of goods in two years. That billion dollars might be worth a lot less when it comes time to collect if the dollar falls. So to hedge against that fall, the US company buys a two-year oil future contact worth $billion. This is easy to do since you can buy that contract on a small margin of its market value. If the dollar does fall, then they make up the loss because the oil future's value will have risen.

So one could say the rise in oil futures is a result of the falling dollar. But the mere fact that more hedge money is chasing roughly the same quantity of oil futures in that market is also pressuring prices up. Pure oil speculators see this and they get in the game too, pressuring the prices up even more.

So I contend that Yergin is just using a new version of the old "which came first, the chicken or the egg" puzzle.

[vippy]

Wrong! The dollar fell only 30% against most currencies, oil, however, went up 540% since 2001.
Not even close. The congress/senate was briefed on 14 Dec 07 on the results of their enron loophole created by Phil Gramm and Richard Lugar and they decided to do nothing about it.
Tell your congress then, to reverse the Commodities Future's Modernization Act if it has no impact
and then let us be the judge. Nothing else is needed, no extra drilling, no peak oil, etc. all point away from the real problem, why do you think that is?

[castlerider]

I agree with vip-ster, here. Anyone who downplays the greed factor that has been involved at the hands of sold out to corporation politicians is being very naive, indeed.

Hard to measure what the proximities are, is all...

So I am sure it comes down the very real problems of supply and demand, supply and demand, supply and demand, all mixed (Largely, HUGELY, thanks to this administration)with a volumous, tremendous, amounts of unharbinged GREED.

[KillTheMessenger]

The problem with this is that oil will not rise forever (simply because US household spending is limited and people do have options to use less oil which they will exercise), even if the dollar continues to slide. As a hedge, it is a temporal tool. We will see much of this money leave to other, better investments as soon as gasoline hits the $8-10/gallon range and conservation becomes non-optional for most Americans. The real question is, where this money will go from here... maybe it will even be renewable energy? Who knows....

[mamacat]

"...such as limited growth in supplies..­......", which implies that there is a shortage, except that as we can plainly see, there is no shortage of oil. What there is, is oil at a very high price.
As the Saudis said, there is no shortage of oil. They may be able to crack the strangle hold that speculators have on the supplies by increasing production even more, but since there are no long lines at the pumps, waiting for gas to be delivered, and no homes going without heating oil, it is pretty obvious that there is no shortage.

[KillTheMessenger]

Just because there is no shortage of oil at $130/barrel does not mean there would be no shortage of oil at $25/barrel. It is surprising how hard most people find it to accommodate even the most basic rules of economics in their arguments. Demand is a function of price. So is supply, although in this case it is possible that we will actually see supply go down with price because oil saved for the future is more valuable than oil produced today. Which is yet another argument NOT to produce US oil any faster and keep some of it for the time when we will really need it.

[Birdman]

All of what you said has some truth to it but the oil figures of the last 4 years shows more supply then demand by about 4 million barrels, although that is pretty small amount it is a surplus none the less. I think more then anything there is oodles of investor money chasing a limited supply of oil futures shich is driving the price vs the actual scarcity used for refining. BTW the last quarter of 2007 and the first of 2008 showed a decrease in world consumption of crude by about 4 percent. Compared to the average of the first half of 2007.

[Mark701]

Anyone who wants to understand why oil and gas cost so much should read this article
http://www.engdahl.oilgeopolitics.net/Financial_Tsunami/Oil_Speculation/oil_speculation.HTM
Its a long read but well worth it. The thrust of the article is that speculators are indeed the reason that oil is so high, 60% higher than it should be after taking all other excuses into account. He goes on to describe how in 2006, a Bush made a change in the oil trading law that resulted in traders not having to report their oil trades on a daily basis as in the past. This has resulted in large investors cornering the oil market then hoarding the oil in order to sell oil at a higher price than they purchased it at. He also indicates that some of the largest owners of oil futures are the big banks like Goldman Sachs who because they lost billions in the sub prime market are forcing the price up to recover lost revenue. A very informative read.

[KillTheMessenger]

A lot of speculation, no proof. None of these articles is economic analysis. Most of them are just rehashing of hearsay. Which is too bad. Because if we could get real, hard proof, we could actually do something about the problem.

[research]

Wow they found ONE "expert" who say it's note

McCain Enron loophole.

[UserLoser]

Why does everyone talking about oil sound like a junkie?

[pennst1143]

even if exxon was a not-for-profit entity and, hypothetically, they returned all of their profits to the consumers, they make only 8-10 cents per gallon.... (which is the highest of the largest five companies, or, so-called "Big Oil). I know the truth hurts but do the math for a moment.... average gallon of gas is over $4, at the very most exxon makes about 40 cents off of that gallon, so even if exxon gave ALL their profits back, you are still paying $3.60/gall­on... profit margins are not the enemy here but thanks to mindless commercials riddled with non-truths, thank you barack obama bashing exxon on television, the discussion has been shifted to meaningless diversions such as "windfall profits" and "getting tough" on "big oil"

[mediamarv]

You are missing a very important part of the equation: exxon et al make their money on pumping and production­... not on the sale of gas. A very good explanation of how that works was presented during the congressional hearings last month (I believe). Do some research and educate yourself.

Find the portion of the barrel price that oil cos get and you will see where the profits are.

[mamacat]

Exxon is closing their gas stations. They make so much money in the oil game, they don't need to be bothered with "small" additional profits at the pumps.

[armadillious2002]

The sale of gas is kind of an end game. The production of crude - bringing it out of the ground and into the market - is where the money is.

[pennst1143]

im not talking about how much they literally make at the pump... it is net income as a percentage of total revenues..­. that percentage is only between 8-10% for exxon.. so again, even if exxon made no money there would be only nominal savings to pass along to consumers

[ChristianEcon.com]

It's amazing to me how easy it is for these propagandists to divert people from the obvious relationship between record prices and record profits.

[KillTheMessenger]

Profit = price - cost. If the cost is high and the price is high, the profit will be high. If you are running a business for which this does not hold, you are running your business very poorly.

[mamacat]

Most of the world's oil pumps today are the same ones that have been pumping for years. The cost of production has not gone up, but the price has skyrocketed, resulting in unbelievably high profits.

[neurolux]

I find it hard to believe that the number of cars in India and China more than doubled in the past three years.

[kingcityguru]

It is true and those countries are buying oil on the margin and driving up prices.

You can attack speculators out of ignorance or say you want to tax oil companies, but that won't result in one extra barrel of oil being pumped. Of course, the Dems have no answers as they don't want to drill for domestic oil (to say nothing of denying the jobs that such drilling would create), they don't want to import oil from Canada's oil sands, and they don't support nuclear energy.

By the way, that Tunisia offshore oil producer -- Candax -- that I mentioned recently as an example of a company that found and pumped oil offshore within a year and that struck a deal with tunisia to give Tunisia their nat gas by product to create electricity in exchange for not paying taxes and royalties on their oil until all their costs are recovered was up 20% today on 6 times normal volume. Win. Win. Win.

[MajorKong]

Who says we're not importing Canadian oil? We import quite a bit of oil from Canada.

The United States has maybe 2% of the world's oil reserves and uses 25% of world oil production. Do the math.

[mediamarv]

Curious as to who pays your salary.... an oil producers association or a RNCC flack?

[mamacat]

Half of Canada's oil production today is from tar sands, and Canada is the largest exporter of oil to the U.S.
Dems have been criticisng big-oil for not drilling more extensively here in the states, not the other way around.
Nuclear energy is neither endorsed nor criticised by the platforms of either political party.

[MemphisBuffalo]

Would we not also have a world auto crisis? Auto makers would be reporting record sales.

[KillTheMessenger]

Why is that hard to believe?

China had 22 million cars in 2006. The US had some 150 million. To double a small number is easier than to double a large number.

[mollysgran]

My Mama told me that an (E)X is "nothing", and a spurt is a "drip under pressure" She would be about a hundred years old now - but her wisdom lives on. (smiles)