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Oil Crisis: Your Primer on the Great "Peak Oil" v "Speculators" Debate
Oil prices soared to new highs ($138, up $11) as brokerage firm Morgan Stanley predicted that oil will hit $150 a barrel by July 4th and Israel suggested it might attack Iran. Needless to say, stocks got clobbered (with the exception of ExxonMobil).
In case you haven't been watching CNBC lately, there's a Great Oil Debate going on. On one side is the "Peak Oil" crowd, who believe that the world has now reached its maximum daily oil output and that increasing demand--which is already outpacing supply--will now drive oil prices into the stratosphere.
On the other side are those who blame the problem on "Evil Speculators", and argue that big energy traders are "gaming" the energy markets and adding at least a $30-$40 speculation premium to each barrel (Michigan Rep. Bart Stupak is in this camp).
Who's right? No one knows for certain (and anyone who says they do is fooling themselves). Part of the problem is that no one knows exactly how much oil the world is producing, or what the world's actual daily consumption is. What's more, no one knows what the "intrinsic" value is of a barrel of oil (other than what someone will pay for it--which brings you back to the beginning of the argument again).
But still, it's a fascinating debate, with smart folks (and morons) on both sides. Below are some short articles that lay out the "peak oil" and "speculation" cases. For what it's worth, my answer is that the current crisis is a combination of both influences: a short-term spike driven by sentiment, money flows into commodity funds, and supply/demand concerns...riding on top of a long-term upward trend.
THE LATEST:
PEAK OIL:
Goldman Sach Oil Bull: I'm Not A Crackpot
Boone Pickens: Why Oil's Going Straight to $150
JUST A SPECULATIVE BUBBLE:
Goldman Sach Oil Bull a Nutcase: Crash Coming Soon
Oil a Classic Bubble, Detached From Reality, Like Houses, Dotcoms, and Tulip Bulbs
ARMCHAIR QUARTERBACK:
The Donald Speaks: President Trump Would Tell OPEC Who's Boss, US Screwed at $125 Oil
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"Proved reserves" should last for 10-80 years.
BushCo, the most Oil industry heavy administration in history,
presides over the Iraq Middle east destabilization war crime, admittedly for OIL.
Bush appeases, kisses, holds hands with, give Nukes to, gives weapons to...
The country and family most involved in the 9/11 attacks:
The Bin Ladens and the Saudis.
Following the money...Who benefited most from 9/11 and the Iraq War crime?
The Bin Ladens, the Saudis and BushChenyOil cronies inc..
And some of you people want to believe that there is no intent, but just supply and demand or peak oil, or some other fantasy.
BushCo robbed the world, right in front of your face!
In view of everyone blaming the speculators for oil prices, here are some thoughts from FireAngel over at www.theoildrum.com
From the CFTC report on oil Speculators at:
http://www.cftc.gov/dea/futures/deanymesf.htm
go down this and see Crude oil Light Sweet. Figures change every week. For the current week
216,388 long contracts for speculators and 188,092 short contracts for speculators. That is a net long position of about 28,300 contracts. That is the amount the world uses in 8 hours. Do you really believe we can influence prices with that?
Also that is about the least the Speculators have been long in recent history and we have the highest oil prices ever.
A few more examples
Trivia qt number 1: Which market has the largest net short position of Speculators in 2008?
Answer:Natural gas
What happened to natural Gas prices?
Went up by 70%. Outperformed even oil
Largest short position and went up 70%. How do you explain that?
Trivia qt number 2:
Since 2006 which commodity has had a very large net long speculator position and gone down by 40%?
Sugar. you know why? Because production always trumps speculation. World production increased creaming the speculators who were long.
Not convinced?
Trivia qt number 3.
which commodity has outperformed all others since 2002?
rhodium...up 2400%... and guess what no commodity futures market for Rhodium.
Food for thought for the thinking.
GAB
Henry, There IS a link between high oil prices and high commodity prices and speculators. Please do the following:
1. Go to SeekingAlpha.com and search for the article by Phil Davis. He explains Paper oil.
2. Read the report that Michael Greenberger gave on 6 3 2008 to the US Senate Committee titled " Energy Market Manipulation and Federal Enforcement Regimes". Greenberger teaches law at the Univ. of Md and has written an excellent report on how the American people are being cheated by an incompetent CFTC and others. Access the report on SeekingAlpha.com Look for Anthony Schneider's article " Greenberger's testimony - I banks control the energy market ".
3. Post the links to these reports in your next article, giving readers the opportunity to hear a few unbiased opinions that do not come from the I banks, oil companies, speculators and the CFTC .
Support the investigations of Rep. Bart Stupak, other members of the Congress and Michael Greenberger and the changes in our securities laws so weare not cheated by all those complicit in rigging commodity prices.
We are being cheated by the same type of thoughtless and dishonest people who worked at Enron.
You should help correct this artificial run up in oil and commodities prices. I hope everyone does the work I have suggested. It will save us money at the gas pumps if the illegal activities are exposed.
http://www.zmag.org/viewArticle/17820
This article entitled: Market Madness does a good job of summing up why the commodities markets are moving upwards. He has some suggestions for the politics of the raising food and energy prices.
I do believe in Peak Oil, but if this was a simple Supply & Demand issue, wouldn't we be seeing shortages? Where I am, there are no gas lines ... no rationing ... no shortages ... just ever-increasing prices.
Maybe we'll start using tulips as fuel? ;-D
Why would we see shortages? In a stable supply-demand situation the price simply rises until there is enough supply to cover demand (at that price - demand in economics is a function of price, and so is supply).
Do you see shortages in the jewelery diamond market? There are millions of women who want a perfect ten carat solitaire ring. Yet, the jewelers in London, New York and Tokio have dozens of them on their shelves. Wouldn't, according to your theory, perfect ten carat solitaire rings always be sold out? After all, there is a million times more demand for them than there is supply. And yet, these buggers are always in store. It might have something to do with the little price tag that's attached to these things...
Ladies and Gentleman, Do you understand that there is no supply/demand situation when you are dealing with a worldwide CARTEL?
OPEC is a CARTEL; sometimes referred to as a MONOPOLY. OPEC, the price fixers, would be illegal in the US. Regarding diamonds...diamonds are , indeed , in short supply but fake diamonds ( cubic zarconia ) are cheap.
Follow my leads to SeekingAlpha and the links that Henry gives above under Speculation and read what Donald Trump has to say.
We can end the OPEC cartel and we can get the speculators out of the oil market. We just need to educate Americans about how to do it.
Professor Michael Greenberger in his report to the US Senate knows how Congress can solve this problem created by Goldman Sachs, Morgan Stanley, other I banks and the Commodity Future Trading Commission.
Is there anyone outside of Wallstreet that doesn't believe the 30 years of "Free Market" economics failed miserably? (again)
If you have ever been a citizen of a communist country (not China), you will want to hang on to Capitalism just a bit longer. The other economic models are A LOT less desirable. Trust me on this one. The free market in this case is doing nothing else than what a well run government would have done 30 years ago: make energy more expensive. No big deal. It's just a matter of cry now or cry later. But cry you must.
Say it with me, everyone: "Regulation is our friend!"
The Goldman speculation was fueled by the Israeli minster threat of attack against Iran which shot the price of the oil to they sky. Every time there has been an escalation of rhetorics by Cheney or Israel against Iran we have seen the price of the oil jump.
Now only if you are a commodity trader and are able to get a drift of saber rattling before it become public. This would be worst than insider trading.
In that case, the finances/investments of Cheneys/Bushes need to be monitored and, if there appears to be large profit gains because of Bush diplomacy/foreign policy (or lack there of), they need to be prosecuted for for this.
I realize that the establishment appears to have this "gentlemens' agreement" regarding prosecution of current or former high office officials but the boys-club better adjust their way of thinking or we'll have to "outsource" law enforcement officials. The "Free Market"/Globalization can work to the People's advantage too....
Look at what the EX ENRON people have setup the CHURN the prices of Oil, Gas and Coal Furtures.
See the outline on page two of how they move the Furtures and increase the prices each time.
http://www.rsi-ireland.com/documents/DarkPoolsVol2.pdf
Thanks Henry, for bringing up Peak Oil on a popular media outlet. We absolutely have to start talking about how serious our energy depletion situation is and get serious about dealing with the unfolding crisis. It is already getting very bad in the third world, and soon, America and Europe will get a taste of the troubles coming.
I have been reading the comments, and nobody has mentioned that world oil production now includes tar sand production and natural gas liquids. Yet even with these augmentations of supply, world production has stubbornly hovered around 85 million bbl/d since 2005. Even with a tripling of oil prices since 2004, the world just can't pump the stuff fast enough to meet demand. To me, the stagnant production data is the biggest "tell" that we have reached the maximum possible production of oil - Peak Oil.
As Richard Heinberg often notes, Peak Oil is not about supply. At the peak of production where we appear to be sitting now, there is roughly 800 - 900 billion barrels of oil left in the ground. Peak Oil is ALL about flow rates meeting the needs of 6.8 billion energy and food users. And the flow rates are not meeting demand. I think this is the fundamental driver of oil prices.
Not that speculators or a weak dollar are not piling on and contributing to the price increases! Yes they are! But fundamental lack of growth in flow rates is the PRIMARY driver.
Actually, I have been pointing out in several posts that conventional oil production has definitively peaked and that we are on our second leg now. In any case, nobody will believe you. Peak oil is just too scary for most people to contemplate. They don't understand that it does not mean we are out of oil, yet, but that it only means we have to start conserving and shifting to renewables. But most people around here just want to tout their conspiracy theories. An intelligent discussion is almost impossible. Sadly, the peak oil crowd is not much better. Many of them believe in peak oil religiously rather than as a science fact and they associate it with Mad Max fantasies. So that's not very helpful, either.
Yes, some of us are noting your expertise, KTM, and there is no question there's a lot of ignorance out there, but there are few simple things that most people don't want to contemplate:
1) A Crash conservation program will hasten the sharp decline in prices, but, as KTM says, we in the West are just not up to that, so the odds are the price of gas in the States, because in part as well because of the weak dollar, will likely rise to $6/gal.or more before the pop. The more we stop driving now, the faster we'll get to the blow out when oil prices will plummet. But the public is complicit with the speculators, which is really pathetic. If you're not changing your driving habits now -- car pooling, taking mass transit, biking or walking -- you are PART OF THE PROBLEM!
Of course poking a stick in the hornets nest of the middle east has nothing to do with anything. Thank you president hoover and the rest of your criminal cadre.
part 2
2) Yet there is no question that profit takers in the form of hedge funds, institutional investors, etc. are indeed responsible for 30 to 40 % of the run-up. Conditions on the ground are just not that different from 12 months or a two years ago except, as it is noted, except that the fear of an American move against Iran grows as the last days of Bush 2 run out. They schemed us into war and scammed us into six buck gas. But the media just won't cover this: this is the new koolaid that they've drunk, that we can't really explain the price gouging -- listen to the Saudis; no wonder they won't do their boys a favor now; it's not their doing. Has anyone EVER seen a top investment fund, hedge fund or endowment fund manager interviewed on any network TV news sho w about their oil moves? Ever? You can't hoard gas but why all the full tankers of oil siting offshore around the world?
For all of you who believe in 'them evill speculators', you may find your pension fund is one of the investors ... if they aren't, you're return is probably going to be less than you anticipated.
Ridiculous, how can you write an article on this if you call this an article, without referring to Professor Michael Greenberger the former Director of the Commodities and Futures Trading Commission..?
The VP of Exxon Mobil himself said based upon supply demand the price of a barrel of oil should be $50-55 dollars..
It is the speculators the dark markets they are trading in and they are running up the price as they are holding Oil futures and would rather hold that than the shrinking dollar..
Why doesn't Huffington post have Professor Greenberger write the definitive article he testified before the Senate Commerce committee and this can be addressed and solved by undoing the Enron loophole..
I hope that was said tongue in cheek
Right on darthdarcy! Professor Greenberger also told the Senators that they should fix the "Gramm Enron loophole'"..." THIS AFTERNOON!" (He was speaking in the morning.) In fact He said that a few times. It was like He was saying to them "Wake Up, this is destroying our economy!" As for "peak oil" it is complete BS. BP and Arco discovered "Gull Island" close to Pruduoe Bay Alaska in the 70's with the largest oil reserves in north America, possibly the world. Then they capped it. see the video about it here:
http://www.youtube.com/watch?v=NbakN7SLdbk
Thanks CRX..well done, and all true I worked for Butterworth for a while as an employee of another company, the top secret division of Exxon and I know they discovered and capped oil all over the place..the eastern coast shelf charts all passed through my hands..!
Yes, precisely.
Perhaps we should take the oil executives at their word when they presented testimony before a Senate Judiciary Committee two weeks ago. "Lifting costs" for a barrel of crude range from $4/barrel in Africa to $8.30/barrel in Canada (for heavy crude). "Finding" or "exploration" costs range from $5.26/barrel in the Middle East, to $63.71/barrel for offshore oil in the U.S. These come from U.S. Government statistics (Energy Information Administration). The oil executives from the five international energy companies testified to the Senate Judiciary Committee two weeks ago that the average cost for a barrel of crude (including lifting and exploration costs) runs between $35-65/barrel. Considering that 1/5 of the world's oil supply comes from "light sweet crude" in the Middle East (which needs very little refining), this is some of the cheapest oil around. So what is the upshot: a huge surplus value on a barrel of crude, most of which represents a massive transfer of wealth to oil producing oligarchs in foreign countries, and struggling middle class families and manufacturing industries at home. Let us not forget the oft quoted sentiment from Upton Sinclair: "It's difficult to get a man to understand something when his salary depends on his NOT understanding it." So let's start presenting the straight facts for a change.
Here is the facts. Ex SEC heads tells wahts happening.
http://www.npr.org/templates/story/story.php?storyId=89723375
You are ignoring the demand side of this equation.
Cost: the amount of value it takes to create goods.
Price: the amount of value a buyer will pay for these goods.
Do you see any mechanism that would link the two? I don't.
Nowhere in economics 101 will they teach you that the market will
make price roughly the same as cost except for a small profit.
That's simply an assumption that people who work for low margin
businesses make because they have never seen a counterexample.
But it is neither a law of nature nor one of economics. For most people
it's just a consequence of having a poor business model.
Presumably, competition and the free market are supposed to keep prices under control. But OPEC is a cartel and not a free market. Political pressure (whatever counts for that these days) has made very little difference in supply. OPEC has decreased supply since 2004 (with only token increases in Fall of 2007 and this Spring). Demand is down in the U.S. (refineries are at 87% capacity at the beginning of the busy summer driving season), but it is up worldwide (due to China and India). The worry from OPEC's perspective ¦ that we have another collapse in prices as we did in the 80s (when people started conserving energy, and producing more fuel efficient cars). So they manipulate supply to keep the juggernaut humming.
If America could have afforded $4 gas all along, we've been decades sitting on our heels and failing to get our house in order. Your comments are appropriate to a U.S. government that lacks an energy policy: a poor "business" model that simply splits hairs and plays around at the margins.
Sorry... that should have been:
Cost: the amount of money it takes to create goods.
Price: the amount of money a buyer will pay for these goods.
The rest of my post stands.
As long as the U.S. and Israel are threatening to blow up Iran and as long as demand for oil continues to increase, buying oil for future delivery will be an attractive investment. The U.S. economy is collapsing as we speak. Soon there will be no money for imperial adventures. The shooting part of the oil wars will end when the U.S. is removed from the competition. Likewise, when the American market dries up, demand for oil will plummet. Problem solved. Except the part about Americans being hungry and homeless. But thats another discussion. I already know the story about Chicken Little and the one about Pollyanna. This is just my opinion.
Your "opinion" may unfortunately turn out to be correct. Things certainly don't look good for us!
An imperfect, but instructive, metaphor is to consider all the oil being in a bathtub. The flow of oil from the tub is fairly independent of the stock of oil in the tub. The flow depends on the number of drains out of the tub. The flow can remain fairly steady until the tub is empty and the flow stops abruptly. Therefore, what will happen will feel more like "cliff oil." Google "Cliff Oil" "systems thinking".
This leads me to believe that the flows of oil and gasoline to the market are being manipulated by OPEC and the oil oligopoly to restrict supply for increased profits.
Oil reservoirs are not like one big bathtub. They are, however, like a collection of bathtubs, some smaller, some larger. The small ones give small flows and are empty sooner than the large ones. Some have not been discovered, yet. And pulling the plug on any one of them is very expensive. Once you modify your bathtub model to be more realistic, cliff oil goes out the window. It falls at the hands of the Central Limit Theorem of stochastics.
http://en.wikipedia.org/wiki/Image:Hubbert_world_2004.png
Yes, there's more than one bathtub. Yes, a few haven't been discovered yet. That said, because of increasing demand and many of the tubs getting harder to empty, it will "feel" like "cliff oil."
The main point is that the supply of oil depends primarily on the number of wells (holes in the tub), not on the amount of oil left in the ground (oil in the tub).
Prior to around 1972, the price of oil was "manipulated" by the Texas Railroad Commission, which served as the oil industry regulator in Texas. Around that time, Saudi Arabia became the world's dominant producer, replacing the great state of Texas. I am not sure the Saudis could significantly increase oil production overnight even if they wanted to. I guess until the world comes up with better technologies, we are stuck with high priced oil and people will have to react as best they can. Too bad most of the world's easily recoverable oil is located in parts of the world that are either politically unstable, corrupt or anti-Western or a combination of the three.
The bath-tub analogy overlooks the fact that as the oil level (the hydaulic head) on the oil pool drops, so does the flow rate of oil leaving the tub through the drains. Just to maintain flow rates (rather than increase them at an exponential rate, like world population growth demands), you would need to apply external sources of energy to pump the tubs. And if demand is increasing, the only way to increase flow rates is to increase the pumping rate - which requires more and more energy.
Unfortunately, this aspect of resource peaking is built into the fundamental structure of nature and it applies to all resources - and even growth processes. When you develop a resource, the easiest to access stuff is gotten to first - just like "mining" almonds in a mixed nut bowl at a party. The longer you are munching the almonds, the more you will have to stir the bowl and the slower your rate of almond consumption will become. This in a nutshell (rimshot, PLEASE!) is the inevitability of resource peaking.
but don't forget to include the biggest speculators among the flow manipulators . . .
So, is reversing the Commodities Modernization Act , that gave birth to Enron (Thanks, Phil Gramm)
and so many other tremendous speculating forces,- something like trying to put the toothpaste back in the tube?
Is it impossible to consider that we will be able to re-do the structure structure of the energies market so that our economy can be protected and remain rational?
Because if it can be done, if it's not impossible, it damn sure needs to get done, and ASAP.
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Posted June 6, 2008 | 01:09 PM (EST)