Real Reasons for $88 a Barrel
Every time the price of oil goes up $3 or $5 a barrel, analysts point with alarm to Iraq, Iran, Venezuela or Nigeria. In today's case, no incursions have happened yet, Turkey is still subject to international pressure and the oilfields of Kirkuk are as far from the Turkish border as you can get inside Iraqi Kurdistan (even if Iraq was providing a dependable oil flow to the rest of the world, which it isn't).
The finger-pointing at unrest here and a worker strike there is just avoidance of the fact that oil is far more expensive than market fundamentals can support. (I do credit the analysts who are finally saying this, if not getting to the root of it.)
So what is this upward race about?
Start with speculative trading.
During a Senate hearing on oil prices last year, the Senate Subcommittee on Investigations concluded that speculative energy trading drives up the price of oil, and a staff report endorsed analyst estimates that speculation may account for $20 of a $70-per-barrel oil price.
The subcommittee chairman, Sen. Carl Levin (D-NY) is backing a bill repeatedly submitted by Sen. Dianne Feinstein (D-CA) that would restore oversight of unregulated energy trading. The bill, fittingly titled the "Close the Enron Loophole Act," has only a snowball's change until the White House changes hands, but would sharply cut speculative trades if enacted.
Even if the trading in futures markets were benign, the trades themselves add to price. Every trade has a cost built in, and every gallon of oil is being traded multiple times. From the NY Mercantile Exchange website: "Crude oil is the world's most actively traded physical commodity. ...The futures contract is the most liquid trading instrument for crude oil, with daily trading volume averaging the equivalent of 230 million barrels of crude, approximately three times physical daily output."
I'm sure the numbers are up from whenever that was written, since the Nymex just reported 13% year-to-year increase in business. Aside from the transaction cost, the dollars thrown into futures trading keep rising, and the amount of oil available is pretty much static. Econ 101 says that prices rise as more money chases less product, and I'd be happy to hear why that's not even partially true in the futures markets for a physical commodity.
Even more interesting is a theory I heard from Marc Cooper, the deep-digging energy analyst for the Consumer Federation of America: It's also OPEC and the Big Oil oligarchy going back and forth over who's taking whose profit.
I'm leaving out some of the technical language and doing some paraphrasing, so apologies to Marc if I get any part of this wrong. But it goes like this:
OPEC is a cartel that asks themselves what they can charge for oil that comes out of the ground for maybe $10-$20 a barrel. They see U.S. oil refiners pushing up the price at the gasoline pump and keeping $30 a barrel for profit, as they did this spring, and figure, "Hey, the refiners are taking our share."No matter what mix of these forces is pushing up the price, it isn't economic fundamentals, it isn't a competitive market and it isn't Turkey's saber-rattling over the Kurds.So now, OPEC has taken back a significant 25 cents a gallon worth of the economic rent that the oil companies were collecting--and the oil companies and refiners have reduced their windfall share of last spring. That'll obviously be reflected in lower 3rd quarter oil company profits. Americans will pay $3.00 for gasoline and not like it, but there won't be barricades in the street or global recession--the things that would scare the Saudis.
That is not commodity trading at work but it's not simple competitive market behavior either.
It's a back and forth between OPEC, the cartel, and oil, the oligopoly. All of it is effectuated by the mechanism for setting the economic rent, the Nynex spot market.
There are not economic fundamentals behind the price of oil. If there were not a crude oil cartel and an oil-company oligopoly, the cost of producing a gallon of gasoline would be about $1.50 including a decent refining profit. Anything above that is baloney.
Tight oligopolies (like the oil business) and cartels price politically, as with last year's election pricing. Since next year is an election year, it's not clear how hard the oil companies will push to restore their big refining margins.
We may get a clue to how much of the price of oil and gasoline is politically determined in the reaction to today's mild little White House statement: "There is no doubt that energy prices are too high. They disproportionately hurt low-income families that have to spend so much of their money on energy. We watch it closely, we're very concerned."
Where was that statement in May, when gasoline was $3.25 (higher, of course, in California)? Tucked away, perhaps, until the White House could blame it on OPEC.
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well, speculative trading is probably true. OPEC cartel theory is sounding, yet an assumption(if not, I'd like to hear more evidence) why there is speculative trading is more important. why do they do it? people or firms behind the trading aren't risk free either. it is that the credit quality in commodity trading is quite high because of its simple structure (you pay, you get the stuff) which must be quite attractive after everyone suffered from the complexity of structured securitizations (sub-prime mortgages). and i suspect there are big option markets (quite reasonable if you see the oil price a few months ago) and subsequent hedging in the futures. anyone know more about this????
one thing. i really do enjoy all the conspiracy theories posted. Alan Greenspan is even inclined..
Supply and demand is in effect for everyone - whether conservative or liberal, common man, or member of the elite. Oil discoveries peaked in 1965. In the US oil discoveries peaked in the 30's and our oil production peaked around 1970. The same thing is going to happen in the world and it appears to be happening right now. World oil production is little changed from 2005.
Meanwhile, we have exported as many jobs as we possibly can to India and China who are in turn increasing their oil consumption drastically. Like land in our major cities, there just isn't enough oil to go around. But the good news is, we will look back on these oil prices as being cheap.
it's nice to see so many people respond PEAK OIL. I almost gave up on this site.
Everyone was asking arianna to ask speaker pelosi about why impeachment was off the table. I think i was the only one who asked her to ask speaker pelosi about her energy policy.
Peak oil never seems to be taken seriously as a politcal issue on this site. I was thinking..
I still feel pretty disgusted with this site though right now.
you say Iran, Iraq, Turkey aren't to blame...ye
The oil futures market is a huge problem. It almost becomes a self fullfilling prophecy with all the speculation.
How nice to hear an intelligent view about what drives the price of oil.
I get so tired of the nightly news informing us that it's ALL just supply and demand ...
To Judy:
FYI.. since you say things like this to people. There is a definite need to regulate how oil trades. it is so rediculously easy to manipulate price. No desire to take the time to get into that now. Just keep pushing for it. BUT your comment of volume of trading having bult in effect on cost of oil is 110% incorrect so please stop saying it. the costs are picked up by the people trading and has NO effect on oil prices. Think of it this way. A point spread on a football game, its purpose is to find a level where an equal amount of buyers and sellers interract. Whether or not 1 millionis bet on the game or 1 billion is bet on the game. HOW MUCH IS BET DOESN'T CHANGE THE SPREAD. the ONLY thing that willchange the spread is an imbalance of betters on one side.
Hope that made sense. As for price fixing.. Whole different story.
have a nice day..
sorry about the spelling. Still suffering jet lag... well actually it is never that good anyway.
A couple of brief points re:
Peak Oil. Yeah, sometime we'll run out. But during the recent oil price runup and even more so when gasoline was hitting $3.50, crude oil was not in short supply.
Supply and demand: Oil is more like diamonds than, say, bread. A cartel controls supply and (in the case of oil) an oligopoly sets wholesale product prices. The difference between diamonds and oil? I can have a fine life without diamonds.
Amazingly, there are people who would defend any thing, even if it is so clearly a scam....
So, let's see: this bunch of oil people get to pull the strings of government and puff, oil goes up and gasoline even higher... Of course, they are good people, only good to their friends and their bank accounts..
Isn't there any shame to this? Where are the "watch dogs" in congress, our (supposedly) representatives?
Certainly there is a lot of speculation in the price of oil , but the underlying price will still have to go up due to Peak Oil.
Oil is a finite resource . The biggest most productive fields are already in production , except perhaps in Iraq. Due to the ongoing depletion of existing oil fields even Iraq won't be able to increase the production of oil over the comiing year.
The US (lower 48) reached Peak Oil in 1970 , just as Hubbert's predicted in 1956.
It's the collapsing dollar. Rasing oil prices is the only way oil producers can get true value without dumping the dollar.
~ajax~
I addressed this very topic several weeks ago.
Since oil is traded in U.S. dollars, the less our buck is worth (via inflation caused by excessive debt) the more our oil suppliers have to charge to make up the difference in it's falling value. That's Economics 101.
The falling dollar only represents 25% of the new price levels.
Oil has tripled since before the Iraq War.
The rest is supply and demand.
Then why was oil so cheap in the late 90s ? ... The Cartel coulldn't hold up the prices and there was widespread cheating.
World demand next year will be 88 bpd and supply will be at least 1 bpd short.
When demand exceeds supply , prices go up.
The Cartel can only limit supply , it can't add barrels it doesn't have .
Dubya removed the profit caps on oil when he took office. This is well known. You are inching closer and closer to troll status.
Judy , oil is a finite commodity and we are using more than we are finding .
Peak Oil
http://www
Peak Oil is the point at which the world cannot produce more oil and production starts falling.
Then there is rising demand from just about evertwhere but especially China.
The oil expert from Banc of America just said on PBSs' Nightly Business Report that $100 per barrel could happen before the first of the year , based on the fundamentals of supply and demand.
Price is not determined by supply and demand in a Cartel.
~ajax~
BINGO!
Dugan says:
"There are not economic fundamentals behind the price of oil. If there were not a crude oil cartel and an oil-company oligopoly, the cost of producing a gallon of gasoline would be about $1.50 including a decent refining profit. Anything above that is baloney."
So Dugan has repealed the laws of suppply and demand.
For her next trick could she find another trillion barrels of sweet crude ?
When they are producing the same ammount that they've produced for years, the demand is barely up from what it was when oil was $20, DOES NOT EXPLAIN $80/BBL!!!
The only reason that the prices are so high is that they could make it that high, and people weren't complaining too much. Period, end of story.
there is only one REAL reason for $88 a barrel
dick cheney's secret meetings with BIG OIL in 2001 to establish america's "energy policy"
Yes , Cheney and the oil companies were counting on Iraqi reserves to add to the worlds' oil suppply .
When and if Iraq's supply does come on line there will be a temporary bump in oil supply , but with demand spiking it won't last long due to depletion of older oil fields.
The United States reached Peak Oil in 1970 . The world is at Peak Oil now..
Why does anybody outside the executive suites of the petroleum business imagine they 'know' the real cost of drilling, refining and transporting the commodity? This is an multinational business without real oversight, which reports income and costs in a way most convenient to itself, to whoever can convince them to do so.
The Bush regime came out of this business sector, and have, with little fanfare given the size of the crime, facilitated a huge though fraudulent transfer of wealth from consumers to supplier cronies all around the world. On Hardball last night, the question was posed: 'Is Condoleeza Rice a failure?' Yes, if you consider only her role as secretary of state, etc. But no, if you consider she has, with her oil patch buddies Bush, Cheney, et al, presided over an era wherein the price of oil, and therefore profits to their sponsors, has jumped more than 300%.
True. We have to take their word for it and I have never trusted them.
You are dead wrong. Demand is outstripping supply becasue we have been on an 85 million barrel plateau for almost 3 years i.e. 3 years no increease in supply. 3 years was the length of the US plateau in 1969-1971. Basically the world is at peak oil now or within months. Oil is dead cheap at $200 barrel, so prepare. Couple that with the fact that it's all heavy sour crude, all the light sweet stuff is gone. So refineries need to maintain a hell of a lot more now making production of refined products more expensive too.
Oil is an inelastic commodity.
seawolf and AD are right. Consider that all the statistics and figures are fudged, but that consumption numbers are track-able. The consumption demand it clearly higher - Rusia, China, India, Brasil, Indonesia, Malaysia, etc all need to consume LOTS more than they did in the 1970's. Still the volumes being sold are not substantially higher. Blaming the oligopoly for the price is not the answer.
http://www
http://www
Peak Oil Overview
http://www
It seems Dugan doesn't realise oil is a finite commoodity. She further has tried to repeal the law of supply and demand .
No, OPEC has repealed it.
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