Just this Friday Thomson-Reuters posted an article which succinctly said it all: "Analysis: Recession risk unless oil prices fall further". The piece states unequivocally the urgent need for oil prices to fall significantly in order to avoid a deep recession. To quote the article's essence:
Every time that the cost of oil relative to global economic output has hit current levels-and that's even after sharp falls in spot prices this month -- it has heralded a slump.
And while economists and analysts say a serious slowdown can still be avoided, many add that unless oil and energy prices fell much further and-most important-stay down, the world economy could be in serious trouble.
But for the price of oil to continue going down and to stay down, unfettered speculation and manipulation must be reined in by our oversight agencies such as the Commodity Futures Trading Commission (CFTC). Sadly the CFTC is an agency that has been derelict in its duty to protect American consumers, impotent in carrying out its responsibilities, going on years of "studying the problem".
Not to give the CFTC any succor, but something stinks in London as well. For the past year or so the price of oil quoted in London has parted ways with the price of oil quoted on the New York Mercantile Exchange. Today the difference in price is approaching $25/bbl ($85/bbl for West Texas Intermediate -- 'WTI' -- traded on the NYMerc and near $110bbl for 'Brent' crude traded on the London ICE exchange). This, after years of oil trading whereby the WTI price was generally considered the world barometer for oil prices and given widespread arbitrage, with almost simultaneously direct influence on the price quotations for Brent in London and other world exchanges such as Singapore, Dubai, Hong Kong, Tokyo. Differences existed, yes, but with generally applied arbitrage, they were marginal, with nothing approaching the current disconnect. Why the difference now, and why is the price of Brent crude not more in line with WTI prices -- an important question because we now have a massive reversal in relationship whereby the higher price of Brent crude has a significant influence on the price level of WTI. The higher the price for Brent, the higher the perceived justification for WTI.
Two issues have come to the fore which may help explain the emerging dichotomy. In 2009 with serious Congressional focus on financial regulatory reform legislation that was later to culminate in the passage of the Dodd-Frank Bill it became clear that the CFTC would be mandated to become a much more aggressive supervisory agency with expanded powers. At the time the WTI quoted price was still the major pricing determinant for global oil trading.
Along with the renewed focus in the halls of American government on financial and financial instrument trading reform, Saudi Arabia let it be known that henceforward their oil pricing would be based on a new benchmark, 'The Argus Crude Oil Index', based in London. After a short hiatus The Argus Index would quickly begin to influence the prices traded on the traditional London exchange for Brent crude, and in turn other world exchanges. Not a smoking gun, but clearly the prospect of Saudi intervention in futures trading to 'manipulate' the quoted price of oil could now be achieved without exposure to a Dodd-Frank enhanced CFTC or other U.S. supervisory agencies such as the Federal Trade Commission.
Then there is another factor: The price of Brent crude is a core multiplier in the pricing of the massive, long-term Russian gas contracts supplying Western Europe, contracts that run well into the billions upon billions making Russia the largest energy exporter in the world. The price of gas bought and sold under these contracts fluctuates according to the exchange quoted price of crude oil. Simply put the lower the price of Brent crude the lower the level gas receipts flowing to Russian gas suppliers.
Most of these contracts were signed at a time when gas prices were around $10 mmbtu with the confident assumption that they would veer higher. Then lurking disaster began to rear its head. While European industry was/is paying some $10mmbtu to Russian suppliers at today's price tabulation based on $100+bbl oil, something very fundamental has changed. Gas prices in the United States have collapsed to some $4mmbtu. This is due in large measure to the enormous expansion of American natural gas reserves and production integral to the development of shale gas drilling techniques and major discoveries such as the Marcellus and Barnett Shale Gas formations. At $4mmbtu the 'energy' equivalent per mmbtu is crude oil priced at $24/bbl (an augury of the price of oil to come? Remember in February 2009 the price of crude fell to just over $30bbl).
Of course anything approaching these levels would be disaster for the Russians, while not making major adjustments in their firm and very long term contracts will place their West European customer base at enormous competitive disadvantage to United States industry in the production of natural gas based petrochemicals, nitrogen based fertilizers such as ammonia and urea and ancillary gas based products such as plastics, and on, not to speak of the basic cost of energy.
One can well imagine that the Russians will do all they can to prop up the price of Brent Crude if they have not already and aggressively done so. This, especially in the light of the International Energy Agency's very recent pronouncement that "Sustained High oil prices and slowing economic growth have dramatically curbed global oil demand."
Have they? I do not know, but it is a possibility touched upon well before the collapse of U.S. natural gas prices.
You may ask, can prices on the exchanges be easily manipulated? Please know one trade requiring a cash margin of only $6,750 by one trader, achieved the landmark $100 threshold on January 2nd 2008 causing the value of some of the oil traded on that eventful day to increase by totals exceeding tens of millions of dollars. Talk about leverage in oil trading!
If these theories have any basis in reality it becomes ever clearer that the formation of oil prices in this day and age is a farce, having little and ever less to do with the market disciplines of supply and demand.
By the way has anyone heard anything further from the 'Oil and Gas Price Fraud Working Group' formed to focus specifically on fraud in the energy markets? The OGPFWG was established amidst much fanfare by President Obama and pointed pronouncements by Attorney Genera Eric Holder's Justice Department in April. No?! Well maybe they haven't come back from lunch yet...
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in the big picture ----heavy subsidies to green energy is probably cheaper than what is being overcharged for petrochemicals
Outlaw SWAPS, shorting, securitization and growing too big to fail.
Force investment back to reality.
GS and company are now so large they can buy a tanker worth of oil, and park it, till prices spike.
The Tea or the GOP anit going to do that, niether are the Obaqma Clinton Rahm DLC DINO blue dogs.
so?
Vote for the CPC Progressive caucus in the primaries and the dems in the general.
http://cpc.grijalva.house.gov/
Not theObama Clinton Rahm Blue dog new dem DLC corporatist anti-populist folks:
http://en.wikipedia.org/wiki/Democratic_Leadership_Council
Oil is real estate, not a product. When Saudi Arabia pumps its oil it will have nothing. Would you sell your property, your only assets, for only what it cost you? The cost of oil extraction is irrelevant, oil is the only asset of many countries. They have a right to demand whatever we will pay. If we don't like it we could stop driving gas-guzzlers. But we won't, we'll keep complaining about gas prices. The US is 4% of world's population, consumes 20% of the oil - but hey, we like big cars and trucks. USA! USA!
Oil prices are based on fundamentals, not speculation. The world is running out of cheap oil, leaving only expensive shale oil. Oil will be around $200 a barrel by 2030, all else is denial.
oil....villains, the whole lot of us.
future production chart: http://trendlines.ca/free/peakoil/PeakScenario2500/PeakScenario2500.htm
Do you want people fracking or extracting shale oil in your neighborhood? We don't have a right to do it to other people. We shouldn't assume we will use the world's reserves just because they are there.
She was run out of town for trying. What incentive have her successors had to emulate her?
With respect to the headwind created by several quarters of high petroleum prices, oil trimmed 1.4% off July's GDP growth rate. The effect is mainly on the auto sector and Light Vehicle unit sales are vulnerable to a definitive Crude-Cost/GDP ratio currently represented by $90/barrel. For the fourth time (prev 1980,1990 & 2007) in three decades, sales collapsed when the threshold was breached in early February 2011. New car sales wil not rebound 'til contract oil drifts below $90 ... which is fourteen dollars below today's cost. In short, there is no relief in sight and the Unemployment Rate is likely to rise thru Q3/Q4.
Barrel Meter model chart: http://trendlines.ca/free/peakoil/BarrelMeter/BarrelMeter.htm
http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=7131
Great news piece on the Real News Network - Paul Jay interview with Bart Chilton (CFTC Commissioner on how speculators manipulate markets)
copper, gold, silver, oil, steel, stainless, titanium, platinum
all priced in dollars...all up a bunch
industrial electrical products have gone up 10-15% already this year...some up to 25%
Canadians have always crossed the border to obtain lower prices. With estimates of as high as 80% of the population of Canada living within 2 hours of the border, people are not unintelligent consumers. Canadians have done this with other products, why shouldn't they do it with fuel. And for what its worth, U.S. citizens cross the border to get lower-priced prescription drugs.
Given these and the fact that the U.S. economy then drives the World, if the U.S. is in a recession, you can almost guarantee that other countries are at least struggling. Your examples do highlight differences, but they simply do not explain away the dramatic differences in the countries and their economies as compared to the U.S.
Say we establish a price guarantied of $80.00 per barrel for U.S. crude. This would insure steady long term investment in drilling in the U.S. Currently because of the high price of oil the U.S. is less than 50% dependent on imported oil. Say in response to the U.S. guarantied price of oil the large exporting countries under cut this price to say $30.00/barrel in reality all we are doing is stock piling oil for when the price exceeds a $100.00/barrel and it will because of China's and India's growing demand.
Some say why encourage more fossil fuel use? The truth is I believe burning oil is a waste of a valuable chemical building block but the average age of a car before it makes it's way to the junk yard is approaching 25 years old. Who drives those 20+ year old cars? I'm just not of the opinion we should restrict the movement of the poor so we will have to phase out our addiction to oil over time.
A larger Strategic Petroleum Reserve will benefit the poor the most giving them stable gasoline prices over a longer period.
There have been huge increases in production in WTI linked regions in the mid-continental region of North America. This is due to increases in production in the Bakken fields of North Dakota, Canadian oil sands production, and other areas. There is not enough capacity to take crude down to the gulf coast, or to the east and west coasts, where many of the refineries are. This has created a discount for WTI, greatly benefiting refiners in the mid-continent. The differential won't last forever. Pipelines and rail terminals are being planned and built. It may last for a few years though, since production should keep growing at a fast pace unless the oil price collapses due to a double dip.