Chairman of Gazprom Predicts $100 Oil Because of Speculation. Speculation, Really?
This weekend, there was Alexei Miller, Chairman of Russia's major energy company, Gazprom, predicting that the price of oil would jump to $100 a barrel because of "speculation." Now there is a man who should know what he is talking about, or certainly what he shouldn't be talking about. And he should know when the fix is in. One little detail however. His language, one could surmise, is willfully misleading. "Speculation" should not be the operative word. Rather, "manipulation" would be more to the point.
"Speculation" is a form of gambling, a wager whereby you may win or lose. "Manipulation" is immeasurably more sinister. It bespeaks of controlling, orchestrating and maneuvering to falsify and rig. In the United States and most everywhere it is illegal to rig markets. When it is attempted either in the commodity or stock exchanges here, we have a plethora of agencies whose task it is to be alert to manipulation, and then to prosecute, imprison and fine. Not always successfully, but to be vigilant nonetheless.
The degree of vigilance varies greatly in international markets, and there is the rub. Oil is traded in markets throughout the world, from London to Singapore, to Dubai to Tokyo among other trading floors. And yet, through arbitrage positioning, they are all closely interrelated. In other words what happens in London and/or Dubai, the trade quoted price of oil is reflected almost simultaneously on prices quoted on the New York Mercantile Exchange with marginal variances according to grade and point of delivery. Thereby "orchestrating" the price of oil in one of the offshore trading exchanges plays back to impact the price of oil on the NY Merc.
With Natural Gas, on the other hand, you have an essentially domestic commodity trading on domestic exchanges. It is a commodity traded under the watchful scrutiny of a newly vigilant CFTC. And why bring up natural gas?
In an enlightening commentary by Donald Marron, a former member of the Council of Economic Advisers pointed out that:
"A barrel of oil has roughly 6 times the energy content of a MMBtu of natural gas. If the fuels were perfect substitutes, oil prices would tend to be about 6 times natural gas prices in practice. In practice the ease of using oil makes oil more valuable. As a result the price of gas is usually traded between 6 and 12 times the price of natural gas."
His commentary also informs us that the ratio of oil prices ($ per barrel) to natural gas prices ($ per million BTU) had hit a record multiplier of 24.5 times as of the date of his writing. Just about where it is today.
With the price of gas at under $3.00 per MMBtu the price of oil should be around $35/bbl with a generous multiplier of 12, and in all likelihood closer to the mid twenties with a historic average multiplier of 9 or less.
On April 27, 2009, in a post "Why Are We Paying $50 a Barrel For $20 Oil," some of these same issues were raised. Since that time the price of oil has increased by some 40%, while talking heads on TV and media analysts have been endlessly repeating the patently erroneous canard that the price of oil is directly tied to the erosion of the value of the dollar. Really? Since earlier this year the price of oil has jumped from $33/bbl to over $72/bbl, a jump of near 110%, while the dollar has eroded some 15%. Correlation? Perhaps, but minimal at best, and far from explaining the dramatic movement in the price of oil.
Then, when comparing the market landscape of oil to natural gas similarities abound. Production exceeds consumption in both commodities placing real physical constraints because storage of excess supply is difficult to find. Land storage terminals for oil is filled to the brim forcing the chartering of oil tankers to hold excess capacity, to the point that the contango play as a speculation (buying and storing oil at current prices, storing it in tankers for future delivery six months or a year down the road -- thereby tying up billions of dollars and taking millions of barrels off the current market adding immediate pressure to ever higher prices -- a favorite ploy of such bank holding companies as Morgan Stanley, JPMorgan Chase, Citigroup) is turning into a pure storage imperative.
But don't take my word for it. In July, Phillip Verleger, a business professor at the University of Calgary (Calgary I'm sure you know is the Houston of the Canadian oil industry), and a fellow at the Peterson Institute for International Economics, predicting $20/bbl oil to come, told CNBC:
"The $20 story is relatively simple... Oil was $31 in December, got up to $70 a few days ago. The price shouldn't have increased. We have a huge surplus on the world market even with the OPEC cuts. It's running a million and a half barrels a day. I've been following this since 1971. We have never had a stretch with such a large surplus."
Over the past years we have been inundated with media and oil industry and sadly, government propaganda under the Bush administration, that the ever-escalating price of oil was a true reflection of market conditions and free market forces. Only recently the CFTC has reversed itself and owned up to the fact that speculation played a key role in market pricing (please see "Wall Street Stampedes To The Aid of the Oil Speculators" 07.12.09). Are we now prepared to go the next step and attribute the otherwise unexplainable pricing of oil to manipulation!?
Certainly the members of the OPEC cartel together with Russia producing nearly 50% of the world's oil, have a keen interest in pushing markets ever higher and given the flood of billions that are being cashed in, have the means to move markets on the commodity exchanges.
Question: Is the CFTC, or for that matter the State Department, the Commerce Department or even the Treasury, doing anything to determine whether the commodity exchanges for oil outside the United States are being manipulated, by whom and/or under whose auspices? The current price for oil is irrational. It is an unauthorized and most likely illegal tax on the daily activities of all consumers, and needs be addressed.
There are those, because of environmental concerns, who cheer high oil prices and for good reason. Yet the way currently construed, those high and feasibly manipulated prices are a tax and transfer of wealth to oil interests and oil producing nations. There are certainly better ways to keep oil consumption down.
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
the problem is that the price of gas in this country has always been way too low.
we should have had gas prices as high as in Europe or Japan since just after WWII.
that would have forced greater efficiency.
we would have denser cities
more subways (real ones like europe and japan)
and we'd have light rail.
we would also have high speed rail to link our major cities.
Now we're in a mess.
When PEAK OIL strikes..., and it will..., all you can legitimately argue is timing..., then we will be hit harder then Europe and Japan.
We have no one else to blame but ourselves.
the first thing Obama needs to do is stop listening to the Oracles (economists)
the oracles don't seem to know anything about the real world
the "science" of economics is not really Science
if it were really a science, then economists would recognize limits, because we live on a ball.
it's just under 8,000 miles in diameter, or 24,000 miles around. It has a total surface area just under 200,000,000 sq miles.
it's a ball..., with limited resources. Eventually, even the substitutes run our of substitutes.
No that "Economists would ever recognize this fact.
You just can't grow forever on a ball with continuously increasing consumption. That only work if we lived on a plane, but we don't. we are not flatlanders.
In order for Obama to get any where in the long run..., he must be honest and realistic. PEAK OIL is real. The only legitimate argument is on timing.
the Oracles are either dumb, they're lying or both
We have no one else to blame but ourselves.
in other words...
In America, GAS has always been WAY TOO CHEAP
I do not agree at all, this type of thinking is very problematic to me.
We need strong visionary type leaders and an enlightened population that forces campaign finance reform. Gas costs maybe .35 a gallon to produce. Ideal price for retail in any sort of true supply/demand market should be 99 cents a gallon.
It would be good for all of us if we had strong leaders that would simultaneously clean up the oil markets, giving us cheap gas, and mandating high cafe standards. It is free market worship that causes people to think we need high gas to curb use. The market doesn't always get it right... look at FOX news! Most succesful doesn't equate best use of capitol, systems, etc. Markets, marketing & propaganda shouldn't be the only factors we consider in setting public policies.
We don't need to economically suffer with high energy prices if we had leaders with the balls to mandate fleet minimums of 75 MPG over the next decade. Does that sound impossible? If so you are a glass half empty thinker!!!!
When the human mind has a goal, or a mandate, funny things happen. Stuff like creative engineers having breakthroughs.
Markets will cause us to give billions more to hostile entities while hurting our standard of living. In a non ideological world there is no reason we can't have a government that keeps markets honest, giving us cheap gas, while also mandating high millage standards for environmental & peak oil concerns.
The multiplier between the price of crude and nat gas as referenced in the article is completely meaningless. Hedge funds had bet on this for years and lost money. Just because two commodities traded in price ratio for a while does not mean they will continue to do so forever.
Crude and nat gas have completely different applications. Crude is a transportation fuel while nat gas is used for electricity, which can be substituted with coal, nuclear, etc. Since crude/natgas are not substitutes, you can't compare them by price/BTU.
The discussion here completely misses the real reason for the oil trade. Oil is an international commodity. Crude can be sold anywhere in the world. Nat gas is difficult to store and therefore is a regional commodity. What does this mean? The demand for oil in China will increase the price of oil in the US. However, the demand for nat gas in China doesn't affect us.
Since oil is an international commodity, it is therefore currency linked. As the value of the US Dollar decreases, the price of crude in USD increases. Since natgas is NOT an international commodity, its price is not affected by the change in value of the USD.
Crude is rising on expectation that USD will continue to fall. People are worried the Federal govt's spending is getting out of hand. This spending is funded by Treasury notes financed through quantitative easing. This decreases the value of USD, increasing the price of crude oil.
And yet 9 months later. the DEMs have not passed anything to end speculation...yet and bring it back to 2000 levels of speculation...
regards
So since Big Oil has proven to poison our earth in its extraction and its combustion, since it has sucked more of our tax dollars than all social welfare programs, and since Chevron, BP and friends (Goldman Sachs, Bechtel, Pickens, etc.) are going to own the vast majority of Big Solar and Big Wind power plants, why are we handing them the keys to our renewable revolution? Why aren't we insisting on owning and generating our own clean power right where it is needed, via MUCH stronger rooftop solar programs such as feed in tariffs and loans?
If they are doing it now, they will do it in the future. Anyone supporting Big Solar or Big Wind is absolutely selling out our nation's future to these same exact crooks. Not similar ones. These exact ones. Y'all need to take a good hard think about how energy should work, factoring in land use, water use, democracy, affordability, reliability, security, jobs, property values, etc. and point of use solutions will be the absolute, uncontested winner.
Don't let Chevron, Bechtel and Goldman Sachs own our solar energy future!
The author may be right if the two products had infinite and equal future supplies. Oil is running out, and there is a premium on a diminishing product, Oil will reach $250/bbl or more since at present rate of use the world's supply will be exhausted in 40 years.
Natural gas & oil each have their own fundamentals, and its perfectly normal to see occassional detachments fromt the price ratio. Gas production is no longer in decline due to new extraction methods and the situation has turned so quickly, that there is not enuf working gas storage for these new flows. Simple supply and demand.
OTOH, oil is presently in glut due to 8 G-20 nations still being in Recession in Q2. The daily surplus mentioned is a reality, but it is certainly not 1.5-mbd - so don't worry about the crude price falling to twenty bucks. The surplus since January has been 0.4-mbd, and I project it to continue 'til June 2010.
To secure and maintain the desired price of $75, OPEC should have increased the production cuts last week. They couldn't 'cuz of quota cheating by Iran, Venezuela and Angola. Several OPEC members are having Budget deficits due to the current price. They want a higher price but they have a dilemma. Cutting production increases their monthly deficits w/o even a guarantee that the price will drift upward. They are plainly cheating to offset those Deficits.
The "fundamentals-based" price of oil today is $46/barrel. At this price level, we usually see about ten bucks added due to "media noise & futures trading". Watch for the USA's contract crude price to drift to $56 over the coming weeks. We won't see spikes to $100 'til 2012Q2 based on presently contemplated fundamentals.
I agree with Freddy that this is a Peak Oil phenomena and the supply/demand pressure is on oil and not natural gas. Therefore the prices for oil are much higher than the ratios would suggest. Natural Gas is in a temporary non-peak situation due to recently developed shale deposits, such as Barnet.
Let's get to cap n TRADE and see what will happen as we give control over all energy to the traders. $100 oil will be history, like the old days of $1.00 gasoline.
Investing in oil or any other product is not in my nature. However,
of all that Bush ever said, one thing struck me as being shockingly
astute, considering its source.
Bush offered the suggestion of taking all of the old military posts
that have been shut down over the last few years and turn them
into oil refineries. That's about as far as the media took it. If there
were any actual possibilites of opening and operating them, the
media didn't like the idea and went on to more worldly wars.
I did. I liked the idea of a United States Refinery Company--owned
by the people (or to use the euphemism preferred by Imelda--the
little people), run by the people and sold to the people--of the
United States.
Isn't such an idea viable?
No, cap N trade will reduce the number of refineries.
I'm not sure what that has to do with anything. Sorry. Sounds like a
high school operetta to me.
But it just seems that the U.S. produces crude oil, which it hands
over to the Texas refineries to process, which are backed up because
they can't process what they have fast enough, which is mostly foreign
oil and we have these empty military bases.................?
No. Refineries aren't a problem. The problem is the supply of crude oil. A refinery turns crude oil into gasoline, diesel, and other products. We do not have a shortage of capacity to do this, which is why the crack spread (the difference of price between crude oil and gasoline) is so small and refiners are losing money. Making more refineries would not get us more oil. In a crude oil shortage, additional refining capacity would sit idle as there are no inputs.
I understand that. However, the price paid at the pump is 'caused by' (insert
past reasons)--which is every thing from 'a man blinked in China' to 'terrorists
are TALKING about attacking the pipelines from Albany to Troy!'
Fear strikes the futures market and within 1-2 days (if not hours) the price
goes up at the pump--having nothing to do with deliveries to the retail outlet!
Yet in all of this, we were told that the U.S. has plenty of U.S. oil.
When I checked production at the EIA website a year or so ago, crude oil
was backing up even then. Foreign oil was being processed but not the
oil from the PAD districts (?). And then a pipe would burst and a refinery would
go down or it would rain and a refinery would go down or the wind would blow
and a refinery would go down! So, apparently we DO have a shortage of refining
capacity.
Some of the military installations could also become storage facilities--of
U.S. oil, to be processed by U.S. refineries.
Exxon refineries are losing money?!?!? BP refineries are losing money?!?!?
You jest, right?
And what generates "crude oil shortages?" --the wind, rain, storms, terrorists,
sunshine, snow in Alaska, ice flows in the Arctic, talk of....., tankers backed up(!?!?),
lack of vision, wrong questions by government committees and my mama's
pajamas.
leduck,
Obama has already allocated more money for energy efficiency and alternative energy than all previous presidents combined and he did it in his first year as president. Peak oil is a problem that needs to be addressed by not only the president, but by every American. To hang it on Obama alone is disingenuous and flat out wrong in light of the investment tax credits, production tax credits and energy efficiency incentives delivered under the stimulous bill.
"Obama has already allocated more money for energy efficiency and alternative energy than all previos presidents combined."
Yes, but it is still orders of magnitude what is needed.
"Peak oil is a problem that needs tobe addressed by not only the president, but by every american."
I agree. I no Obama is not a dictator. A gas tax would be nice. but that should have been enacted decades ago
"To hang it on Obama alone is dangerous and flat out wrong in light of the investment tax credits, production tax credits and effiency incentives delivered under the stimulous bill"
obviously you have not followed me. You are merely responding to one comment or something. I always say that allot of our problems began after the 50s, when we started to build up suburbia. I wasn't crazy about Bush at all. I do not hang Peak Oil soley on Obama.
As always, a great column. Recent statements by various OPEC ministers have been galling to read. The culmination last week was the statement that everyone was happy with the price of oil at $70, consumers and producers both! The rationale for a push to $70 was that no one would be in the oil business if oil was any cheaper. Three years ago, $70 a barrel wasn't in any oil producer's wet dreams.
Environmental concerns? Oh, you mean like millions of people sick with cancer or dead from diarrhea or starvation because of pollution to their waterways by oil and gas companies? Or dead cetaceans (whales, dolphins) who have beached themselves with broken ear bones from oil and gas exploration sound bombing? Or global warming from burning fossil fuels? Or dead zones in the Gulf of Mexico from petroleum based pesticides and fertilizers?
Exectly!
The author leaves off a number of factors. Natural gas is pumped out of the ground, filtered a bit, then piped to the customer where it is just burned. Oil must be pumped out, taken somewhere, and then extensively refined before it is useful. From a barrel of oil we generally get about half a barrel of gasoline, and all sorts of other things, like jet fuel, petrochemicals for plastics and fertilizer, heating oil, etc. The cost of a barrel of crude oil is thus dependant not just on the energy that can be extracted but on the sales price of all the various end products we can extract. So, if industrial use of oil products goes down, the cost of the raw material will change, maybe up, maybe down. There are so many factors involved, such as the fact that oil from different places has different percentages of gasoline vs. roofing asphalt (for example), that manipulation on a global scale over a long period becomes more difficult.
While I agree with your point at a high level I think we must remember that Gasoline is a byproduct from the production of everything else that is derived from crude oil. Have you looked at the price of solvents or cleaners lately? What about lubricating oil? In my neck of the woods a quart of store brand 10w-30 while less volatile than Gasoline, is still roughly the same price as a gallon of gas. Just like it has been forever. (Except when gas ran up to $5 a gallon, oil was still cheap at $2 a quart.)
I personally think the price of the non-energy portions of oil went up simply because the price of the crude went up. It had nothing to do with demand.
Splitting hairs - they manipulate to speculate! This is the "market casino" that suppose to "free" regulate demand and supply!
Yes, they do speculate, but the market is being cornered, I posted several post which were not allowed.
American don't understand what is being pulled on them, and sadly there are too many greedy people in our own nation.
The American people are a very disappointing group, too full of greed an through their greed letting other nations have an upper hand.
You must be logged in to comment. Log in or connect with
