Oil Prices: Russia's Medvedev is Puzzled But the Financial Times Knows Best

In a forthright television interview on June 2nd between President Medvedev of Russia and Maria Bartiromo of CNBC, the subject of oil prices was discussed -- an issue of particular concern to Russia as the world's largest energy exporter. The gist of the conversation was enlightening. Simply put, Medevedev confided that today's prices of $60-70 were a throwback to the prices of 2006, which was then perceived by Russia as generously high, and that he was puzzled why prices reached this level today.

President Medvedev clearly doesn't read the Financial Times. In a braying editorial on the same day, the Financial Times swept aside all doubt, instructing us in schoolmarm manner that "Oil [Is] Back To Normal" and that we should all put on our Alfred E. Neuman persona, and understand that the 100%-plus price rally in oil prices since hitting bottom earlier this year is no cause for worry. Well, if prices continue to go up, that could, according to the Financial Times, trigger inflation, being "a final straw for many sectors battered by recession." But again, hey, don't worry, because further immoderate price rises can be hedged against. Did you catch that Mr. and Mrs. Juarez? If gasoline and home heating continues to escalate as oil prices go up, taking a big chunk of your day to day living budget, don't worry. All you need to do is call your local broker and start trading oil contracts on the Commodity Futures Exchange. Simple as that!

The Financial Times, forever the apologist for any upward aberration in oil prices, goes on to compare the price movement in oil to other products such as agricultural commodities that "have all gone up." The fundamental differences are not touched upon. Soybeans and wheat deal with real problems such as dry growing conditions and limited stockpiles. Oil on the other hand functions under fabricated conditions with Saudi Arabia shutting in 4.5 million barrels a day of its oil production, while the rest of OPEC probably shutting in an additional 3 million barrels. All this while oil storage throughout most of the world is filled to capacity and scores of supertankers are at sea, loaded with oil, serving as auxiliary storage with nowhere to go to discharge their cargo. And not for the Financial Times to overlook the dollar's weakening as a further reason for a renewed spike in oil prices, without pointing out that the dollar has lost some 11% of its value since the outset of the year, while oil has escalated over 100%.

Far be it for the Financial Times to mention the machinations of OPEC, or the trading aberrations on the commodity exchanges. They all seem to be club members and therefore above reproach. But that breath of fresh and candid air coming from Russia, now that's a most pleasant change.

Comments

[leduck]

after we purge the american system of evil speculators, then the economy will right itself..., and we'll all live happily ever after

[fisharefreinds]

where are all thses homeless and unemployed people going to go? are they to be purged too?

[SaltySaltillo]

I find it remarkable that every time oil goes UP the speculator­-conspirac­y-theorist­s come out of the closet, but every time oil goes DOWN, they are silent. If speculators have some mystical, magical power to move prices upward, why would oil EVER go down? Wouldn't it be logical that these market-moving crooks would simply move oil to a really high price and then hold it there forever?

[DesertDogAlpha]

It's a self-correcting market - inconvenient as that thinking is to those who hate markets and love conspiracy theories. Prices go down, rig counts and drilling go down. Supply goes down in due course and prices go up. If the dollar goes down in value, prices go up. If the economy shrinks, demand and prices go down and vice versa. Prices are set on the margin with some not very difficult to comprehend fixed and variable cost considerations coming into play.

Of course, for the 50 percent of Americans who don't pay any income taxes this is difficult to digest. Better to just complain.

[fisharefreinds]

ok smarty pants, Enron wiped their tush with your "market" supply and demand theory years ago.

[sharonsj]

According to everything I'[ve read, ALL transportation is down. That's trains, planes, cars, trucks, boats!! This is not supply and demand--the higher prices are due solely to speculation. Since the government refuses to do anything about it, we remain screwed.

[KillTheMessenger]

And from everything I hear... supply is down, too. And what's worse, low oil prices have canned tons of drilling projects, so the market expects to have an even tighter supply-demand situation in the nearterm future.

:-)

[SaltySaltillo]

over 1,000 drilling rigs have been taken out of service since last fall.

[leduck]

where's obama?

[fisharefreinds]

it has always been supply side economics--Reagan's term and he believed wholeheartedly in it.

[DesertDogAlpha]

High oil and natural gas prices are very good since only when they are VERY high can alternate energy technologies be sustainable (stand on theri own two feet without endless government subsidies). Plus, high prices will send the right price signal to reduce carbon footprint. So, we can and should join with Exxon in celebrating very high prices.

The alternative is endless variations on the government-imposed ethanol debacle.

[TxAggie]

I was not aware that Exxon was celebrating high oil prices (exactly what is "high"?). I would suspect that Exxon, like most E&P companies would welcome a stable price and stable cost structure, the roller coaster ride we have been on in the indusrty is not healthy for us nor the economy.

[zakon]

Ever since speculators (i.e., Wall Street, institutional investors, etc.) were allowed on the commodities exchanges, gambling is institutionalized.

The supply and demand laws that existed between Tropicana and orange growers, refineries and crude oil exporters, cocoa farmers with Hersheys has been smashed when the rules were changed to allow "investors" into the buying and selling. Oil and OJ are inputs of production, not "investments" to hedge and gamble and manipulate!!!!!!!

Our government allowed the rules to change. They are complicit in this massive destruction of our wealth and the ruin of real capitalism.

[DesertDogAlpha]

So get into the commodity marketplace and see how well you can do! You could be rich as can be -- or maybe not....

[FreedomCorpse]

The last run up in the price to $147 was excused as "demand from Asia" like 5 cent an hour labor are driving hummers or something now they say its inflation despite massive demand destruction. The US government still refuses to regulate anything as if Milton Friedman's "economic theories" are still proven valid. Thanks former Sen. Phil Gramm for all the massive worldwide damage you played such a pivotal role in making happen.

[sonofsamphm1c]

When an American decided to burn an extra gallon a week, thousands of people with mopeds decided to burn a few extra drops a week.

We were burning more than ever, and they, 1000s for each of us, were also burning more than ever before. Add it all up, it was record demand. And it did not start backing off until the recession latched on.

[KillTheMessenger]

So you are still mistaking the scribblings of so called analysts for reality? So sad... when will people learn? If you want to pay less, buy less.

Yes, it is that simple.

[LeftRight]

And if you look at what's happening, you will find that we ARE buying less, and there's more available, so it SHOULD be going DOWN according to your precious theory. Yet, it's GOING UP, in spite of lower demand and higher supply....­..

[TxAggie]

The run up to $147 was caused by the fact that the entire GOM was suht in due to huricanes. The $147 was the peak, it was not the average. How do you regulate a worldwide commodity?

[GetAbike]

Oh ya, if you have not done so already, go see the blog by Michael Martin: Are Speculators to Blame for Soaring Oil Prices? on huffingtonpost.com for a lively commented blog.

http://www.huffingtonpost.com/michael-martin/are-speculators-to-blame_b_208773.html

I stay out of that particular debate as it is well debated by others without my ignorant two cents worth.

[FearlessFreep]

Last summer most people would have been happy to see oil at its present level.

[Raul Garcia]

In case you haven't noticed, this isn't last summer.

[larry278]

Yeah, I did. What happened to all of the sunny days in May in the east. June isn't showing us much sun either. Did Pres Obama sell spring's sunny days to pay for the stimulus & the bail outs?

[KillTheMessenger]

You want it to be? No problem. Take a good, long trip in a 6mpg RV.

[GetAbike]

Ya know Raymond, your pet peeve(s) with the MSM, especially the financial news outlets, are not unlike my own.
"They all seem to be club members and therefore above reproach. But that breath of fresh and candid air coming from Russia, now that's a most pleasant change."
Now, when it comes to practical and geologic limitations on growth generally, and oil specifically, your views may be more akin to the MSM than to my own.
That is ok, but what will you have to say when the chickens come home to roost after this fall-off in exploration and development the last 8 months. Will you attribute the stated (and inevitable) production declines to a "breath of fresh and candid air" or a rascally ploy to justify gouging?

KTM said it best: "So unless we see much higher and sustained prices soon, the delay in new drilling will automatically program the next supply shock into the system. It might already be unavoidable at this point."
As the world is using less oil worldwide than last year (Maybe 5 to 10 million bbl/d less?) then the world is still blowing through 70-80 mbbl/d of this valuable stuff - an amazing rate considering this world-recession.
And what has changed? Our driving habits? Development of alternatives? Our President making nice and hoping for the best?

I mean it- good luck to all of us.

[Overtone]

How to Lower the Price of Oil!

Future cars will need no fuel and can become power plants when parked.
Revolutionary breakthroughs will make possible a Self Powered Internal Combustion Engine - SPICE™.

A SPICE can be used to power a hybrid. It needs no fuel and will end the need to plug-in, as the engine can run when parked and wirelessly transmit and sell power to the local utility.

The SPICE is powered by hydrinos. One barrel of water can equal several hundred barrels of oil. To learn more about SPICE and hydrinos see: www.chavaenergy.com Look under the heading HOW?
A second breakthrough is the MagGen™. These magnetic generators, without moving parts, will replace batteries in electric cars, trucks and buses.

Scientists and engineers will doubt these technologies are possible until they have been validated by Independent Laboratories. That is an important step on the agenda.

Until now, car ownership has been an expense. Payments to car owners driving a hybrid with a SPICE, or powered by MagGen, are likely to be substantial.

When vehicles selling power to the grid fill a parking garage, it will have become a multi-megawatt power plant.

The cost of many vehicles might be paid for by utilities, as they purchase power whenever needed. The parked cars each become decentralized power plants - a rapid, cost-effective path to a rebirth of the automobile industry.

And as worldwide production begins to ramp up, a permanent end to high oil prices!

[leduck]

so much for the laws of themrodynamics

[KillTheMessenger]

What you don't know can't hurt you. And everything that's on the internet is true.

:-)

[KillTheMessenger]

I still would like to see the section in the US constitution where we are being guaranteed cheap oil forever.

Any constitutional lawyer here who wants to take that?

Now, absent this guarantee and given that higher oil prices are a fact, wouldn't it be more important to ask how we can reduce our dependence on oil in the fastest and most efficient manner rather than to get upset about what is being written in this or that article in this or that newspaper?

[02bmw76]

It's a rigged game...

[LeftRight]

I'm so tired of hearing "supply and demand" from people around me when I question the price of oil and gasoline. Since the world's supply lockers of oil are filled to capacity, and the refineries are not making as much as they can, and people are using less gasoline, shouldn't the price be LESS than it was during the mid Clinton years when it was around $12/bbl?? Oh that's right, there's the SPECULATORS DRIVING UP THE PRICE!!!!!!

[KillTheMessenger]

No, the price should not be less because people are willing to pay more. You see... prices are not being set by speculators but by the buyers of the end product. Last year we were willing to pay $4+ for a gallon. This year we are on our best way to pay $3/gallon, again and we are doing nothing to lower our consumption any further. The market factors that into the price discovery automatically. If people would use 50% less gasoline at $4/gallon than they are using at $2/gallon, the price would never go anywhere close to that number. However, people are not using significantly less until the price goes way above $4/gallon, so that's where demand cuts off...

Supply will fall off pretty steeply over the next few years because marginal cost for drilling is above the market price right now and most producers are past peak, anyway. So unless we see much higher and sustained prices soon, the delay in new drilling will automatically program the next supply shock into the system. It might already be unavoidable at this point.

[Raul Garcia]

Willing to pay $4.00 a gallon? Bullshit. I feel it in the shorts every time gas has gone over $2.25 a gallon and I do more than my share to cutback.

If I remember correctly, last year I had no other choice to keep myself from getting bent over, other than to the convert my 4 cylinder truck and grow and distill my own alcohol.

[LeftRight]

See you don't understand what's happening here. People are driving less than they did before, and supplies are so large that we've run out of places to put it. BOTH of those should be lowering the price individually, put together we should be at around a dollar a gallon!! The reason that we aren't is because of the speculators!!

[DesertDogAlpha]

Uh, with the cost of the last barrels of oil produced in the world running in the range of $75/barrel the question isn't why oil is back up where it is -- it's why it ever got down to the $30/barrel range a few months ago....

[blood1]

If anyone wonders why the government is under pressure to regulate the Hedge Funds, this is it.

The price of oil is the commodity that Hedge Funds think will make them money in the short term. They are gambling, yes gambling, that they can go back to their forced price increase at the pump.
They learned that the price point at which the public would complain was $4/gallon.­..so they are gambling that as summer rolls around, we will use all the gasoline which they have at inflated prices...a­gain. Don't you just love it that Hedge Funds are back to their old ways: Putting their own wealth on the back of the American economy/public.

Just watch the profits in the Oil Sector for the second quarter (not available until July). They are laughing all the way to the bank!

[KillTheMessenger]

If you want to make life really bad for speculators, just don't buy any gasoline at $4/gallon.

Yes, it's really that simple.

[Raul Garcia]

Brilliant, I'll buy a bicycle with a trailer.

[cdrach]

i cut way back @ 2.30 a gallon