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Some Valuable Remarks About Oil and Speculation
Posted on April 10, 2012
Posted By: Ferdinand E. Banks
Topic: Fossil & Biomass
Last night I participated in a debate (arranged by Russia Today TV -- 24-7 -- Crosstalk, and transmitted internationally in English) in which I pointed out -- on several occasions -- that the aggregate (though unweighted) Brent-WTI (West Texas Intermediate) price of oil was about 112 dollars a barrel (= $112/b), and I claimed that if this price reaches $130, we could be facing a clear and impending economic danger.
Early this morning, when I checked this aggregate price on the important sites OilPrice.Com and 321 Energy, it was almost $115/b. I therefore decided to inform my friends and neighbors that an increase of the nature is the worst possible news at the present time, because the global macro economy is definitely not in the best condition. I can also note that while that debate was stimulating, in addition it confirmed two things that many colleagues seem to have overlooked.
First, over the last year or two, the most important components of the oil scene are at last on the fringe of being completely understood by many persons only moderately interested in that topic, by which I mean that oil is physically and not just geo-politically scarce, and its price has a considerable macroeconomic influence. Moreover, the new North American oil promise -- e.g. oil sands in Canada and Bakken oil in the U.S. -- may turn out to be a false dawn, at least in terms of the dawn that we need, and perhaps absolutely must have.
I also attempted to inform the other participants in the debate, and the audience, that the full story dealing with the availability of physical oil and its relation to the macro economy can best be obtained from the work of Professor James Hamilton of the University of California, San Diego, whose most recent contributions can be found on OilPrice.Com. Hamilton may be the best student in the world of the oil price and its macroeconomic effects, and he has something to say on this topic that should not be ignored.
All of this is on the positive side of the debate. On the negative side it was clear that the role of speculation is still not adequately understood. There is unfortunately still an unfounded belief somewhere -- perhaps everywhere -- which the world would be a better place if financial institutions -- voluntarily or otherwise -- stayed away from paper assets having to do with physical oil.
My view of this is quite simple, and I am glad to report that almost all of my students at the Asian Institute of Technology (Bangkok) and Uppsala University understood its basic elements perfectly, even if many outside my classrooms adamantly refuse to do so. As an example, in 2008, when the price of oil was going into orbit, and threatened to ruin the global economy, President George W. Bush did not take a helicopter or bus to New York and Wall Street, and lecture the young 'masters of the universe' (as they are sometimes called) on their irresponsibility or incompetence.
Instead he took Air Force 1 to Saudi Arabia, where his visit probably ended with the famous Turkish adieu, 'smiling may you go, and smiling may you come again', even if with all this smiling little or nothing was said or done about increasing the flow of oil. Of course, more than thirty years ago the then king of Saudi Arabia said that his country would never provide a sustainable output of more than ten million barrels a day (= 10mb/d), and if domestic consumption is considered, it means that at the present time Saudi exports are slowly declining.
Let me make a prediction. Those exports are declining and they will continue to do so, although if the oil price duplicated its escalation of 2008, an attempt would probably be made to provide more oil for the export market. The question is how much could be made available in the short or medium run, if the talk about making oil available was more than fantasy or empty promises. I tell my students and anybody else with an interest in the topic that the correct answer is very little, and the main issue is not willingness but ability. In addition to sustainable capacity (of about 10 mb/d) it is possible to refer to a Saudi surge capacity (of an extra 1.5-2 mb/d), but surge capacity means exactly that. It cannot be maintained indefinitely, and some insiders have started to claim that an output of 10 mb/d can only be perpetuated with difficulty.
Now for the bottom line in my argument. Speculators react to changes or possible changes in the oil price due to what is taking place on the supply-demand front, or what they perceive is taking place or could take place in the light of present market dynamics! They don't -- and for the most part can't -- initiate these changes, although there is no point in denying that occasionally conditions prevail in which speculators have a marginal influence. Yes, I know of cases in which speculators apparently were able to initiate a price spike of one sort or another in which somebody might make a lot of money, and maybe there were some negative macroeconomic overtones, but spikes do not count in the present oil market setting. The spectacular oil price rise of 2008 (which actually began several years earlier "when it was brilliantly referred to by Daniel Yergin as a "slow motion oil price escalation") was a disaster because of its impact on the global economy. In a sense it too may have begun as a spike, but a spike that got out of control. The fundamental mechanics consisted of demand outrunning supply.
Moreover, there is something else that I like to stress that everyone should make an effort to understand and appreciate. What happened after the oil price topped out (at $147/b), and rapidly declined to $32/b, gave OPEC an opportunity to show its power. They had another of those famous meetings in marvelous Vienna or somewhere, and the next thing we knew the price had unexpectedly recovered to more than $70/b. That recovery had nothing to do with speculators. It was caused by OPEC reducing the quantity of the oil it supplied to the market.
All of this is expanded on in detail in Chapter 3 of my new energy economics textbook, but although my future students will be expected to understand it perfectly if they prefer a passing to a failing grade, everybody else need only understand that the dramatic talk about oil and speculation that is resonating through the blog-o-sphere and on the op-ed pages of many newspapers should be taken with a grain of salt. More optimistically, if you get over with this fixation on speculation, you can easily and with authority and style discuss the global or a regional oil market in any gathering anywhere in the world.
References
Banks, Ferdinand E. (2012). Energy and Economic Theory. London, Singapore and New York: World Scientific Publishing Company. (Forthcoming).
Authored By:
1960-61: Assistant lecturer, Institute of Economics, University of Stockholm (Sweden).
1961-64: Lecturer in economics, the International Graduate School, University of Stockholm; Lecturer, Institute of Economics, University of Stockholm, Sweden Consultant, United Nations Development Program (Egypt, Ethiopia, Senegal).
1964-66: Senior lecturer in mathematics, statistics, and economics – The United Nations Institute for Economic and Development Planning (IDEP), Dakar, Senegal.
1966-68: Senior Lecturer (economics), Stockholm University, Sweden; Consultant, United
1961-64: Lecturer in economics, the International Graduate School, University of Stockholm; Lecturer, Institute of Economics, University of Stockholm, Sweden Consultant, United Nations Development Program (Egypt, Ethiopia, Senegal).
1964-66: Senior lecturer in mathematics, statistics, and economics – The United Nations Institute for Economic and Development Planning (IDEP), Dakar, Senegal.
1966-68: Senior Lecturer (economics), Stockholm University, Sweden; Consultant, United
Other Posts by: Ferdinand E. Banks
Some Aspects of Japan and Nuclear Energy - May 06, 2013
Not Business But Personal: Nuclear Energy - January 29, 2013
The Beginning of the Nuclear Renaissance Has Not Been Televised - December 13, 2012
Logic and Swedish Nuclear Energy: An Update - November 21, 2012
Oil, OPEC and the Best Brain in the World Again - October 18, 2012
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Shale Gas - A Potential Game Changer By Kirk Edelman
Oil, OPEC and the Best Brain in the World Again By Ferdinand E. Banks
Economics of Shale Gas By Karol Mazur
Oil and Iraq By Ferdinand E. Banks
Comments
April, 13 2012
Jim Beyer says
Here's the discussion:
April, 13 2012
Jim Beyer says
Good discussion by all the participants.
I agree that:
1) Speculators can magnify but not control, oil price fluctuations. If speculators didn't see or sense some kind of supply limit (peak oil) then they wouldn't be speculating. At least not successfully.
2) High oil prices could push us back into recession. If this happens (again) it would be evidence of the undulating plateau of oil production that many think will be how peak oil will be manifested.
3) No one and no one country (including the U.S.) can do anything about oil prices. Even if the U.S. electrified their entire transportation sector tomorrow, it would have little/no impact on the world oil price. NOR WOULD INCREASED DOMESTIC DRILLING. There may be good reasons to increase domestic drilling, but impacting the world price of oil is not one of them.
4) In terms of "what to do", the short (and long) term answer is to try to get off oil. Buy a Chevy Volt and other cars like it. (Very low fuel use and no compromise in performance, other than the price tag.) The problem with these solutions is they don't impact on the oil price; they just remove a tiny bit of vulnerability of our economy from the impact of high oil prices.
April, 14 2012
Ferdinand E. Banks says
There is going to be another OIL AND MONEY gig in London late this year. A very rich man once informed me that he had reserved a place at his table for my good self, but unfortunately I did not have enough money to to take a slow boat to that great city, and so I declined. Lucky me. When I saw the list of speakers I realized that if I needed more information about this topic I can get it from the people who contribute to this site/forum, rather than having to clap for some of the nonsense one often hears about energy from certain people.
April, 17 2012
Tam Hunt says
It's worth pointing out the little known fact that Brent prices in 2011 far exceeded, on average, the record highs reached in 2008, and they're of course even higher now. This is a large factor in why the IMF projects EU growth to be negative 0.3% in 2012. As for the US, WTI prices are not quite as high as they were in 2008, but gasoline prices are even higher, reaching a record annual price in 2011, higher than in 2008. This cycle of economic recovery, oil price increase, recession, etc., will probably be repeated a few more times, until we collectively get very serious about dramatically reducing our dependence on oil.
April, 17 2012
Don Hirschberg says
Today I listened as President Obama went on and on about the need to regulate speculators more. One would think except for speculators there would be no oil issue at all.
I suppose it is obvious that I am not an economist but it seems to me whatever handle speculators have might have enough leverage to change prices only a few dollars - even that’s enough to make lots of money. But we hear of $20, $30, and greater influences?
We used to hear about efficient markets and how speculators earn their living by keeping an orderly market within a narrow band which centers about valid pricing. Spikes, skinny spikes have very little area under the curve and can be weathered quite handily.
Jim, Thanks for the link.
April, 17 2012
Malcolm Rawlingson says
Great article Fred. But answer me this question. How have the Saudis managed to maintain th million barrels a day for as long as they have without suffering from the depletion characteristics that have plagued American conventional oil production. Surely there will come a time when production levels in that country will start to fall. Maybe it is already occurring and no-one wants to let on. But let's do the math 10 million bbl/day times 365 days a year is 3.65 billion barrels of oil times 50 years is 182.5 billion barrels of oil. Are their oil fields THAT big?
Speculators may make a bit of a difference in oil price but supply and demand are what matters. There is more demand from all those new members of the "middle class" in India and China and less supply. The price is set to go much higher and I suspect that will have the effect of shifting consumption to other fuels notable natural gas. There is a great deal more of that.
Malcolm
April, 17 2012
Malcolm Rawlingson says
Sorry for the typo second line should be ten million barrels per day. M
April, 17 2012
Malcolm Rawlingson says
And I forgot my main point - the Saudis are going to keep the price of oil at the point where it makes them a great deal of money but not high enough that the demand for it shuts down and consumers switch to natural gas. They know full well that if the price of oil makes driving gasoline engined cars unaffordable people will switch to natural gas in droves and their monopoly ends. These are smart people. Their ONLY business is oil. And of course who is their main up and coming competitor. The tar sands. That is the only area of the world that has reserves that come close to the Saudis. Production is ramping up rapidly - well over 3 million barrels a day already. That of course explains all the "opposition" to pipelines because the achilles heel of the tar sands is it is landlocked and major pipeline capacity - The Northern Gateway pipeline to the West and Keystone to the south - is required to ship it out to the market place. Right now the oil trades at a discount because the mid west hubs of Cushing Oklahoma and Patoka Illinois have too much oil. The Keystone XL pipeline unlocks that bottleneck by increasing the flow rate to 1.1 million bbl/day with much of that increase going to Texas refineries where the full market price is obtained.
Malcolm
April, 18 2012
Ferdinand E. Banks says
Bertrand Russel once said "Although this may seem a paradox, all science is dominated by the idea of approximation". Assuming that is the case, Malcolm, I'm ready to accept the figure of 10 mb/d for Saudi production, although of course exports are less. However, I dont know if I can accept it next week, but today it is OK...I think.
Now for that famous ride of John von Neumann through the streets of London during WW2, in which he told Jacob Bronowski that game theory was more than those algebraic exercises that I stupidly taught a couple of times, but lies and deception (although he used different words). The Saudi Oil Minister - and OPEC executive al Naimi (who is a very intelligent man) - once said that Saudi Arabia can produce 15 mb/d for 50 years, following which I said to myself that it would be a mistake to believe ANYTHING coming out of that part of the world about oil. Incidentally, this business about speculation and the escalating oil price was originally dreamed up by OPEC, and it was definitely the right move on their part, because there are plenty of people in North America and Europe (and perhaps elsewhere) who fell for and expanded that silly reasoning.
Recently I became persona non grata on another site for protesting the publication of an article in which President Obama was called a liar for announcing that oil was in short supply. According to some person, North America is overflowing with oil, which reminds me of the opinion about oil of the good Professor Peter Odell, which was that the Middle East was superfluous where the supply of oil was concerned. That opinion made him more popular than ever. As for the president, he is not a liar where energy is concerned - he simply doesn't have a clue, and the real problem was his appointment of another incompetent to the office of Energy Secretary.
About the Keystone pipeline making our days where the oil price is concerned, I can only say what the young ladies liked to say when I was a soldier in the Far East: It never happen GI. OPEC wants a trillion dollars a year for their precious oil, and they have the juice to get it. I dont see any way for Tam and me to ever agree on nuclear, but we are on the same wave length where these fossil fuels are concerned. Somebody has got to do some serious thinking about this issue, and ppreferably soon, and get that thinking to the TV audience..
There is something wonderful going on here, which is that all or most of us are on the same page where the topic of oil is concerned.
April, 18 2012
Fred Linn says
If you don't use oil, it does not matter what the price of oil does.
Don't use oil.
April, 18 2012
Jim Beyer says
Fred,
I think you and Tam would agree that peak oil will hit us before the effects of climate change will. I'm almost starting to believe that Al Gore made a mistake with all his "Inconvenient Truth" stuff. Not that he was wrong, but the climate change issue (and the push back) served to cloud the real problem of peak oil. I've said several times before that I think World Oil Production peaked in July, 2008. I'm probably not correct on that, but I'm correct ENOUGH. Limited supply results in limited economic growth.
Both the right ("drill baby, drill") and the left (Obama's tapping of the SPR) are wrong in thinking there is anything we can do to effect oil prices. There isn't. All we can do is walk away from it. The "easiest" way to do that is to vector our light vehicle use (automobiles) away from it. Not exactly easy.
I was "concerned" that even the Union of Concerned Scientists don't seem to "get it". They just came out with a big study on how green electric and hybrid vehicles are. How some in certain parts of the country (that burn coal)the vehicles are a bit less green than others. That's NOT the priority issue right now; getting away from oil is. So I guess I'm a bit concerned about these Concerned "scientists".
It should be noted that moving towards more electrification of transportation will allow for more use of renewable resources (as these vehicles would represent opportunistic demand). So I say respectfully to folks like Tam, let peak oil drive us toward greener energy.
April, 18 2012
Tam Hunt says
Jim, I agree that higher gas prices will be the driving factor in getting us on the path toward electrification, as well as into much smaller cars, bikes, carpooling, buses, trains, etc. CAFE standards are a good guide to the future, but actual market forces are likely to do a lot more than CAFE. Electrification will be a small part of the solution for the next decade or two, just because changing over the ICE fleet takes so long. But electrification is definitely the most promising long-term solution for weaning us from oil.
April, 18 2012
Ferdinand E. Banks says
Tam, Ive seen brilliant articles against electrification, especially by Jim Petersen in the site SEEKING ALPHA, but I'm not convinced. Somewhere in the back of my mind has always been the belief that electrification is the way to go. A lot of work needs to be done on this, and they should be doing it at the USDOE. Whether they are or not is another matter.
As for Al Gore... well. He should have won the presidency in a breeze. A piece of cake. Instead he lets George W. win, and we get a catastrophe, a _______ disaster, and not just for the US.
April, 19 2012
Fred Linn says
There is a quick and easy way to move toward vehicle electrification. Railroad locomotives are already hybrid electrics----and have been for about 70 years. Diesel/electric. Diesel engines generate electricity that drive generators which supply the tractive drive. Electric drive does not require mechanically complex transmissions(that are heavy and expensive). And, electric drive allows smooth, easily controllable power transfer. Build overhead power lines and simply by pass the diesel engines----deliver the electricity to the engines directly. In areas without overheat power lines available----you still have the diesel engines to fall back on. And diesel engines can run on natural gas.
Fles Fuel cars can run on gasoline, or any mixture of gasoline and ethanol up to E85(85% ethanol). Using blender pumps, you can set the delivery to any gasoline/ethanol mixture you want. In Brazil, the only gasoline you can buy is 25% ethanol. Flex Fuel vehicles sell for the same as conventional gas only vehicles. But they give you a choice of what fuel you want to use.
Natural gas vehicles are mostly bi-fuel. They run on liquid fuel or gaseous fuels. They can be switched from one mode to the other, either manually or by computer. The set up is a bit more expensive, but the price difference between gasoline and natural gas(methane) is enough that the conversion can pay for itself very quickly. It costs about 1/3 to 1/2 as much to drive the same distance using natural gas as it does compared to using gasoline. Bi-fuel natural gas engine vehicles are popular in Europe, South America and Asia.
There are even vehicles in manufacture, on sale, and in use on the road by consumers that use a range of fuels. The Fiat Siena Tetrafuel can run on gasoline, gasoline and ethanol mixtures, pure hydrous ethanol(unblended) and/or natural gas(methane). The Siena can run on petroleum, some petroleum, or no petroleum at all.
If the technology on the Fiat Siena Tetrafuel came on every vehicle sold---nobody would care about the price or supply of petroleum, they'd just use something else.
Diesel engines can also run on natural gas.
We have lots of options available. The more options you have, the freer you are. Consumers should be free to choose whatever they want to fuel their vehicles.
April, 19 2012
Fred Linn says
By the way----natural gas is methane, CH4. Methane is both a fossil fuel(natural gas) and a biofuel(biogas, biomethane). It can be made easily and cheaply from any type of biologic organic material at all, including sewage and landfills. We've been doing it for over 160 years in recent recorded history.
Both natural gas and biomethane are the same thing, methane, CH4. They can be mixed together in any proportion at all with no loss of performance in any application.
Germany is moving into natural gas as transportation fuel, and biomethane production from sewage, agricultural and municipal waste at flank speed.
As an added bonus, methane is the cleanest burning fuel there is, and the same amount of energy with natural gas produces only 65% of the CO2 produced compared to petroleum. If all of our vehicles were using natural gas instead of petroleum, total pollutants produced would be over 90% less, and the CO2 produced doing all the same things as now would be the equivalent of taking every third vehicle off the road entirely.
April, 19 2012
Ferdinand E. Banks says
Well, somebody who has a passing grade in remedial logic at Boston Public can deal with these comments of Fred Linn. I''m not up to it right now.
I will say though that my wife and I were on our way to the dancing and jazz at Scansen (in Stockholm) one evening, and when we found ourselves behind a bus that was using natural gas, I almost decided to forget about Stockholm and go back home and get drunk.
April, 19 2012
Jim Beyer says
I thought about vehicle electrification for quite awhile. I do think it's the right thing to do. No, it won't be easy. (Though it will be quite a bit easier with gas at $5/gallon instead of $2.50/gallon.)
The trick is how do you do it with minimal cost and minimal extra inconvenience to the driver. I guess the charging port VS. going to the gas station is a wash with customers. (People hate going to the gas station, apparently.)
An optimal vehicle would have a battery pack (like the Chevy Volt) and a tank of compressed natural gas. It probably should also have a small gas tank (3-4 gallons) for gasoline or diesel so it can interact with the existing fueling infrastructure (and keep people from getting stranded). How much would this all cost? A lot. But it gets us off petroleum. Given that peak oil is a potentially civilization-ending problem, I don't think it's too high a price to pay.
Net savings in gas per year would be about $2k, or so, depending on how much you drive. Assuming the vehicles could be made for less than a $10k premium, they'd pay for themselves in 5 years or so. 3 would be better.
The Chevy Volt at about $32k, solves the range problem of the RAV4-EV. But its battery pack is only 16 kWH (Lithium ion, 435 lbs.) VS. the 27.4 kWh (NiMH, 987 lbs.) of the RAV4. That's not that big a savings in weight. I'm not sure Lithium Ion is worth the effort. We will see.
April, 19 2012
Ferdinand E. Banks says
Greater electriication means nuclear to me. I don't see any way around it, however I will not appoint myself to investigate the issue. I will say though that it is not as simple as I once thought that it was.
As for peak oil being a "civilization ending" phenomenon, I wonder about that. When I was in the American army in Germany, living a wonderful - though unproductive - life, I came across some information about Sweden, although at the time I hardly knew where it was. This country was more or less cut off from what we call civilization during WW2, but they kept a large military going with wood alcohol, and Swedish industry probably grew. There were no bananas of course.
Peak oil should concentrate a few minds. The opposition to nuclear will have to go, and some real technical progress should follow. I just hope that no social progress is surrendered.
April, 19 2012
Alok Misra says
Prof Banks The crisis of oil is already on Us in India. Petrol is likely to cost 1.75 Dollar per liter before long.State govts are very happy because they tax it by 65 % that is a major part will go into their pocket.This is the easiest form of revenue as otherwise they can notcollect taxes whose evasion is simply enormous. India has practically Double the Unregisterd economy(call it Black money Economy) than the registered one.You can roam around my city without ever being bothered by a bill ortaxes.Gold market itself is some 50 Billion Dollar. per year.But taxes onpetrol youi have to paty as you fill your tank. Now some thing about Saudis. My grandfather was in That area during the World war one and he was a Cryptographer in the British Indian Army.THese guys were paid far more than regulars. In 1960 in a fit to share some thing he told me that He had sent a cable to Viceroy of India from the General Posted there.The cable sid that ritishers should take out all oil that was in India and postphone as long as required such a thing in Middle east especially Saudi Arabia.He advised that Britishers should look for oil outside that Region.He had forseen what is going to result if the oil revenues start flowing into that region. His contention was that this should be postphoned atleast for one hundred years.That was year 2014. Just think how right he was. Hisadvice was ignored.
April, 20 2012
Ferdinand E. Banks says
Alok, of course they didn't listen to him. 'They' make a point of not listening to anyone who knows about energy. I was in the US last summer and visited some bookstores to buy some energy books. The only textbooks they had were mine. This is not a great thing, it is a sad thing, Disheartening actually.
And that's why it's possible to circulate any nonsense you want about energy. If you read the papers in Sweden you will read, and sooner rather than later, that India and China are going to rely on sun and wind in the future instead of....whatever it is they are really going to rely on.
This is the reason why I have unexpectedly taken an interest in game theory again. By game theory I don't mean those algebraic puzzles that I stupidly gave my students to play with, but the use and dissemination of lies and misunderstandings.
April, 20 2012
Ferdinand E. Banks says
President Obama has apparently said that he is going to put some more cops on the beat to deal with those dirty speculators. Well, what else could he say? Speculators do NOT have much to do with high oil prices, but many voters want to hear that they do, and so this is what he tells them. It's something like Angela Merkel and nuclear. The voters in Germany want to hear that sun and wind and this and that will make their lives sweet and rich, and so why should she tell them the truth when it could cost her the election.
April, 20 2012
Jim Beyer says
Fred,
No politician wants to say they can't influence the price of oil. And certainly no politician wants to admit that Peak Oil is occurring, threatening to occur, could be occurring, etc. (Why don't reporters ask them this? It would be worth it just for the squirm factor....)
Regarding taxes, I think this is a major (the major?) stumbling block keeping alternative fuels from getting to our transportation sector. It will be impossible, or nearly impossible to add a fuel tax to electricity or natural gas going into vehicles. As Alok has noted this is a very difficult tax to avoid.
Also Alok, your note was very interesting, but it didn't indicate WHY the British should avoid drilling for oil in Saudi Arabia. I could try to fill in the blanks, but I probably wouldn't do as well as you would.
April, 20 2012
Len Gould says
I would simply add that my IMEUC energy market proposal includes the only logical means I can see to add a road tax selectively to only that electricity used to charge autos, by having the smart meter require a valid account ID communicated electronically from the auto before charging an auto, and adding the price of the tax to the market price of the current delivered, charging it to the registered account associated with the ID of the auto. Of course, how to control the instant black market in plug filters which would mask the fact that the connected appliance is an auto..... ugh.
April, 21 2012
Ferdinand E. Banks says
I'd love to be able to contribute to your discussion of taxes, Len, but if I tried I would probably just say something that was silly or stupid or both.
But the point is that there is a building filled with economics and engineering graduates in Washington, supervised by a Nobel Laureate, and each one of them should be working on this issue 8 hours a day, to include saturdays and sundays, except of course Dr Chu. He should be working on it ten hours a day, and twelve on saturdays and sundays,
April, 21 2012
Tam Hunt says
I just read the first substantive arguments for why speculators are a real factor in oil prices (up to 25% of the current price). They're not particularly firm, but he seems to be make seem real points. I'm curious what folks on this string think of these arguments? What I find to be a glaring gap in his arguments is the omission of any discussion about the plateau of global supplies and the impact of sanctions on Iran, etc.
http://naturalresources.house.gov/UploadedFiles/KelleherTestimony03.21.12.pdf
April, 22 2012
Ferdinand E. Banks says
In my lonely world over here in Sweden, there are no "substantive arguments" why speculators are a major factor in the oil price, and I dare - I dare - someone to make a statement like that in my presence in a seminar room or conference. Speculators react! OPEC (and the Majors) act! This ignorant talk about speculators is some form of populism - a variant of the same kind of thing that might change the French government today or in a couple of weeks.
But I am willing to admit one thing. The people in the financial sector who are getting rich on oil price movements are eons smarter than the people watching those horrible American TV series, smoking weed, and reading skin magazines. For reasons given by Don Hirshberg, it's every man and women for him and her self now, and if you refuse to smarten up you might end up believing substantive arguments floated by ignoramuses..
April, 22 2012
Tam Hunt says
Fred, did you read the testimony? I'd appreciate your substantive response to these substantive arguments :)
April, 22 2012
Fred Linn says
Tam----if we don't use oil, it does not matter what the price of oil does.
Don't use oil, and let the speculators do whatever they want.
April, 22 2012
Ferdinand E. Banks says
No Tam, I didn't read the testimony, nor am I going to read it. I read the moronic article which said that Obama is a liar when he claimed that oil in the US is scarce, and when I protested I was declared the author of garbage.
And my strategy/response is really very simple. In a seminar room or conference I make a fool of the guy who said that behind the high oil prices is speculation - assuming of course that I can keep from laughing. Since I know that two plus two is equal to four, I simply can't compel myself to think about the liklihood of it being something else.
And isn't Fred Linn's advice wonderful - or is it fruitcake. If he has something against oil, then let him park his limo and private plane somewhere, and take a stagecoach down to the Riviera.
April, 23 2012
Jim Beyer says
Tam,
It's a bit much to ask people to read an 18-page text that is not really well organized. As far as I could tell, it seems to be saying that excessive speculation/trading can be bad. I agree. But I think that's more of a general problem with the markets (why does one need to trade a stock thousands of times per second? The additional contribution to liquidity is minimal.) Statements like "70% of the traders are speculators, and only 30% are truly hedging against risk." That's par for the course! Speculators provide liquidity; that's their 'value' to the market.
At this point, I think the worst thing that the speculators are doing is showing us that the true price of oil really SHOULD be the 30% or so higher that they drive it up (if that's what they are really doing). If supply/demand dictates one price, but the future of greater shortfalls dictates another, maybe it isn't even wrong that they push up the price.
I don't find the arguments all that substantive. I do think the market is churning too much (electronic trading) but I think that's a generic market issue, not directly related to oil. It's interesting to note that Canada recently decided to stop minting pennies, because they are more trouble than they are worth. Yet the U.S. markets some years ago refined the valuation of stocks to be down to the penny (instead of an eighth of a dollar). Why was this fine granularity now needed? For fine-tuned electronic arbitrage -- far too fine-grained to contribute to liquidity.
April, 23 2012
Jim Beyer says
If you look at the wellhead price for U.S. Natural Gas, you can see that it has been trending downward for the past two years. Why? Well, I'm not sure, but it's probably due to well fracturing which is providing additional sources for the gas. That is, supply is trending upward, so price trends downward. The reverse is probably true of world oil supply. If it was just energy trader speculation, you'd think they'd be able to drive up the price of natural gas in the U.S. as well.
April, 23 2012
Michael Keller says
As others have observed, the price of natural gas is low because hydrocarbon liquids are also being extracted and these products are vastly more valuable (about the price of a barrel of oil) than the natural gas. The natural gas is being more or less given away.
As to the price of oil, try correlating it to the value of the US dollar and it becomes painfully apparent what is actually going on. The Obama administration and the Federal Reserve Bank are directly responsible for most of the mischief. Quite clearly, the massive US debt is being funded by printing money, which directly causes the US dollar to be worth less. The price of oil is basically tied to the US dollar, which is less valuable, hence the price of oil goes up.
A multi pronged solution is required. Elements to increase the value of the dollar include: 1. Chop the crap out of the US budget, and that includes deep sixing subsidies of all kinds. 2. Stop the Fed from printing so much money. 3. Stop the mindless "monetary easing" policy of the Federal Reserve. Elements to reduce the price of gasoline in the US include: 1. Drill-baby-drill. 2. Build the Keystone pipeline and similar projects to move oil from Canada 3. Get rid of the useless boutique fuel blends of the EPA 4. Get rid of the vast majority of mindless regulations that needlessly drive up the cost energy. Please note, I completely reject the argument that what we do in the US does not impact the price of our gasoline. Quite clearly, it does as evidenced by difference in prices between California and say Kansas. As far is the rest of the world is concerned, figure out your own solutions and have a nice day.
What I am advocating is not meant be a long term solution, but rather a stop-gap measure to buy time to allow the economy to heal and technology innovations to become more effective.
Oh yes, one more element of the effort to help reduce the price of gasoline in the US: drop-kick Obama over the stern in next November's election.
April, 24 2012
Jim Beyer says
Michael,
Combined local, state, and federal taxes on a gallon of gasoline; California: 69.0 cents ; Kansas: 43.4 cents. Source: API, April 2012.
I agree that our fiscal house is not in order, but if it was just that, then the price of everything would be going up at the same rate as oil. That's not the case. Actually, you don't seem to be disputing peak oil, so I'm not sure of the exact focus of your rant. Perhaps you are saying that because of peak oil, everything gets harder, and what were merely annoyances (speculative traders, excess regulation, etc.) are now focal points for reducing price, as there is little else left. That's probably the case.
April, 24 2012
Ferdinand E. Banks says
Tam, one of the major problems in the US (and elsewhere) is showing interest in nonsense. Notice what I said. It is not only wrong to send soldiers and marines to Afghanistan, but it is wrong to notice that somebody else has been that stupid. It should be a non subject.
As for giving Mr Obama his walking papers, there is no question in my mind that the US - and perhaps even the rest of the world - would be better off if his services were dispensed with later this year. I saw and heard some strange things when I was in the army, but nothing like what I have seen and hears on TV screens since Mr O. became THE MAN. Hopeless, that's what he is, or exactly what the Dean of Engineering called me before giving me the boot. Of course he is better than that radar pair John McCain and Sarah Palin, but who isn't.
As for American voters serving notice on Mr O., well, I wouldn't bet on that. They bought the lies of George W., and anybody who could read or understand Enlish should have figured out where he was coming from.
April, 24 2012
Michael Keller says
Jim, your logic is difficult to follow. The price of oil is tied to the dollar, which OPEC has threatened to change from time to time. That is a fact. The US dollar has been deliberately devalued to finance our massive debt. That is a fact. The world's economy is sputtering, yet the price of oil is unusually high. Connect the dots.
I'm not sure what planet you are on, but the price of goods and services that involve the use of gasoline/diesel are unquestionably going up because the price of oil is going up.
The focus of my "rant" is that a large part of the high cost of gasoline/diesel in the US is directly attributable to the actions of the Obama administration, which is unquestionably thwarting the supply of transportation fuels.
My fearless prediction: Obama will be voted out of office, more or less suffering the same fate as Carter.
April, 24 2012
Jim Beyer says
Michael wrote:
"The focus of my "rant" is that a large part of the high cost of gasoline/diesel in the US is directly attributable to the actions of the Obama administration, which is unquestionably thwarting the supply of transportation fuels."
The global financial crisis occurred in the Summer of 2008, months before Obama was even elected. And if gasoline/diesel are in such low supply, then why are we exporting it? It's because the world price of these fuels is high enough to do so, and that impacts the supply of these at home. The fuel will go where the money/demand is.
April, 24 2012
Michael Keller says
The price of gasoline has increased by over 50% since Obama was elected. There is simply no question that the Obama regime has adversely affected the supply of gasoline in the US and his policies are a major contributor to the price problem. To sit there and deny the obvious is preposterous and borders on delusional.
April, 25 2012
Ferdinand E. Banks says
Put me down as delusional and even stupid Michael, because Obama is not the cause of the high gasoline price - although given his imcompetence, he might be able to claim a few percent of the blame. And I repeat: OPEC wants a trillion dollars this year and they are going to get it, unless the global economy starts to swerve off the rails and they do what I would do, which is to take a few bucks less.
April, 25 2012
Tam Hunt says
Michael, you seem to have missed some rather relevant facts and are perhaps watching too much Fox News. Yes, gas prices have risen hugely under Obama - far more than 50% in fact. But you may recall that somewhat important 2008 event known as the global financial collapse that led to the Great Recession that we're still struggling with? Oil and gas prices were at record highs in 2008 and crashed in the fall and winter as the financial collapse occurred and projections of global growth were severely curtailed. The fact that oil and gas prices have risen under Obama is actually testament to the fact that he's done some things right on the economy, returning the US back to growth, as the rest of the world struggles to regain its footing. So of course oil and gas prices have risen substantially. It's called supply and demand. Global supplies have been pretty much stagnant for about seven years, while demand has risen, plummeted and risen again. Prices have followed accordingly. The only x factor here that I can see is the role of massive amounts of capital (speculators) sloshing around the globe and various markets, including commodiy markets, looking for the best bang for their buck. I don't doubt that speculation plays some role in oil prices, but the question is "how much." The supply and demand picture is pretty compelling by itself.
April, 25 2012
Michael Keller says
The Obama administration has in fact: (1) stifled oil drilling and production in the US; (2) restricted gasoline supplies by goofy and ineffective boutique fuel blends; (3) devalued the dollar (which the Fed freely admits). Further, instability in the Mideast has increased (particularly Iran and the nuclear bomb program) because the US is viewed as weak as the direct result of rudderless Obama policies. To sit there and contend that this does not significantly increase the cost of gasoline in the US flies in the face of logic. Sorry Fred, you really should have paid more attention in your engineering classes.
As far as your "evil" speculators are concerned, they can not affect the fundamentals, only the margins from time to time when shortages are percieved to exist. My only real problems with speculators are: (1) they should be treated no differently that gamblers who do not get to write-off their losses as business expenses; (2) margin requirements should be higher, with margins call made more often so the “lads” are using more of their own money making bets.
In closing, I am talking about transportation fuel supplies in the US, not the world as we are actually able to exert quite a bit of control over our own destiny. Case in point: natural gas, which we have lots of and the price is now really low (but not the case as in say Europe). We also happen to have lots of oil in North America, but access is being restricted by inept, bungling and poorly thought-out Federal (and state, like California) policies promulgated by those of the Democratic (A.K.A. socialist) Party persuasion.
PS Tam, the "growth" rate is grossly insufficient to put the folks back to work and more or less guarantees college graduates are unable to find work. That is exactly what is occurring. The only way out is to inject optimism back into the economy, just like Reagan did when Jimmy Carter was heaved over the side. I am confidently predicting that is what will occur come November as Americans are fundamentally not a society of victims.
April, 26 2012
Ferdinand E. Banks says
Well Tam, you need clarification on several points, but I'll let you and Michael fight that out.
The oil price crashed to about $32/b in 2008, OPEC had a meeting, and in a terrible global economic situation, they got the price back up over $70/b in no time at all. You should never forget this, because it is a real key to the mechanics of the oil market.
What about speculators here? Those who had any intelligence realised what a decrease in OPEC supplies would mean, and made a bundle, while those who were dumb enough to believe that OPEC couldn't do anything about the price of oil took a fall. If speculators had tried to do something about the low oil price, without the help of OPEC, they would have filled the welfare offices the following week.
I say good for OPEC. Back in Chicago (where I was raised) they had a saying: WHEN YOU FIND A FOOL, BUMP HIS HEAD! We are in the trouble that we are in today because of George W. Bush and NOT Obama. But when American voters had a chance to do something about it - by which I mean elect John Kerry - they went with Bush again. In other words, they bumped their own heads. Had Kerry been elected president, we could have avoided Obama's incompetence - or at least some of it.
April, 26 2012
Karol Mazur says
Prof Banks - there are some also valuable remarks in line of your argumentation: http://www.econbrowser.com/archives/2012/04/a_ban_on_oil_sp.html
Bests!
April, 26 2012
Tam Hunt says
Michael, The Obama administration has in fact: (1) NOT stifled oil drilling and production in the US - please look at the actual areas open to drilling under Obama and don't simply repeat Republican talking points; (2) NOT restricted gasoline supplies by goofy and ineffective boutique fuel blends because all of these requirements have been in place far longer than Obama has been in office; (3) devalued the dollar (which the Fed freely admits), which has actually had limited to no effect on oil prices, particularly when we observe that in recent months the dollar has gained in strength while the price of oil has gone up (hmmmm). Further, instability in the Mideast has increased (particularly Iran and the nuclear bomb program) because the US kowtows to Israel far too much, is making Iran out to the next Iraq (that is, a trumped up war based on nothing but fearmongering), and is generally FAR too much of a global mafioso than a kind hegemon. Obama's foreign policy has been essentially the same as Bush's except with smoother rhetoric. Bush-lite is what I call it. It's time for the US to listen to Ron Paul and other folks who advocate a more modest foreign policy that focuses on protecting the homeland and aiding (non-militarily) the struggle for democracy around the world.
April, 26 2012
Ferdinand E. Banks says
Thanks Karol. And Tam, I prefer tp hear cleaning up the homeland. But I go along with you on one thing, Obama's foreign policy is the same as that of Bush with an important difference: Obama is a more skillful hypocrite. Now that Romney will be the Republican candidate, I think that the best thing that can happen for the US AND THE WORLD, is to put Mr O. in the wind.
April, 27 2012
Tam Hunt says
Fred, as bad as Obama has been on foreign policy, Romney will be far worse, as well as on domestic issues. I plan to hold my nose and vote for Obama.
April, 27 2012
Michael Keller says
Tam, Boutique fuel blends (of which there appear to be dozens of formulations mandated by the EPA) require refineries to alter production runs. That clearly limits supply and drives up prices, which is exactly what occurs in California.
Recent oil production gains in the US occurred on private lands, with drilling and production decreasing on Federal lands. Further, the Obama regime stopped oil drilling in the Gulf waters in direct defiance of an order issued by a Federal judge - check out the events associated with the recent Gulf oil spill. As a direct result, many drilling rigs left the area. Obama has prevented deployment of the Keystone pipeline. Obama is preventing drilling in the far reaches of Alaska. Obama is preventing drilling of large areas off our coasts. The list goes on. To sit there and state the Obama regime has not stifled US drilling and diesel/gasoline production is simply stunning to behold and factual grossly incorrect. If you reduce supply, prices will go up and that is exactly what has occurred.
Iran and radical Muslims say they want to annihilate the Jews (which is exactly what Hitler very nearly pulled off). Based on their actions, I believe them. If the gutless wonders in Europe had recognized Hitler for what he was and destroyed him early on, millions of deaths could have been avoided. Instead, they cowered and denied the obvious. The radical Iranian leaders are very much in the mold of the evil Nazis. They need to be destroyed.
April, 27 2012
Tam Hunt says
Michael, your facts are off.
Again, the boutique fuel blends required in the US long pre-date Obama, which you fail to acknowledge.
Second, do a comprehensive analysis of US oil production under Obama and you will learn that oil production in the US has actually increased rather surprisingly in the last two years, as I write about in my article. And as I also mention, US oil rig counts are up dramatically in the last year, to an all time high and up 69% in 2011 over 2010. So you're simply wrong about Obama limiting new supplies. The truth is the opposite. As for limiting drilling in public lands, dig a bit deeper and you'll find that many existing leases are available for drilling and yet are not being drilled. Why?
Last, with respect to Iran, they've never announced their intent to "annihilate the Jews." This is the kind of crazy hyperbole that leads to actual wars. Yes, Ahmadinejad and Khamenei have announced their view that Israel will and should disappear from the pages of history or collapse (often translated as "should be wiped off the map," which is not an accurate translation), but this is hostility to the Zionist enterprise, not to Jews generally. It's rhetoric like yours that leads to unnecessary wars of choice.
More generally, you ignore the fact that Israel has hundreds of nuclear warheads and Iran is not crazy - it won't invite its own annihilation by striking Israel either conventionally or at some point in the future with its own nuclear weapons. Israel faces no existential threat, as many of Israel's own top personnel have often admitted. The worst threat to Israel's well-being are the crazy right-wingers in Israel and in the US that see every negative word against Israel as an existential threat...
April, 28 2012
Ferdinand E. Banks says
Tam, a man with Obama's intelligence should have done better - a lot better. The problem is that when he won four, he immediately began to think in terms of eight. You could of course reason that since he can't get twelve, he will do what we Democrats want him to do if he wins again, but for what it's worth - and it's not worth much - I would prefer not to take that chance if it were left up to me.
I encountered quite a few mormons during my second tour in the US Army - after I was fired from Hughes in LA that is. At infantry leadership school at Fort Ord, from which I was expelled on the last day of the course for unclear reasons, and put to work on a garbage truck, my competitor for first place was a mormon who once accused me of being "a drinking man" - which is an accusation that I did not deny. Everything considered though, a LOT of what I heard from those gentlemen made sense, and since anti-Mormon predjudice probably plays a big part in the dislike of Romney, I don't feel compelled to go along.
Let's put it this way, despite his impressive intelligence, HE MISSES THE POINT.
April, 29 2012
Ferdinand E. Banks says
By "he" of course, I am not talking about the gentleman who asked me if I was a drinking man, or the person he will vote for if given the opportunity. I'll let Tam figure out who I have in mind.
April, 30 2012
Tam Hunt says
Fred, Romney's being a Mormon has nothing to do with my dislike of his policy positions. I find Mormonism as strange and uncompelling as mainline Christianity. The fact is that based on his statements and his being forced to run to the right, Romney is far more conservative on issue after issue than is Obama. I'm actually a left libertarian in that I do agree that government should be as small as possible, but that we have to always be ware of the accumulation and unjust use of power. That requires a fine balance between government power and private power that weighs in favor of the Democratic governing philosophy more at this time in our history than it does the Republican phillosophy. I also find the Republican political aversion to facts and reason repugnant.
May, 22 2012
Larry Page says
I think this is the main reason why many car manufacturers are making electric vehicle or what we call hybrid cars which do not depend on oil and it depends on electricity stored in the car battery to power up the cars. Its just a matter of time before this oil problem of ours is solved.
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