free html hit counter Peak Oil Debunked: 352. HIGHEST REAL OIL PRICE IN HISTORY

Wednesday, May 07, 2008

352. HIGHEST REAL OIL PRICE IN HISTORY

Here's an amazing fact which cries out for comment. According to this chart based on EIA data (click to enlarge)...



We are now at the highest real oil price ever attained in history, going clear back to 1861 and the days of Colonel Drake.


So why is the economy still functioning? Peak oilers, mainstream economists, OPEC... They all believed that high oil prices would crush the economy, and pointed to numerous past cases where that actually happened.

Well, here we are at the highest real oil price ever achieved in history, and the world economy is still vigorously growing.

From Forbes 5/5/08:
"BASEL (Thomson Financial) - Global growth is still strong owing to the resilience of emerging markets but inflation risks are significant, G10 central bankers group chairman Jean-Claude Trichet said, following a meeting of the group.

'At a global level, global growth remains significant despite the slowing down observed in a number of industrialised economies and clearly thanks to the remarkable resilience of a great number of emerging economies,' Trichet told journalists.

'We see ongoing growth at a significant level... even if somewhat lower than in the previous year,' he added."
Source
It seems the economy is far more resilient to oil shock than expected. So what happened to the theory? High oil prices killed the economy every time so far. Why hasn't it happened this time?

Even more curious: Now mainstream economist types like Yergin, Citibank and OPEC are predicting $150-200. $500 and $1000 predictions are being bandied about. So have we completely abandoned the theory that high oil prices cause economic recession/depression?
by JD

96 Comments:

At Wednesday, May 7, 2008 at 7:16:00 AM PDT, Blogger JD said...

As usual, please use the Name/URL option (you don't have to register, just enter a screen-name) or sign your anonymous post at the bottom. The conversation is better without multiple anons.

dave mathews: Congratulations. You have received the POD death penalty, and your posts will be deleted on sight.

Everyone: Please ignore posts by dave mathews. They will be deleted shortly.

Thank you! JD

 
At Wednesday, May 7, 2008 at 7:56:00 AM PDT, Anonymous Bikerman said...

Um....

The economy is stagnating at best. Where is this "vigorously growing" economy you speak of?

 
At Wednesday, May 7, 2008 at 8:54:00 AM PDT, Anonymous Anonymous said...

That is true.

The economies are stagnating.
US is going through a recession right now, but due to credit/subprime issues, rather than oil. Most developed countries aren't doing well, only Canada is in a better shape so far, but they are the only net oil exporter out of G7. and their current account surplus mysteriously equals Alberta's trade surplus, I wonder if it is because of oil sands...

Raphael.

 
At Wednesday, May 7, 2008 at 9:40:00 AM PDT, Anonymous Bikerman said...

Technically it's not a recession; indicators are that growth is extremely small. In order for it to be a recession growth needs to be negative for more than one quarter. The economy is stagnating. Prices are going up, wages are stagnating, jobs are being lost. Very much like 1970's "stagflation". Maybe it's convenient to blame it on "subprime mortgage issues", but there's no doubt that high oil prices are contributing. Just how much they are contributing could be masked by the subprime mess.

 
At Wednesday, May 7, 2008 at 11:06:00 AM PDT, Anonymous jd for president said...

"Maybe it's convenient to blame it on "subprime mortgage issues", but there's no doubt that high oil prices are contributing."

this is mostly a credit driven problem although certainly inflation has not helped.

 
At Wednesday, May 7, 2008 at 11:16:00 AM PDT, Anonymous jd for president said...

Don't forget that some areas of the world are booming because of the rise of oil prices and other commodities.

 
At Wednesday, May 7, 2008 at 11:35:00 AM PDT, Blogger JD said...

bikerman,

Note that I am talking about world growth. The US is not the world.

From Forbes 5/5/08:

"BASEL (Thomson Financial) - Global growth is still strong owing to the resilience of emerging markets but inflation risks are significant, G10 central bankers group chairman Jean-Claude Trichet said, following a meeting of the group.

'At a global level, global growth remains significant despite the slowing down observed in a number of industrialised economies and clearly thanks to the remarkable resilience of a great number of emerging economies,' Trichet told journalists.

'We see ongoing growth at a significant level... even if somewhat lower than in the previous year,' he added."

Source

 
At Wednesday, May 7, 2008 at 8:05:00 PM PDT, Anonymous RC said...

One thing to keep in mind is that oil prices aren't as high in the rest of the world. Oil is worth between 65-75 Euros per barrel, which is something European economies can handle. The US economy is hurt due the credit market, plus falling dollar = high oil prices.

But, I agree with the overall assessment that the economy can handle high oil prices. High oil prices hurt primarily service/tourism industries due to high gas prices (and trucking/flying of course). Gasoline is our primary usage of oil.

An oil price rise for diesel trains doesn't have the same effect, due to their efficiency.

 
At Wednesday, May 7, 2008 at 9:48:00 PM PDT, Blogger Cameron Snow, PhD said...

I personally don't expect oil prices to get above the $150 mark that Goldman Sachs recently said was quite probable if there is a major supply disruption.
However, I think the economy can handle prices that high. Because of our low gasoline taxes we are still paying far less at the pump.

 
At Thursday, May 8, 2008 at 12:22:00 AM PDT, Blogger goritsas said...

jd,

First off, nowhere in the article does Trichet actually tell us what "strong growth" means. 2%? 2.5%? 1.5%? I thought you weren’t a “believe the other bloke just because he’s important and said it” type of guy. Also, please note, if we do decide to accept Trichet’s pronouncements, he goes on to say global growth is contracting, “even if somewhat lower than in the previous year.” So, I ask you, is less global growth this year vs. last year not negative growth? Is not negative growth a contraction in growth? Two quarters of this contracting growth business in a row and, hey presto, the world’s officially in recession. Even if global growth is the same this year as last year isn’t that, at least in economics speak, stagnation? It seems to me not going up and not going down is not going anywhere and that seems pretty stagnant to me.

Second, Trichet is the president of the ECB. Right now the ECB is still wedded to their anti-inflation strategy and he'll say just about anything in order to resist the crescendo of calls for rate cuts in the Eurozone. He’s busy whinging about the strong Euro but doesn’t want to have to do anything himself. He wants the Yanks to raise interest rates so he doesn’t have to cut them.

Third, there are two features to this whole economic growth thing that always seem to be under the radar. Why is the error never reported? 2% is one thing if the error range is 0.25%, but something else all together if the error range is 1.25%. The other problem with economic growth reporting is the relationship between population and GDP. If population is growing at 1.6% globally and world GDP is growing at 2.6% the effective world GDP growth is really only 1%.

 
At Thursday, May 8, 2008 at 12:59:00 AM PDT, Anonymous rc said...

goritsas,

I agree with what you say about recession. The US is in a recession despite this BS of 0.6% economic growth. GDP growth is a funky thing though, it doesn't really represent the state of the economy at a micro level. GDP growth is dominated by large corporations. In a poor country, if 10 people don't produce much, but 1 man earns $1 billion than that is GDP growth, but the 10 other people aren't responsible for it and are no better off. Nonetheless, GDP growth has leveled off.

Better indicators are CPI and unemployment rates and trade volume. Unemployment rates have increased, but not by a ridiculous amount. Trade volume (wholesale) is as high as ever. CPI is up due to higher fuel prices (again, though food prices have increased by nickles and dimes, not dollars in the US).

There are three key economic regions that are dominating the world economy today:
1. Asia/Middle East
2. Europe
3. North America

1. Asia maintains there high growth rate despite high fuel prices. Indian and Chinese economies are as strong as ever. Middle Eastern nations are rolling in money and are throwing money at whatever they feel like investing in ($30 billion here, $40 billion there).

2. Europe is experiencing moderate economic growth. The credit bubble has obviously affected the European economies. They are essentially experiencing similar problems as the US but on a milder scale. Life goes on, perhaps a recession is looming though?

3. The US economic outlook is grim. It's gonna be a severe recession. The dollar is down, down, down. No one can get any credit. People are spending less money. The economy has been resilient thus far and there has been no day to day change in my life because inflation has been mild and I don't drive, but things will get worse rather than better.

The US economy would be tanking regardless of whether or not oil prices are high or not. Maybe we are seeing a shift in the global economy away from America and Europe towards Asia.

Anyone who denies a recession is looming is a fool.

 
At Thursday, May 8, 2008 at 1:10:00 AM PDT, Anonymous Luis Dias said...

"Even if global growth is the same this year as last year isn’t that, at least in economics speak, stagnation?"

If you want to call an exponential growth "stagnation", be my guest. I am too fed up trying to prevent stupidity.

"Second, Trichet is the president of the ECB. etc"

Here we go again with consp theories...

"Why is the error never reported? 2% is one thing if the error range is 0.25%, but something else all together if the error range is 1.25%."

I think the error is somewhere in the range of 0%.

"The other problem with economic growth reporting is the relationship between population and GDP."

You do understand that this issue is irrelevant, for it was always present in the maths since the industrial revolution, right?

 
At Thursday, May 8, 2008 at 2:04:00 AM PDT, Blogger Baz said...

http://www.animationandfineart.com/Animation/Images/Warner/JonesChuck/JonesChuck5340.jpg

 
At Thursday, May 8, 2008 at 3:24:00 AM PDT, Blogger goritsas said...

luis dias,

Thank you for you considered reply. It was both thoughtful and filled with thought. I do worry for you though, how much longer will you cope in this environment? Why do you take on the difficult task of trying to prevent stupidity? Should you, in your clearly growing angst, even be trying to manage such a responsibility? Please, don’t feel you have to help me prevent my own ignorance, as I’m truly happy to fall victim to my own lack of fitness and leave behind a negative contribution to the gene pool.

If you want to call an exponential growth "stagnation"

Sorry, you’re correct, I got that wrong. What I was really trying to articulate is simply the decline in global GDP (as suggested by Trichet). If that continues long enough then we’ll find ourselves at a time when global GDP is no longer greater than zero. Should that happen for two consecutive quarters, then, using the well know definition of recession, the world will be in recession. Now, I’ll be the first to admit I have no idea if that will happen. But as it stands right now, the trend in declining output seems to be overtaking a large part of the OECD. I’m much more inclined to believe that trend will continue than be arrested. Hence, the OECD will ultimately be declared to either be in or have been in recession. I also think OECD output is essential to Trichet’s emerging economies and the result of a recession in the OECD will lead to their falling into recession. Sorry that I fucked it up. It’s not easy being subordinate and inferior to such grand thinkers as luis dias.

Here we go again with consp theories...

I don’t know where you got that idea from. Trichet’s simply doing what all of us do when faced with defending our entrenched positions, defending them. The ECB has set out inflation control as its single most important goal. As long as he sees even a whiff of inflation he’s going to continue to support the ECB’s inflation busting stance, regardless of the pressures building around him for a rate cut. The various indicators coming from the Eurozone are starting to work against him, at least from what I’ve been reading so far. Not all and not decisively, but enough that he may be forced to at least start making noises about a rate cut sometime in the future. Then there’s the rise of the Euro vs the USD, leading many, not least of which is EADS, to want action to be taken to do something about that pesky USD. I just think he’d rather have the U.S. raise rates than have to lower rates himself. So, I don’t see it as a conspiracy at all. Just the usual machinations of the top executive doing what he’s set out to do. I think he’ll be forced to change course at some near point in the future, but that’s just a opinion.

I think the error is somewhere in the range of 0%.

Thanks for clearing that up. I didn’t realise economic indicators could be so accurate. I thought all statistical methods were subject to some kind of error owing to the various methods employed to collect and analyse the data. Shit, wrong again.

You do understand that this issue is irrelevant, for it was always present in the maths since the industrial revolution, right?

Well, I must admit, I didn’t know that gross output was corrected for population, no. I thought gross was gross, but clearly I’m wrong.

As for the exponential function jibe, anyone with a savings account or a mortgage understands the exponential function. I have some of both.

 
At Thursday, May 8, 2008 at 4:32:00 AM PDT, Blogger FR said...

So many of my fellow Americans don't believe there are any other countries in the world, and that gives them a narrow vision. I knew, for a fact, when JD started talking about the continuing growth of the economy, some American would say, "No, the economy sucks right now," because it's so sluggish in the States. The US, however, is not the only country in the world, and peak oil is a global issue, and we are seeing tremendous growth in the world as a whole, especially China and India.

This does, indeed, disprove what the naysayers have been spewing the past six years.

By the way, does anyone know that US oil consumption decreased last year by 1%, yet the economy grew by 2.2%? That's not very good growth, but with a 1% drop in oil consumption, it's pretty remarkable.

Economic growth is starting to decouple with oil consumption, and that's a very good sign.

 
At Thursday, May 8, 2008 at 6:04:00 AM PDT, Anonymous Aram said...

Please, let's not take these comments from speculators and their "analysts" that speculation isn't the problem too seriously.

First its Goldman Sachs (the subprime crisis is "contained") saying that oil is going to $200.00.

How much does Goldman have invested in oil going to $200.00?

Now Barclay's is saying we're heading up there as well for sure.

Same situation.

And yesterday some head of a commodities exchange testified before congress that it "isn't speculation."

You're kidding, a commodities exchange head who makes money based on how much people drop on commodities saying that it isn't his fault? Wow, what news.

http://www.businessweek.com/lifestyle/content/apr2008/bw2008041_945564.htm?chan=top+news_top+news+index_businessweek+exclusives

http://www.businessweek.com/lifestyle/content/apr2008/bw20080422_520796.htm

Most telling item:

"...the new flow of investment monies into oil rose from $450 million per week at the first of the year to $3.4 billion per week"

But it's not speculation, and all that money is "really" going into other commodities, according to Barclay's.

 
At Thursday, May 8, 2008 at 6:07:00 AM PDT, Anonymous Aram said...

Damn, my links didn't work... Ok, then...

"Gasoline inventories are higher than the historical average at this time of the year, and gasoline fundamentals are actually weakening in the U.S., so there is really no need to worry about supply being too tight." — Purvin & Gertz Oil Analyst Victor Shum; Associated Press, Mar. 10, 2008.

"The current high oil prices are inflated by as much as 100%. The price surge is a result of excessive speculation." — Oppenheimer Oil Analyst Fadel Gheit; Congressional Testimony as reported by CNN, Dec. 11, 2007.

"The [oil] fundamentals are no problem. They are the same as they were when oil was selling for $60 a barrel, which is in itself quite a unique phenomenon." — Jeroen van der Veer, chief executive officer, Royal Dutch Shell; Washington Post, Apr. 11, 2008.

On Tuesday, Apr. 1, my column discussing the impact speculators are having on the price of oil (BusinessWeek.com, 4/1/08) was published on BusinessWeek.com. Since then, we've watched oil contract prices continue to rise, now setting an all-time historical record even when factored against inflation. In spite of the controversy my article stirred up—it generated more than 800 comments, more than 430,000 page views, and was dug at Digg.com almost 4,000 times—there was very little new or original in it; I simply compiled numerous articles and quotes from other sources to validate the claim that things aren't always what they seem—in the oil patch or at the gas pump.

More amusing was the fact that, the day after that column ran, the weekly oil report came out from the Energy Information Administration, which showed that we had put another 7.4 million barrels of oil into our reserves. And to validate my point in that column—that there is no connection between price, demand, and the supply of oil and gas—oil prices leaped almost $4 a barrel on that day. And the news kept right on coming.
The new oil reality: Prices will always go up

On Apr. 7, Reuters Online Service reported that oil had gone up another $3 a barrel, but near the end of that article came this line: "Ships along the northern end of the Houston Ship Channel, which feeds eight refineries in Houston and Texas City, were stopped by dense fog on Monday." As could have been predicted, when the second week's oil report came out from the EIA two days later, crude stocks had fallen by 3.2 million barrels. The result of Gulf Coast fog holding up oil deliveries was that on the release of the second oil report, oil prices again rose by $2.37.

This is the new oil paradigm. No matter what happens, it is used to justify the commodities market's contention that oil prices just aren't high enough: In one week we add 7.4 million barrels of oil to stock in reserve and yet the price goes up almost $4 a barrel. Then the very next week our reserves fall because of fog, and the price goes up another $2.37. But the only people who still claim to be stunned by what's happening in oil are the analysts quoted by the media that cover the industry.

Seven days after the fog report ran, Reuters reported that the EIA was forecasting gasoline demand to be down in the U.S. this summer for the first time since 1991. They mentioned, as I had in that previous column, that gasoline inventories on hand were at the highest levels in 15 years.

On Apr. 14, Automotive News ran an article showing that gasoline reserves on hand going into this year's summer driving season will be at the highest levels since 1999. In between those two stories, on Apr. 10, AP Online discussed the record prices for gasoline and diesel—but also pointed out, "Oil prices were pressured [lower] Thursday by data from tanker-tracking firm Oil Movements showing that OPEC oil shipments rose last week."

Five days later British Prime Minister Gordon Brown and President George W. Bush jointly called for OPEC to further open their oil spigots. Apparently they already had.
Somebody, pull the hand brake!

The point of the original article was that there is currently no shortage of gasoline in the U.S.—even if gas demand were normal—and by everyone's agreement, demand is falling and has been for most of this year. I would take small issue with the article in Automotive News, because the official reserves of gasoline on hand on Apr. 4 totaled 221,268,000 barrels, and you would have to go back to the same week in April of 1993 to find a higher number (228,289,000). Likewise, the amount of oil on hand sat at 316,016,000 on that date, and that was higher than it was during the same week in 2004, 2003, 2001, and 2000.

Of course, anyone discussing oil is going to get hit with the 'China Factor.' That's certainly understandable, since most articles discussing crude will bring up China's surging demand. However last year China imported 3.2 million barrels of oil per day, or something less than half of their total oil demand. It is now being estimated that China will use 7.9 million barrels of oil per day in the coming year, but that is their total oil use, imports included. (By contrast, the U.S. currently imports between 12.2 million and 13.6 million barrels per week.) In any case, the International Energy Agency is forecasting U.S. demand for crude will fall by 2%. Assuming the import component of China's oil use remains the same, the two nations' numbers cancel each other out.

If you take the "fear factor" out of the oil market, all that's left is the hard numbers—and nothing in the real world justifies oil's current pricing. In fact, on Apr. 11, a Washington Post article on the current problems with the price of oil quoted Jeroen van der Veer, chief executive officer of Royal Dutch Shell (RDSA), estimating that the new flow of investment monies into oil rose from $450 million per week at the first of the year to $3.4 billion per week by mid-March. Once again, you've got the head of a major oil company stating that speculation—not market fundamentals—is driving the price of oil.
What's Behind the Airlines' Demise?

In the first column I discussed how all U.S. refiners are not making the margins they've become accustomed to on gasoline at the moment; to blame is the high cost of oil combined with lackluster demand for gasoline. (However, by continuing to cut back on production of gasoline, refiners have improved their positions for "crack spreads"—the industry term for the difference between the price of crude oil and petroleum products extracted from it—since Apr. 1—a point not lost on motorists everywhere.) Much in the same way, ethanol isn't really profitable right now either, because the price of corn has skyrocketed to over $6 a bushel. But none of this was an attempt to explain the problems with distillates, which are heavy fuels, heating oil, aviation fuel, and diesel.

Middle distillates, such as aviation fuel, have played a big part in four airlines' having declared bankruptcy over the last 30 days, while Delta (DAL) and Northwest (NWA) have declared their intent to merge their operations.

But distillates also are killing the trucking industry in the U.S.; the price of diesel has shot up over $4 a gallon throughout the country because the stockpiles of distillates are running well below the five-year average. And yet, according to Antoine Halff with New York brokerage Newedge USA, in the first week of April the U.S. exported more distillates than it imported. Combine that with the fact that we were running our refineries at much slower rates to burn off some of our gasoline reserves, in order to push up the price of gas, and you have a mix that has hurt our ability to improve the distillate reserves. Additionally, import of distillates into the U.S. is down 38% this year, mostly because there is little surplus of these fuels in Europe.

Distillates refined in the Middle East are typically directed to Asia; governments there don't require that those fuels meet the new U.S. standards for ultra-low sulfur content.
There Is No Shortage of Gasoline

It gets worse. According to Tom Knight, an energy trader with TAC Energy in Texarkana, Tex., the U.S. is about tapped out on its ability to make ultra-low-sulfur diesel. In a nutshell, one of the big problems with diesel is that refineries have cut back their runs on gasoline to enhance their profits, while at the same time we've hit a brick wall in making the new EPA-required formulation for diesel from the materials available. The same holds true for aviation fuel.

So here we go again. There's no shortage of gasoline. Nor is there a shortage of oil on the world market. There is a shortage of distillates such as diesel and aviation fuel, but that is partly because refineries are trying to short gasoline supplies to improve their "pitiful" crack margins. And all of this plays out against an economic slowdown that, in any other place or time, would be forcing the prices of these commodities down rapidly.

Don't even get me started on how the ethanol mandate is helping to do the exact same thing to food prices.

 
At Thursday, May 8, 2008 at 6:08:00 AM PDT, Blogger goritsas said...

jd,

OIL SHOCK AND ENERGY TRANSITION by Andrew McKillop pretty much lands squarely on your side and should be of interest to you, if you haven't already seen it. Clearly laid out explanation for rising oil prices increasing GDP growth. I recall reading his 2003 paper that argued the same scenario.

 
At Thursday, May 8, 2008 at 6:10:00 AM PDT, Anonymous Aram said...

Oh, one other thing-

I keep hearing about "tight" supply from the "analysts" (nay the salesmen for the speculators).

Ok, if it's "not speculation" then why when inventories are not tight are the "analysts" saying that they are?

And who decides what is "tight supply," if not the speculators who set the price?

For example, all through 2007 we heard about supplies being above average. JD even had an article about how inventories were higher than they had been in many years.

Then in October we started hearing that supplies were "tight."

If memory serves, even in the depths of winter supplies never dropped between 280 million barrels and have since climbed up to around 325 million barrels.

Speculators, at what point are supplies not "tight" given that they are right in line with averages and by all true fundamental measures there is plenty of supply?

 
At Thursday, May 8, 2008 at 6:37:00 AM PDT, Anonymous bikerman said...

So many of my fellow Americans don't believe there are any other countries in the world, and that gives them a narrow vision.

It's also possible that some of your fellow Americans have studied the global economy.

The major downturn in the USA will spread to the rest of the world as the Japanese/Asian crisis of the 90s did.

The economies in the globalized world are not isolated as you seem to think they are. They haven't been in many, many years.

 
At Thursday, May 8, 2008 at 11:21:00 AM PDT, Blogger bc said...

If memory serves, even in the depths of winter supplies never dropped between 280 million barrels and have since climbed up to around 325 million barrels.

300 million barrels sure sounds like a lot. But you guys use over 20 million barrels a day, so in days of supply 300 millions is not so much.

Viewed in days of supply, the situation is somewhat finely balanced. This probably didn't matter much when there is plentiful supply, but when supplies are in doubt it's a different ball game.

I think it would be a very big mistake to think its all down to speculators. The people who say "oil should be x price" are talking out of their ass. Speculators may be amplifying an underlying trend, but the underlying trend is a fundamental demand/supply imbalance.

The price is sending a signal: the world needs more oil. The answer so far is "we can't supply more".

 
At Thursday, May 8, 2008 at 11:55:00 AM PDT, Blogger Sean Daugherty said...

To be absolutely sure, bc, the message so far has been "we won't supply more." The question of "why" is not yet settled.

Oil reserves are limited, yes. We can't rely on them (in the sense of "business-as-usual") in the absence of a regular supply. But we've never been able to do that. Moreover, they're not intended for that purpose in the first place. So this recent talk about how "tight" the supply is must be read with some liberal skepticism, because, historically, it's nonsense.

So the question comes back to why supply isn't keeping up with demand. OPEC, for instance, seems to be sticking by it's initial claims that it doesn't see the need to increase pumping rates. Though they are certainly not an unbiased source, the fact that, as JD points out, the world economy keeps chugging along with oil prices north of $120/bbl seems to support them to an extent: if they can get that much money with a constrained supply, there's not too much incentive to increase that supply and thereby lower the price.

That's just a thought, though. It's entirely possible that the reason that "we won't pump more" is because, as you say, "we can't pump more." More likely, it's a combination of factors the extent and pull of which we can only estimate at this time. For what it's worth, I think it's well within the realm of possibility that we're either near or at the peak amount of oil that can be extracted. But at the same time, I think it's just as, if not more likely, that the true and immediate economic impact of that milestone is being inflated by speculation and various political and economic factors. And yet, even with those additional factors driving up the price of oil, we're not seeing the kind of economic catastrophe of the doomers' worst case scenarios.

Mind you, that's an layman's educated guess, nothing more.

 
At Thursday, May 8, 2008 at 12:30:00 PM PDT, Anonymous econogeek said...

Goldman Sachs' commentary on the commodity speculators.

There are two inherent inconsistencies/biases in this report that stick out like sore thumbs:
1. They explicitly say that money going into the oil market is responsible for the large price increases.
2. World consumers of oil should be thankful to speculators because they are accelerating the transition away from oil.

HAHA...this is even more inflammatory than the dribble that Matt Simmons spews out

"We believe there is a fundamental misperception among many in the oil industry, Wall Street, the media, politicians, and the
general public that so-called “speculators” are driving up the oil price to supposedly unjustified levels. Unfortunately, we do not
think the energy crisis will be solved by finding and punishing the big, bad speculator. In fact to the contrary, we believe commodity investors are helping to solve the energy crisis by speeding up the process of incentivizing higher capital spending on a wide range
of energy projects while at the same time encouraging lower levels of demand by energy users.

Without question increased fund flow into commodities has boosted prices. The issue is whether the resulting oil price is “real” or
represents speculative excess; we strongly believe the former. We note that if it is an excessive oil price, where is the excess supply? Inventory levels look normal and just about all of industry—both non-OPEC and OPEC—are badly missing production forecasts. The minimal supply growth despite what is now nine years of favorable energy market conditions is remarkable and in our view the most substantive indication that current oil prices are fundamentally justified.

The fact that tight oil supply/demand fundamentals are attracting large amounts of capital is a good thing. Higher oil prices signal to oil companies the need for greater investment. Higher oil prices also signal to consumers the need to demand less. This is basically the point of capitalism, which over the past hundred years has proven to be the superior economic and geopolitical philosophy.

The so-called commodity speculator should be applauded for speeding up the message to both oil companies and consumers that energy markets are tight. Commodity speculators also encourage venture capital and private equity firms to invest in alternative energy and other new forms of supply. During the 1990s, very little investment went into clean energy. Today, alternative energy investment is rising rapidly thanks in large part to the role of commodity investors in bidding up energy prices.

In our view, supporters of a cleaner environment should be supportive of commodity investors, as the combination of lower
demand and new alternative energy investments take hold. In our view, commodity investors are helping to accelerate the speed by
which the world will naturally want to burn less crude oil."

 
At Thursday, May 8, 2008 at 12:54:00 PM PDT, Anonymous Aram said...

300 million barrels sure sounds like a lot. But you guys use over 20 million barrels a day, so in days of supply 300 millions is not so much.

Irrelevant.

The current supply is right in line (actually a bit above) the so-called average, as determined by speculators.

If supplies are pretty are right in line with where they should be at a time when demand is going down, then fundamentals cannot be responsible for an increase in price.

Viewed in days of supply, the situation is somewhat finely balanced. This probably didn't matter much when there is plentiful supply, but when supplies are in doubt it's a different ball game.

Based on what fundamental do you determine that supplies are not plentiful?

Supplies were right in line with the speculator determined averages before an almost six million barrel gain yesterday. And demand is dropping.

I think it would be a very big mistake to think its all down to speculators. The people who say "oil should be x price" are talking out of their ass. Speculators may be amplifying an underlying trend, but the underlying trend is a fundamental demand/supply imbalance.

Based on what fundamental do you claim a supply/demand imbalance?

Supplies are consistently rising. Demand is falling.

When supplies increase and demand decreases a rise in prices cannot be determined by supply/demand fundamentals.

The price is sending a signal: the world needs more oil. The answer so far is "we can't supply more".

You sound like the speculators.

Based on what do you determine "can't."

OPEC has plenty of reasons not to supply more.

The dollar they get for their product is extremely weak (albeit strengthening).

They aren't saying, "the market is well supplied" for no reason. They aren't morons and they don't do things just to piss people like you off.

In late 06/early 07 supplies were only a little bit higher than they were now and prices were threatning to go back to $40.00/barrel. OPEC cut production by 1.7 million barrels per day because the market was oversupplied. The price went up from there and was stable between 60-70.00 per barrel until September when the Fed decided it was ready to deal out some corporate socialism.

Given that fundamentally nothing has changed since the price was around 70.00/barrel how is a price pushing 125.00 justified?

That's just a thought, though. It's entirely possible that the reason that "we won't pump more" is because, as you say, "we can't pump more."

So, when Saudi Arabia says that it is planning to expand per day production from around 9 million barrels to almost 13 million barrels they are lying? And when they say they are scrapping plans to expand from 13 million barrels per day to 15 million because they are worried about future demand justifying pumping 15 million barrels per day they are lying?

Exactly what does OPEC have to gain by lying about their reserves? They have huge amounts of capital invested in their industries (the ones that are worth a damn, anyway. Venezuela, Iran need not apply). JD has pointed out in posts here that the Saudis have good wells that are siting idle. They clearly have the stuff and the ability to produce it.

 
At Thursday, May 8, 2008 at 12:58:00 PM PDT, Anonymous Aram said...

Goldman Sachs' commentary on the commodity speculators.

There are two inherent inconsistencies/biases in this report that stick out like sore thumbs:
1. They explicitly say that money going into the oil market is responsible for the large price increases.
2. World consumers of oil should be thankful to speculators because they are accelerating the transition away from oil.


That one comment really bears repeating...

1. They explicitly say that money going into the oil market is responsible for the large price increases.

And yet they say that the speculator isn't responsible for the prices.

They can't be and not be responsible at the same time. Of course, what would you expect from a speculator?

One guy bid the price of oil over $100.00 the first time it happened for no other reason that to be able to say he did it.

No, speculation plays no part at all.

 
At Thursday, May 8, 2008 at 1:53:00 PM PDT, Blogger Sean Daugherty said...

So, when Saudi Arabia says that it is planning to expand per day production from around 9 million barrels to almost 13 million barrels they are lying? And when they say they are scrapping plans to expand from 13 million barrels per day to 15 million because they are worried about future demand justifying pumping 15 million barrels per day they are lying?

I think you misunderstand me, actually. I'm in agreement with you, although I cop to not being aware of OPEC's plans to expand production. The crux of my argument was that there's a fundamental difference between choosing to not pump enough oil to keep prices down to the $10/bbl a lot of people seem to view as their right and not being able to do so.

If we take OPEC's claims at face value, then that's the basic flaw in the doomer argument. As these past months/years have proven, the market will bear these $120/bbl prices, so where on God's green earth is OPEC's incentive to sell it for less? As they've been arguing, there's plenty of supply out there for present demand. The fact that the economy keeps shuffling along doesn't do much to disprove their point.

Exactly what does OPEC have to gain by lying about their reserves? They have huge amounts of capital invested in their industries (the ones that are worth a damn, anyway. Venezuela, Iran need not apply). JD has pointed out in posts here that the Saudis have good wells that are siting idle. They clearly have the stuff and the ability to produce it.

I think the standard doomer response would be that they're trying to keep their limited supplies a secret from the rest of the world so that we don't all transition away from oil and cut off their economic lifeblood.

Which, of course, is nonsense for a multitude of reasons. Several middle eastern and OPEC nations are leading the pack in investing and developing renewable energy technology, first of all, which suggests that they're not going to shrivel up and die when the world stops relying on oil. Not to mention the fact that it flies in the face of LATOC gospel that we couldn't transition away from oil even if we wanted to.

Personally, I think OPEC's actions make perfect sense without having to resort to the boogeyman of imminent supply shortages, for all of the reasons you've stated. But, as I mentioned at the end of my last comment, I'm just a layman, so I allow the possibility that I'm wrong.

 
At Thursday, May 8, 2008 at 5:01:00 PM PDT, Blogger JD said...

I tend to agree with aram (and Prof. Hamilton) that the run up since late last year (about $30-40) is speculative froth. The facts are:

1) The surge since since late last year has affected not only oil, but also aluminum, barley, coffee, cocoa, copper, corn, cotton, gold, lead, oats, silver, tin, wheat and uranium.

2) This surge has coincided with huge, rapid interest rate cuts by the FED, an unprecedented surge of speculative money into commodities, and a "dot commodity" boom mentality.

It strains credulity to the extreme to believe that all storable commodities are suddenly hitting a Hubbert peak in late 2007/early 2008. There are waaay too many fishy coincidences to swallow the "it's just supply and demand" theory of the last 6 months.

 
At Thursday, May 8, 2008 at 5:51:00 PM PDT, Anonymous econogeek said...

JD...I was looking at your post about Matt Simmons and how speculators set oil prices and came across this tasty little nugget from CNBC today:

http://www.cnbc.com/id/24525419

Just in case you need the reference to look up the quote.

“Speculators basically don’t take delivery of the barrel. For every long on the Nymex, there’s a short. There are basically less speculative shorts today than there were in July when oil was $60 less. So I just think it’s a great—it’s a great excuse for people who have been wrong in their price. But the reality is, the fundamentals are basically showing that supply gains are getting fewer and fewer, and demand is still growing.”

BTW...see below for the link to the Goldman Sachs superspike report. Their dribble about how we should be thankful for energy speculators is on pages 11 and 12.

http://msnbcmedia.msn.com/i/CNBC/Sections/News_And_Analysis/_Blogs/Beat%20Blogs/Energy%20Source/DAILY%20POSTS/goldman_sachs_superspike.pdf

 
At Thursday, May 8, 2008 at 5:52:00 PM PDT, Anonymous econogeek said...

apologize for the disjointed post...the quote above was from Matt Simmons today on CNBC

 
At Thursday, May 8, 2008 at 6:13:00 PM PDT, Blogger FR said...

bikerman,

"The major downturn in the USA will spread to the rest of the world as the Japanese/Asian crisis of the 90s did.

The economies in the globalized world are not isolated as you seem to think they are. They haven't been in many, many years."

I understand that the economy is global, but China and India are still growing rapidly. When do you suppose they're going to stall?

Also, the downturn here in the US has much more to do with the housing, financial and credit crises, along with debt and the falling value of the dollar, than peak oil. Second, it's obvious th

 
At Thursday, May 8, 2008 at 7:33:00 PM PDT, Anonymous Aram said...

Econogeek,

But the reality is, the fundamentals are basically showing that supply gains are getting fewer and fewer, and demand is still growing.

What "fundamentals" are showing this?

Sean- I wasn't trying to be a dick to you, and if I came off that way I apologize. You know more than a layman- give yourself more credit!

 
At Thursday, May 8, 2008 at 7:35:00 PM PDT, Anonymous Aram said...

I just noticed this-

In our view, supporters of a cleaner environment should be supportive of commodity investors, as the combination of lower
demand and new alternative energy investments take hold. In our view, commodity investors are helping to accelerate the speed by
which the world will naturally want to burn less crude oil.


Talk about shilling for the peak oil lie and the environmental terrorists! If there was any doubt at all that this "report" was agenda driven, that paragraph should clear it up.

 
At Thursday, May 8, 2008 at 7:48:00 PM PDT, Anonymous aram said...

Here is a great little technical masterpiece... It's a little tough to understand and pretty dry reading, and oddly enough it's another case of a speculator saying the words "speculation isn't the driver" while at the same time writing an article that proves speculation is the driver...

http://www.321energy.com/editorials/hamilton/hamilton042708.html

 
At Thursday, May 8, 2008 at 7:50:00 PM PDT, Anonymous aram said...

God damn...

I'll get links to work right one of these days...

The article is called "Dollar Neutral Crude Oil" and is authored by Adam Hamilton. I read it on 321energy.com but I'm sure it's posted other places.

 
At Friday, May 9, 2008 at 3:05:00 AM PDT, Anonymous Luis Dias said...

Aram, you are beginning to behave like a troll. If you flood the discussion, it doesn't mean you are right, it only means you have drown it.

I don't agree with you on several things:

1. You imply that most of the price on oil is due to speculators. If that were the case, then yes, the reserves would be extraordinarily high. They are not. As you say, they are above average, but that is only common, because the US is growing in demand, therefore reserves must grow. If you do a bit of research you will discover that reserves in US have been growing since you were born. But if you count reserves in days of usage, you'll eventually see that they haven't grown much, if anything at all. You even nitpick 6 million barrels of increased reserves, as if that were something extraordinary. It is not, it is only eight hours worth of petrol.

Reserve has been below avg and higher than avg, but tendency is always to be higher than last year.

If speculators were driving the price, reserves would be astronomically higher, for the oil that they bought wasn't for consumption. If such reserve growth is miniscule, then their real footprint is also miniscule.

2. Speculators, if you take out your ridiculous indignation glasses, are the driving force of capitalism. If you don't like capitalism, then be it, but those are the rules and the system we have. And speculators are the ones who signaled peak oil long before it happened, giving a real boom to alternative energy technology R&D, to which only now we are witnessing the extraordinary results, with electrical engines being tested, solar power diminishing costs, etc, etc. Without the clear economical incentive, those things would lag in time, just as they have during the nineties. Remember the EV car? It was destroyed not because "Big Oil wanted your ass", but because it was an economical disaster.

Booms and busts are necessary in capitalist societies. I figure them as evolutionary "revolutions", where multiple answers come to solve solutions, and busts come to pick the best in them and destroy the rest. It was so with the net bust. In 2000, the internet blew up. The result wasn't disaster, it was Web 2.0!

So nitpick all figures you want, you are like a restless conspirational theorist who gathers all the required information and spews it all out, like pointing out to a lot of trees. But I don't care about the trees. I care about the forest, and you definitely aren't seeing it.

 
At Friday, May 9, 2008 at 6:19:00 AM PDT, Anonymous Aram said...

Luis-

1. You imply that most of the price on oil is due to speculators.

No, I don't imply it.

I've shown points of fact that illustrate it to be true. I haven't just thrown around peak oil trash talking points as you are doing.

because the US is growing in demand

Except that demand isn't growing. It is falling.

If your case were to be made that demand is falling then gains would not be being made. Reserves would be falling. They aren't. They're growing and demand is dropping.

If speculators were driving the price, reserves would be astronomically higher

Compared to recent lows, reserves have gone higher pretty much in a straight line if, as I said earlier, you knock out those few weeks of draws wherein supply was held up and reached its destination the next week.

As those supplies have risen and demand has fallen so has the price risen.

You're above statement is really not in line with the realities of the situation.

2. Speculators, if you take out your ridiculous indignation glasses, are the driving force of capitalism.

You're showing your true colors here with your petty attmpt at an insult.

I have not once stated that the speculators aren't driving capitalism or that they're doing wrong by their actions.

My argument, summed up nice and neat, has been that they keep saying that it isn't speculation that's driving the price, but everything they say when deconstructed contradicts that assumption.

Speculation IS driving the price and it is out of line with supply and demand fundamentals.

I never said it was wrong, I simply said that they are not being truthful when they speak of supply and demand fundamentals supporting the current price.

And speculators are the ones who signaled peak oil long before it happened, giving a real boom to alternative energy technology R&D, to which only now we are witnessing the extraordinary results, with electrical engines being tested, solar power diminishing costs, etc, etc. Without the clear economical incentive, those things would lag in time, just as they have during the nineties. Remember the EV car? It was destroyed not because "Big Oil wanted your ass", but because it was an economical disaster.

And here I've been thinking all these years that the Stonecutters held back the electric car. ;)

Except that peak oil (and you and I may differ in what that term actually means) is a lie.

The speculators can't be, at the same time, not responsiible for the current rally and deserving of praise because they're doing "god's" work as the Goldman article claims and you seem to agree with.

These same speculators (Boone Pickens for instance) are also the ones making the same wrong claims all the time.

Remember last year he was saying that world demand was 88 million barrels per day and that the world could only produce 85?

Guess what, Boone was wrong.

Oh, and didn't his investment group lose 14 million shorting oil when he should have gone long?

And he's back again making the same claims he did last year that were wrong then.

You obviously are a big time peaker, so I doubt anything I say will kill your conviction, but all your peak oil prophets can be wrong, just like Simmons has been and just like Boone is. Oh and nevermind that Hubbert's theory has been proven wrong, what, 5 times?

So nitpick all figures you want, you are like a restless conspirational theorist who gathers all the required information and spews it all out, like pointing out to a lot of trees. But I don't care about the trees. I care about the forest, and you definitely aren't seeing it.

I find it interesting that you label me a conspiracy theorist for pointing out that these "speculators" who claim that they aren't the problem yet provide detailed analysis showing that they are the problem!

Look, if you want to believe a theory that can't be proven that's your business.

If you want to drink the "fundamentals support the price" koolaid, that's your business too.

But if you want to actually discuss the issue, maybe you should have some of these so supportive fundamentals on your side as opposed to a bunch of liberal, peak oil nonsense talking points that don't prove anything.

 
At Friday, May 9, 2008 at 9:20:00 AM PDT, Blogger goritsas said...

aram,

I assume you share jd’s speculative premium of 30 to 40 USD for WTI, so could you explain who’s on the short side of these trades? My current conclusion is your relying on participants like long-only hedge funds with plenty of cash to spare and no where else to put it, so what is the profile of our beloved seller? What do they look like? Why do they keep coming back for more, to the tune of your premium, that seems to be showing no signs of shrinking, to be punished over and over again?

As for your apparent outrage at speculators driving up the price on a futures exchange, so what? Isn’t that what speculators are supposed to do on a futures exchange? Use the leverage granted them by these exchanges to trade contracts and finally exit their positions long before settlement in order to pocket a profit, pushing prices up or following prices down to their advantage? They get to do this because speculators provide the liquidity to keep the exchange trading. Unless you’re referring to speculators taking delivery on the expectation of selling higher in the future. I have real trouble following your prose, so please excuse me for asking, are you talking about purely financial speculation, or are you talking about taking delivery speculation, or both, even?

Would you also be able to explain what you mean when you say peak oil? You suggest luis dias may have a different definition than you, so it would be helpful if to understand what your definition is.

Just so I can clarify your point about peak oil being a lie, are you suggesting the decline in production and the depletion of reported reserves in the Lower 48 is simply an outlier and not the general behaviour one would expect when extracting oil?

Also, when you say reserves, I’m pretty sure you mean stocks, don’t you?

 
At Friday, May 9, 2008 at 10:03:00 AM PDT, Anonymous Bikerman said...

I understand that the economy is global, but China and India are still growing rapidly. When do you suppose they're going to stall?

India - not sure. China - about the time that their currency floats. Their artifically undervalued currency is the primary reason for their economic boom.

 
At Friday, May 9, 2008 at 10:37:00 AM PDT, Anonymous econogeek said...

Aram,

The section in quotes was directly from the Goldman Sachs piece. Not my personal opinion (which was at the top of the post). I think the Goldman guys are a freaking joke.

The really interesting thing is that nobody really knows why oil prices are so high. And that to me signals a bubble...

One other point to the peak oil crackpots: If you really believe that this isn't a speculative run-up, then why haven't inventories dropped commensurate with price increases?

Aram, I completely agree with you that this is speculative bullcrap generated by fund flows.

As Goldman Sachs says in it's beautiful little report:

"Without question increased fund flow into commodities has boosted prices." -Arjun Murthi, Goldman Sachs super-spike analyst, 5/8/2008

 
At Friday, May 9, 2008 at 10:43:00 AM PDT, Anonymous Anonymous said...

One more comment on the goldman sachs horse-hooey.

Their argument that speculators are helping to ease the transition away from oil is a pathetic attempt at rationalizing irrational behavior.

In my mind, this stream of logic is not dissimilar to Hitler's justification killing off millions of Jewish people so he could repopulate the world with perfect beings.

-Econogeek

 
At Friday, May 9, 2008 at 10:49:00 AM PDT, Anonymous Aram said...

Goritsas-

I assume you share jd’s speculative premium of 30 to 40 USD for WTI, so could you explain who’s on the short side of these trades?

Before I answer this, tell me how you believe the price of a commodity is set.

My current conclusion is your relying on participants like long-only hedge funds with plenty of cash to spare and no where else to put it, so what is the profile of our beloved seller? What do they look like? Why do they keep coming back for more, to the tune of your premium, that seems to be showing no signs of shrinking, to be punished over and over again?

Are you assuming that only hedge funds are investing big?

Who is to say there aren't plenty of people who have never had money in commodities before piling whatever they can in?

As for your apparent outrage at speculators driving up the price on a futures exchange, so what? Isn’t that what speculators are supposed to do on a futures exchange?

Who said I was outraged by them?

I made it pretty clear I am outraged by people claiming they aren't doing it when they say they are doing it (well, after they say they aren't doing it).

They either are or they aren't. They can't be doing both.

And so what they're doing may be exactly what they are supposed to be doing, but then the price increases are not in line with fundamentals of supply and demand. That's the issue. It has nothing to do with any outrage you imagine I have because you've misinterpreted something I've posted earlier.

Use the leverage granted them by these exchanges to trade contracts and finally exit their positions long before settlement in order to pocket a profit, pushing prices up or following prices down to their advantage? They get to do this because speculators provide the liquidity to keep the exchange trading. Unless you’re referring to speculators taking delivery on the expectation of selling higher in the future. I have real trouble following your prose, so please excuse me for asking, are you talking about purely financial speculation, or are you talking about taking delivery speculation, or both, even?

I think you and I have differing views on how commodity prices are set. Again, I think I need to know how you view it before I can answer your question.

Would you also be able to explain what you mean when you say peak oil?

"Peak oil" can only really mean one thing- the point at which we find ourselves when all recoverable oil has been found and half of it has been consumed.

I know that's not how everyone sees it, but the term has become diluted by peak oilers to seem to mean something more palatable than it really is (at least it seems that way to me).

It also has to be closely tied to the idea that the world is running out of recoverable oil. At least, that's what the term "peak" means. If I am at the "peak" of Mt. Everest I cannot go any higher because there is no more mountain above me.

And the hardcore doomers know that this is exactly what they want people to think.

Just so I can clarify your point about peak oil being a lie, are you suggesting the decline in production and the depletion of reported reserves in the Lower 48 is simply an outlier and not the general behaviour one would expect when extracting oil?

I'm not sure if this is what you're looking for, but I'll give you my general take-

These United States have been said to be past their "peak" in production.

And given that the "peak" is the point at which you only have half of your entire recoverable reserves left, don't we actually have to know just what are recoverable reserves are?

I don't know how much oil has been extracted from the "lower 48" since we started drilling for oil. I'm sure there is a number somewhere though.

I don't know how much actual oil there is left in the ground as I have not, and I'm pretty sure no one else has, conducted a survey of every inch of ground and the territorial waters claimed by the US.

I do know that there is a lot of oil still left in the traditional energy states. I do know that there is a lot of oil in the gulf where we are drilling. I know there is oil in the gulf we haven't even touched. I know there is oil in the Dakotas and Montana and Wyoming that we haven't touched. I know that there is said to be oil in the continental shelf and in deep ocean waters that we haven't touched. I don't know how much is there in all those places that we haven't touched, but it has to be a sizable amount.

So given what the real definition of peak oil is, have these United States actually "peaked" in their supply? We'd have to know what are total recoverable reserves are to say for sure. And no one actually knows what those numbers are. They couldn't possibly.

Now it's fair to say that these United States extract less oil than they have at points past. Does that mean that we have reached a point where we've extracted half of the total of oil that is available? I don't believe it does and I don't know that we could even know.

What I do know is that I find it hard to wrap my thinking mind around the idea that we don't even know how much oil there is in this country yet we have peak oil doomers trying to make the case that they know what is available in other countries.

 
At Friday, May 9, 2008 at 11:39:00 AM PDT, Anonymous peak silly said...

Here's my crackpot conspiracy theory. It did occur to me that if I had the conviction of a True Doomer I would have bet everything I have on oil rising in perpetuity and would be very wealthy by now. If people like Kunstler actually believed what they are writing why aren't they all billionaires?

But they are not, however maybe now the market is really starting to convince them to go all-in and drown in their own PO koolaid.

BTW Goldman Sachs was a prime engineer in the subprime distaster. Making a ton of $ securitizing bad loans and pushing them onto pension funds and such. Then, knowing full well how rotten they were, going massively short on them at the same time. They're not out there saying $150/$200 oil just to be nice.

 
At Friday, May 9, 2008 at 6:49:00 PM PDT, Blogger JD said...

Speculators, if you take out your ridiculous indignation glasses, are the driving force of capitalism.

luis,
aram has brought a lot of interesting cites to the table, and that's a good thing. The issue of speculation has to be hashed out somewhere in the peak oil community, and here is as good a place as any. He is listing his sources, and people can make up their own mind about them.
I agree that high oil prices are a good thing, and if the current situation was just about oil prices, I would be far less concerned. But the inflationary fever has now spread to food and other critical items, and the theory that speculators are doing us a favor by jacking up the price of food is pretty dubious. There is no alternative to food, and there is not going to be a transition away from food. I agree that capitalism is the way to go, and that higher prices for farmers should work their magic. However, at the same time, I think we need to be keenly on the lookout for excessive speculation, profiteering, hoarding and other counterproductive behavior.

 
At Friday, May 9, 2008 at 8:06:00 PM PDT, Anonymous Lucario said...

So if speculation really is the problem in this case, then what can the ordinary person do to stop it?

You folks may talk a lot about it, but none of you seem to be doing anything about it....

 
At Saturday, May 10, 2008 at 1:48:00 AM PDT, Blogger bc said...

In my mind, this stream of logic is not dissimilar to Hitler's justification killing off millions of Jewish people so he could repopulate the world with perfect beings.

Godwins Rule.

If you have to equate speculators to Hitler to make your point, now I know you guys are talking bullshit. You haven't a fucking clue.

It's traditional to blame a convenient scapegoat instead of thinking about the real reasons, but it has to be one of humans' dumbest traits.

Anyway, no point in arguing with idiots, bitch away!

 
At Saturday, May 10, 2008 at 5:17:00 AM PDT, Anonymous stuck in Shizuoka said...

Aram--

I can appreciate your comments on speculation and current crude oil increases. Certainly, other energy commentators in the media concur with you and, from the supply-demand view, the current long-term bids reflect a bubble of sorts. How long this will continue is another matter with a myriad of factors to be considered. Saudi Arabia has just yesterday gone on record that they will willingly raise production to meet demand, albeit in the short-term. If there looks to a be a raise in production, why are prices continuing to soar--the fear factor and hedges against the Dollar seem the primary reasons.

However, my own understanding of what constitutes 'Peak Oil' is vastly different from the definition you gave in your previous commentary.

For example, your comments that;

"These United States have been said to be past their "peak" in production.

"And given that the "peak" is the point at which you only have half of your entire recoverable reserves left, don't we actually have to know just what are recoverable reserves are?"


are not the basis from which the Peak Oil proponents base their predictions on. Yours is a more cornucopian view, akin to those espoused by Yergin, CERA, Hoffmeister, USGS etc.

The view that there is an immediate and dire situation in oil production and demand facing us (e.g., Vaclav Smil--formerly a Peak Oil skeptic), is based on a very different set of assumptions and hypotheses. In fact, there really is not a very clear correlation between "knowing what recoverable reserves are" and how much can be produced from these reserves.

Whether there are above-ground factors such as a lack of manpower (greying workforce/shortages), a lack of political will (the US Offshore fields/ANWR, Venezuela, etc.) or political strife and instability (Nigeria/Iraq) or below ground factors (the limitations of production in heavy oil/ shale/tar sands) or difficulties in exploration (Arctic areas/Greenland/Deep Water) or simply technical and financial limitations (deep water finds/ outdated drilling rigs/shortage of drilling rigs), world production levels will likely never allow for half the reserves to be produced.

A peak in oil production is simply that--the point at which worldwide production of oil peaks and begins a descent into lower and lower amounts. There may well be greater reserves in place but it will be factors I've mentioned above that prevent the recoverable reserves from being extracted. Even countries with expanding infrastucture, political willingness and stability and capital (e.g., Canada) may never recover half their recoverable reserves simply because the majority of reserves of oil is in the form of bitumen and requires far too much energy inputs too extract, no matter what the price.

We all have our wish-lists. Perhaps we can extend this current plateau or even see some upward ticks in production. If Iraq became relatively more stable (with American forces/Iraqi forces tightly controlling the Southern area) and saw EXPONENTIAL growth (as JD notes earlier), Venezuala and Iran rejoined the International community as cooperative players, Nigeria dealt with MEND forces, The US went on an energy war-footing and drummed up enough capital to overhaul and greatly expand its capacity whilst opening up the areas currently mandated as off-limits, Canada put in a nuclear power plant in Saskatchewan to power up the processing neededed in Alberta to double its output, the Brazil find turns out to be match the original hoopla, and Russia brings in massive foreign investment to explore and produce (some recent encouraging signs with Japan there) oil without the mandatory 51% ownership by the state, AND, most of all, the Saudi Arabia wild card turns out to be legit and they can turn on the spigots as much as they claim (does anyone actually believe them here?), then....who knows..perhaps we are not at Peak yet. However, this is quite an optmistic set of events wouldn't you say?

Even so, this goes to show how we could be at the Peak in production now, despite a lot of reserves very much in the ground.....Its not a matter of a "peak in supply" as you put it--if so, Canada could supply the US for decades--but rather a peak in production, no matter what the factors are.

 
At Saturday, May 10, 2008 at 6:14:00 AM PDT, Anonymous Lucario said...

I'd still like to know what an ordinary citizen can do about speculation. If this current price crisis is due to speculators, then it would make less sense to debate whether there is a peak in oil produltion or not and more sense telling the world what the common person can do to quash speculators. I thought this bolg was about solving problems like that, not about debating.

I await an answer.

 
At Saturday, May 10, 2008 at 6:32:00 AM PDT, Anonymous stuck in Shizuoka said...

what can a "ordinary" person do about speculation? Not a thing I'm afraid, other than buy a hedge fund and make some money off of it. I bought a nice little Australian commodities/energy fund that has done very well of late. Makes the situation seem a little more bearable. Also just sold a house at its peak value and will put most of the profit into Canadian energy funds. What else can we do in these times?

If its a matter of demand that you are thinking of--as in squashing demand--I would try to keep in mind that any loss in demand in the West/Japan will be eaten up by consumption in China.

As for the purposes of the blog, my impression was that JD set out to address the "doomer" mentality and examine mitigation and fallacious arguments in the Peak Oil arguments. Debate seems warranted here, especially about defining Peak Oil, at least IMO.

 
At Saturday, May 10, 2008 at 6:41:00 AM PDT, Anonymous stuck in shizuoka said...

Speculators knock OPEC off oil-price perch
By F William Engdahl, author of A Century of War: Anglo-American Oil Politics and the New World Order.
Asia Times Online, May 6, 2008

a very good read...rather interesting and VERY germane to this topic

 
At Saturday, May 10, 2008 at 9:57:00 AM PDT, Anonymous Anonymous said...

"and a "dot commodity" boom mentality."

This is totally wrong. we are in a commodities bull market. the prices of most commodities are still historically very low. "speculators" have been blamed since oil was $60 at least.

 
At Saturday, May 10, 2008 at 2:28:00 PM PDT, Anonymous Luis Dias said...

@JD

Troll was a heavy word, I admit. But he does write a lot of big long tiresome follow-ups. It's hard to follow through. But I understand the interest in maintaing a good debate. It's perhaps blogspot fault that a somewhat big comment seems to have biblical proportions.

@ aram

I've shown points of fact that illustrate it to be true. I haven't just thrown around peak oil trash talking points as you are doing.

You've packed a bunch of news that we all also happen to read. It is still irrelevant. What have you got to show me? That's as idiotic as the claim that the cold winter of 2008 cancelled out Global Warming. There's a word for people that think this way. It's called "deniers".

You're above statement is really not in line with the realities of the situation.

Well I happen to disagree with you. But then again! We both fail to have the arithmetic calculations of demand/supply equations so that we could arrive a meaningful discussion. There's no point in developing the discussion until we find out how we could quantify speculation and real demand. I won't dwelve into that, not that interested. But you seem keen on finding stuff.

You're showing your true colors here with your petty attmpt at an insult.

Petty attempt at an insult? True colors? What the hell? You swarmed the site with your conclusion that the oil was speculator-driven and that it wasn't exactly "peak oil". The only point in bringing about speculators is if you don't believe that speculators are the driving force of the market. If you don't "speculate" what the price of oil is, how do you know how much is it worth? It is EMBEBBED into the system, so it is meaningless. Get it? If Goldman Sachs or anyone else says otherwise, of course they are lying, they are only saving their asses. But it is embebbed in the system. It just so happens that it isn't a popular thing to admit.

All you can say is that there is a bubble going on. The big question is if it is going to POP or not. If it is going to POP, then it can be a bad thing and a good thing. Web 2.0 was good for instance. Mortgage pop wasn't so good. If it isn't going to POP, then it is good, because it signals the market that high prices are here to stay.

Except that peak oil (and you and I may differ in what that term actually means) is a lie.

Let's not dwelve into semantics. If by PO you mean the point in time where we won't produce so much in a day than in a previous day, I don't agree with you. It's going to happen. And evidence points out that this moment is not so much far in time.

If by PO you mean all the doomerish nonsense, Die-Off and the likes, then I agree with you, it's a myth. A fearmongering christian myth.

But PO in the first definition is real. You don't have to dispute lower 48. You have to explain north sea, mexico, most non-opec countries, etc, etc. Yes, it may happen that we find other fields, but of course it gets more difficult to follow an exponential supply curve. In a point in time, you just can't.

These same speculators (Boone Pickens for instance) are also the ones making the same wrong claims all the time.

He's a strawman. He reckons a good bubble and everytime he goes on telly he takes it as an opportunity to hype it the most he can. So it doesn't matter what an interested party has to say about peak oil.

You obviously are a big time peaker, so I doubt anything I say will kill your conviction, but all your peak oil prophets can be wrong, just like Simmons has been and just like Boone is. Oh and nevermind that Hubbert's theory has been proven wrong, what, 5 times?

I'm not a "peaker". If I had your attitude, though, I'd say you've just shown your true colors here at your petty attempt at insult. Like you, I'm a free thinker. Of course Simmons is wrong. There's a lot of people that say a lot of different things and they can't possibly be all right in the same universe. Hubbert though told a thing that reminds us of an aspect of exponential curves: a doubling of Ultimate Recovery Reserve in the US only meant a shift in the peak date of about 5-10 years. So even if you said that tar and shale could produce in the same speed as conventional (they can't at present), you had delayed PO by 7 years or so. It's this reality that makes me reach the obvious conclusion that peak oil will arrive not far away in time.

JD and others though, even Simmons, have stated that they believe that we would reach a plateau that would last 15-20 years. If that's the case, it's not as dire as most people think...

yet provide detailed analysis showing that they are the problem!

You're a liar. First you rant me all the way and say that "I have not once stated that the speculators aren't driving capitalism or that they're doing wrong by their actions." and then you claim their analysis show that they are the "problem". Which IS IT?

But if you want to actually discuss the issue, maybe you should have some of these so supportive fundamentals on your side

I've been following peak oil in various sites, and theoildrum, for instance, has been quite detailed in fundamentals, reserves and the likes. Ever since the growth of the oil price, I haven't seen any evidence of outrageous growth in reserves.

What I do know is that I find it hard to wrap my thinking mind around the idea that we don't even know how much oil there is in this country yet we have peak oil doomers trying to make the case that they know what is available in other countries.

We don't "Know" but we have a pretty good idea. The US has been surveyed a lot of times throughout, and oil fields aren't exactly "tiny". Therefore, statistical methods can give you a good perspective of what should be expected to be found out. Of course, like in quantum mechanics theory, anything is possible, and you could theoretically go through the wall. But the percentage of that happening is rather... small.

 
At Sunday, May 11, 2008 at 6:41:00 AM PDT, Blogger JD said...

I'd still like to know what an ordinary citizen can do about speculation.

Hi lucario, welcome to POD.

You're right that the issue of speculation is mostly just an intellectual debate at this time. Nevertheless, it's an interesting debate, and pretty inevitable, so we might as well hash it out.

That said, I wouldn't even bother with the idea of stopping speculators in the case of oil. The number one thing you can and should do as an individual is reduce your personal exposure to rising oil prices. Common-sense strategies include: carpooling, riding the bus, riding the train, moving closer to work or shopping, moving to a city with better transportation, bicycling, walking, riding a moped/electric bicycle/scooter/motorcycle, buying a more efficient/smaller vehicle, sleeping near or at work a few nights a week, telecommuting etc. As Shizuoka points out, that's not going to solve the overall problem, but it will definitely solve *your* problem. It's a lot more practical and straightforward to reduce your oil consumption than to try to make some personal effort to stop speculators.

 
At Sunday, May 11, 2008 at 5:29:00 PM PDT, Anonymous Anonymous said...

JD,

Economig growth is slowing and being predicted to be 0% in the next quarter here in Belgium.
Furthermore the trade balance went negative for the first time since decades. All directly linked to the price of oil, according to the economists. Not even mentioning the inflation here.
And all this while we are not even peaked, which you do believe will happen. My guess is when we peak the economic situation wil get worse and not better and that world economic growth is not here to stay when we start the donwslope of the curve.

 
At Sunday, May 11, 2008 at 10:32:00 PM PDT, Anonymous stuck in Shizuoka said...

Today's Oil Drum www.theoildrum.com, addresses this very topic. An interesting article was posted reflecting on a study done three years ago regarding $120 barrel oil and its effect on the global economy. A newer article from Europe is also included. Worth the read.

Japan is seeing some downturns in manufacturing and Toyota is posting its biggest loss in years. Part of a transitional phase or the beginning of the great downturn--followed by the mother of all depressions?

Oil predicted to rise to $200 in 6-12 months or oil about to burst with renewed buying of the dollar?

Pickens just cited a loss of 400,000 bl/d of demand in the US as prices take their toll.

 
At Monday, May 12, 2008 at 10:38:00 AM PDT, Anonymous Luis Dias said...

It's a bottleneck.

Let's hope we can all squeeze through :)

 
At Monday, May 12, 2008 at 11:37:00 AM PDT, Anonymous maxrates said...

It takes time for high prices to affect people. Right now americans are using "plastic" to maintian living standard. Data shows that consumer credit is rising. If oil prices stay high..........revisit this subject in a year.

maxrates

 
At Monday, May 12, 2008 at 4:50:00 PM PDT, Blogger JD said...

It takes time for high prices to affect people.

That was the response when I asked why $70 oil wasn't destroying the economy. I was told to revisit the topic in a year, and here we are. :-)

 
At Monday, May 12, 2008 at 5:37:00 PM PDT, Anonymous stuck in shizuoka said...

An NY Times opinion piece, although more speculation on...speculation really. Some food for thought here though about the machinations of what drives speculation versus genuine supply-demand constraints

http://www.nytimes.com/2008/05/12/opinion/12krugman.html?ex=1368244800&en=c899176fff63fce4&ei=5124&partner=permalink&exprod=permalink

JD, how do I simply add a HTML to this rather than cutting and pasting? Thanks...

 
At Tuesday, May 13, 2008 at 10:24:00 PM PDT, Anonymous Babun said...

I read that piece by Krugman also. Even if i find that his logic is not infallible it does present a good argument against the "fundamentals don't justify price" -argument. Because that's exactly what fundamentals (supply and demand) are doing. They're justifying the price.

If the speculators would be responsible for some or most of the price rise and fundamentals would not support this then we ought to see lower prices when the "actual" demand falls. So if the world is ready to pay this price for oil (and the speculators are mostly to blame) all it means is that the markets have once again been inefficient and speculators have helped us push the price to more real levels. And the fundamentals support this.

 
At Tuesday, May 13, 2008 at 10:26:00 PM PDT, Anonymous econogeek said...

One of the most important tenants to the "fundamentals justify the price" crowd's argument is that oil inventories haven't gone up as the price has skyrocketed.

I'd like to share a couple of recent revelations that show inventories ARE building up (hint: it's just not necessarily where speculators ask you to look).

1. Iran currently has 30 million barrels of oil sitting in oil tankers on the Persian Gulf that they can't sell. (Please note: When Bloomberg wrote the story it was 20 million, it is now 30).

http://www.bloomberg.com/apps/news?
pid=20601109&sid=akLt5fJKQNr8&
refer=home

2. Increasing spare capacity: It was at less than 1 million barrels per day in 2004, now it is almost 3 million barrels per day. (2.3 of sustainable capacity according to the IEA, the most reliable source of oil fundamental information).

3. Investment Banks are storing the oil in warehouses, floating tanks, and storage facilities all over the world. Seriously. Don't laugh too hard. I know this sounds unbelievable but look at this article from the UK Telegraph:

http://www.telegraph.co.uk/money/
main.jhtml?xml=/money/2007/11/04/
ccoil104.xml

And this one from the Wall Street Journal:

http://online.wsj.com/article/
SB115163341075595034.html?
mod=googlewsj

Or perhaps this one in Qatar's Peninsula Newspaper

http://www.mafhoum.com/press7/
206E63.htm

(BTW...I did not do extensive research in picking these articles...this is just a very small sampling of the many articles from reputable sources that demonstrate this point).

How much oil do investment banks actually control? I don't know, but I'd be willing to bet you that the EIA, IEA, or anyone that tries to estimate oil inventories in major consuming countries does either.

So now...my challenge to the fundamentals justify the price crowd...please show me empirical evidence in the system where "supply is outstripping demand" as you all seem to claim.

 
At Tuesday, May 13, 2008 at 10:57:00 PM PDT, Blogger JD said...

econogeek,
Here's your links in an easier to use form:

Bloomberg

UK Telegraph

WSJ

Qatar

Here's another talking about Morgan Stanley's tank farms:

WSJ

 
At Wednesday, May 14, 2008 at 1:02:00 AM PDT, Anonymous Jerry said...

I don't much about all of this. I'm very new and the first site I read was Lifeaftertheoilcrash.net. Scared the hell out of me. I soon started to realize that a lot of his links went no where. But still pretty dim to say the least.....anyways why couldn't we the U.S. convert our own currency to say the british pound? Not much of a market or accountant type either.

 
At Wednesday, May 14, 2008 at 4:36:00 AM PDT, Anonymous Luis Dias said...

@econogeek

Nice gathering of thoughts.

1. If Iran isn't able to sell crude, that's not speculation. That's bad marketing, bad politics and bad product (you can only speculate by buying more, aka hoarding, not by buying less). Iran crude has high sulphur (in the same article you provide) and there are few refineries in the world that can refine that. I'm not even going into politics here. It should be evident Iran's problems.

2. "Spare capacity" is an abstract term. It means that the world could theoretically produce more 2 million barrels per day, but the producers won't do it. That's not speculation either, btw, it is reserve management by the producers.

It's not even consensual. In the telegraph story you posted, there's this line:

Recent supply and demand figures back up Horsnell's view. The International Energy Agency has forecast that global demand will be 85.9m barrels of oil per day this year, rising to 88m next year. Supply, however, is forecast to rise from 85.2m to 85.6m barrels per day – leaving a growing shortfall over the next two years.

That is shortage of capacity, not spare. It is often said that Saudi Arabia has most of this spare capacity. Is it true? Nobody knows, except them. And MS can't be blamed if the Saudis prefer to keep production sustainable rather than full throttle.

3. It's an interesting point. I never considered it even possible. To have a real footprint in the price market, you'd need to hold dozens, if not hundreds of millions of barrels, physically. The articles you quote try to indignate the reader at the thought that speculators are increasing the oil price by a whooping "7-8$"!! Wow ok. That means that the real price of the oil is not 126$, it should be 118$. That explains it all... (snore)


Typical of conspirational theorist activity. Nitpick seemingly huge figures to prove their theory without even attempt to question on how much it has an impact on the whole. Clue: it is a very small impact. If anything, speculators are driving the price faster than the rest of the market. But not by much.

 
At Wednesday, May 14, 2008 at 5:01:00 AM PDT, Blogger JD said...

luis,
At this point, oil prices are rising by about $10 a week. So the really relevant question is: why is anyone selling any oil at all? There is a truly massive financial incentive to hold onto oil and sell it later. Meanwhile, you're telling us that it's nutty to think that somebody somewhere might be holding -- despite the fact that it would be hugely profitable to do so. Since when did people lose interest in taking the easy profit? It doesn't add up.

 
At Wednesday, May 14, 2008 at 9:20:00 AM PDT, Anonymous Luis Dias said...

That's fine JD. Bring up the facts, like Ecogeek did. You'll find that such facts won't support you. And that's because you don't have to stock up oil to have huge money, you just have to buy futures and sell them months later. Given that oil is quite inelastic in the short run, if the price is high, companies will still buy your futures. You don't need to stock millions of barrels, you just need to buy futures.

This has a lot of advantages over personally stocking up oil. First, you don't need to buy enormous warehouses and manage the transport, etc. Second, oil won't lose quality over the time span you stock it. I don't mean that there aren't folks doing this. But I don't see it as massively as you are implying.

Now, if supply wasn't so constrained, it would grow. The incentive is just astronomical. And yet, we only get to see a minor jump in supply in 2008.

There are many variables here, but if there is really a shortage of capacity vs demand, then the soaring price is definitely justified. Speculators are only opportunists that hop into the right train at the right time.

"So the really relevant question is: why is anyone selling any oil at all?"

We still drive cars and generate power by oil, in case you didn't notice. Most of the buyers aren't speculators, but actual gas companies.

Like I said previously, the question isn't about speculators. It's about bubbles. If the price increase is sustainable or not. If the bubble pops or not. Given history, I'd bet yes. Given Peak Oil Lite, and soaring demand (with so much huge potential, imagine China and India) I'd say no.

This road is starting to rumble. There's no need to panic though. As you have been incredibly and persistently claiming throughout your outstanding blog, we really don't "need" the oil. It will be painful, but all births are. We could be witnessing the hard birth of an incredible 21st century age.

 
At Wednesday, May 14, 2008 at 12:36:00 PM PDT, Anonymous econogeek said...

My point with that article is that the "commodities aren't in a bubble" crowd has been screaming for the past 3 years to show examples of excess supply in the market. I think that this information that shows some very unusual anomalies in the supply chain, coupled with comfortable supply inventories and spare production statistics reported by the IEA that fundamentals clearly are not driving this train.

Ivory tower analyses of potential future supply by "geologists" from the oil drum, LATOC, and other alarmist sources do not explain this information (see some of JD's earlier posts for some examples of their crappy analysis).

Now...do I think that prices are going to come down anytime soon? Hell no. The REAL reasons for the price increases are as follows:

1. Zero regulation in commodity futures trading. The only thing that has gone up exponentially in all of this is the earnings and number of contracts traded on the ICE, NYMEX, and other exchanges. These aren't non-profit organizations. Why do you think they are so resistant to regulation? Think what a little transparency will do to ICE's quarterly earnings (which makes most of it's money on the volume of contracts traded).

2. Fear of anything that is not a hard asset or government backed bond.

3. Stupidly cheap money policies by not only the US Fed, but the ECB and the Japanese Central Bank. People aren't just afraid of the dollar, they are afraid of all paper currencies.

As Milton Friedman once said "Inflation is almost always a monetary phenomenon"

4. Securitization of commodities. The futures market treats ETFs and other speculators the same as someone who purchases barrels of oil in the real world.

Personally, I've been playing the oil market for awhile, and have done fairly well. However, it's somewhat foolhardy to think that this is a supply and demand issue. It's not. To get a sense of when this will blow up, keep an eye on the federal reserve for rising interest rates, the Enron loophole closing, and perhaps even some inquiries of investment banks into their stockpiling. (They can't do this in the US under the 1940 Investment Company Act)

Contrary to some of the accusations on here, I'm not a conspiracy theorist. The factors I listed above are large macro-economic forces not easily controlled by one entity. I don't think that Goldman Sachs and Morgan Stanley executives meet in boardrooms to discuss how they will rip off the oil consumer. However, when investment banks have contracts to supply jet fuel to major airlines (e.g. Morgan Stanley and United Airlines), I think it should raise a few eyebrows. Last time I checked, Morgan Stanley doesn't refine oil.

Unfortunately, reality doesn't coincide with the oildrum, LATOC, and Simmons' wet dreams of imminent oil shortages right now. Sorry guys.

 
At Wednesday, May 14, 2008 at 1:34:00 PM PDT, Anonymous Babun said...

One of the most important tenants to the "fundamentals justify the price" crowd's argument is that oil inventories haven't gone up as the price has skyrocketed.

I'd like to share a couple of recent revelations that show inventories ARE building up (hint: it's just not necessarily where speculators ask you to look).

1. Iran currently has 30 million barrels of oil sitting in oil tankers on the Persian Gulf that they can't sell. (Please note: When Bloomberg wrote the story it was 20 million, it is now 30).

http://www.bloomberg.com/apps/news?
pid=20601109&sid=akLt5fJKQNr8&
refer=home


As luis dias already pointed out, this is not due to a lack in demand - but a host of other factors. Even in the article it is explained that the refineries are under maintenance.

I'd call refinery maintenance "fundamentals" too, but I guess your opinion may differ. I thought we were discussing whether demand and supply justifies the high price. Less refining capacity means less supply.

2. Increasing spare capacity: It was at less than 1 million barrels per day in 2004, now it is almost 3 million barrels per day. (2.3 of sustainable capacity according to the IEA, the most reliable source of oil fundamental information).

Oh so your argument is that producers are withholding oil from the market? I still thought we were talking speculators here.

I agree with luis dias that this is a rather abstract term. Afaik most of the "spare capacity" is in saudi arabia and even george dubya is contemplating whether or not they actually have spare capacity.

And if you really think about the matter - when the matter is supply and demand - you can see that this argument is kind of out of the scope. Even if this argument was true, the price would still be a result of supply and demand.

Also if it is true, I don't know if it's a good argument for there being anything out of the ordinary going on. I don't believe we've ever been at 0 barrels spare capacity. I'd imagine it's about flow management and that it's used only to remedy critical situations. And it may be partly that oil producers are realizing that times are changing. Completely natural things. The fact that we would want to strive to use all of that spare capacity if there's nothing critical going on - that would be something odd. Or is there something critical going on?

3. Investment Banks are storing the oil in warehouses, floating tanks, and storage facilities all over the world. Seriously. Don't laugh too hard. I know this sounds unbelievable but look at this article from the UK Telegraph:

Right. It's the oil in the warehouse. Cuckoo! It's not like they're really just storing it there and waiting for the prices to rise. They're involved in distribution and apparently taking advantage of their position on knowing market trends. Also, I don't believe we're talking huge quantities here.

You seem convinced that this is something remarkable. Do you have any numbers?

And this one from the Wall Street Journal:

http://online.wsj.com/article/
SB115163341075595034.html?
mod=googlewsj


As far as I can see, this article discusses something else than financial speculation. It discusses the issue of energy companies manipulating the market. I am however aware of the many articles that do speak about speculation being a major contributor to prices. More articles doesn't make the argument better though. Better arguments do.


Or perhaps this one in Qatar's Peninsula Newspaper

http://www.mafhoum.com/press7/
206E63.htm


Yes, I believe I already commented on this.

(BTW...I did not do extensive research in picking these articles...this is just a very small sampling of the many articles from reputable sources that demonstrate this point).

Really? I could actually tell by the fact that you seem to have poorly examined them. One of them seemed to discuss something else than you thought, two of them expressed an alternative view to yours, and one had some damn old information in it.

How much oil do investment banks actually control? I don't know, but I'd be willing to bet you that the EIA, IEA, or anyone that tries to estimate oil inventories in major consuming countries does either.

Well we can discuss conspiracy theories or we can discuss widely available information. I prefer to base my opinions on widely available information.

So now...my challenge to the fundamentals justify the price crowd...please show me empirical evidence in the system where "supply is outstripping demand" as you all seem to claim

I'm sorry, but I don't really think you presented any reasonable information to prove that stockpiles are building up. Evil banks storing up lost world demand (or more) in warehouses does not seem like a good explanation. Nor does the fact that there's a maintenance season going on in refineries. I argue that world demand is still high even though prices are high. This means the price is supported by fundamentals.

 
At Wednesday, May 14, 2008 at 2:30:00 PM PDT, Anonymous Luis Dias said...

ecogeek,

Your points sound sane and correct. But I think there are a few caveats.

1. If there is an oil rush because of the falling dollar, that doesn't tell us that the oil is bubbling, but that the dollar is in free-fall. Therefore the real price of the oil isn't climbing as fast as it seems, and speculation can't hardly be blamed by that. If you see oil price in euros, for instance, it is still in the 80 euro range. That doesn't sound so much as a bubble, does it?

2. Panic motivated by a runaway crude. I'll bite that. Yes, it is a speculation of sorts and may well be unfounded. But crude markets isn't exactly for the faint of heart, and thus I don't believe that speculation by fear has such a big footprint. But it might have some (2,3%?)

3. "However, when investment banks have contracts to supply jet fuel to major airlines (e.g. Morgan Stanley and United Airlines), I think it should raise a few eyebrows."

It does, but it may not guide us to the conclusions that you have made. Instead, it may mean that oil costumers are afraid of the volatility of oil markets and if they can "securitize" it, they will. They work better with a stable price table rather than a volatile one. Speculators though, like to play risk. It's a perfect symbiosis, I can only conclude.

"Unfortunately, reality doesn't coincide with the oildrum, LATOC, and Simmons' wet dreams of imminent oil shortages right now. Sorry guys."

That's the problem of forecasting. Prophets always assume that the world is linear, or, worse, that the world is not linear, is exponential, and because people don't understand exponentials (we are dumb), mankind is fucked. Thing is, the world is not even exponential. It is also linear, logarithmic, non-linear and profoundly chaotic. But that doesn't mean they are wrong. Imminent oil shortages may well be ahead, why not? Probably, huge oil price hikes will create so much harm as the food price hike is making in the third world.

That also means shortages.

 
At Wednesday, May 14, 2008 at 4:26:00 PM PDT, Anonymous econogeek said...

Babun & Luis,

Like I said, if you think fundamentals justify the price, show me evidence of a supply drop over the past six months that is commensurate with the price increases. Like Jerry McGuire says, "SHOW ME THE MONEY". (And by shortage I don't mean some forecast that shows a future shortage)

If we had a shortage, like you two are suggesting, it would show up in everyone's inventories. Iran would have no problem selling their sour crude b/c there'd be a shortage and everyone would need the oil.

Every time I bring this up to the peak oil proponents, there's always an excuse for the supply builds. Iran can't market their oil, you're a conspiracy theorist b/c oil companies have warehouses. The market sure doesn't think there's a imminent shortage looming. If they did, oil for future delivery would be more expensive than oil today (scarcity economics) on the pricing curve.

As for my point about currencies, it's not just the dollar, it's the Euro, the yen and other currencies that are depreciating relative to hard assets. The gold/oil ratio has been relatively stable since 2001.

As for the point about supply/demand analyses that project out to the future (and JD has so eloquently pointed out in prior posts) demand can actually go down vis-a-vis more efficient oil use or alternatives (i.e. replacing fuel oil with nat gas in the 1980s, better cars, etc.).

Last point...babun, I don't really appreciate the ad hominem attacks. Investment banks clearly have warehouses and no one knows how much oil they have. It could be a little, it could be a lot. But they own storage tanks in large numbers and in places outside of detection (Morgan Stanley has large tank farms in Singapore, for example). They aren't doing it to corner the market, it's an economic enterprise run by Wall Street that has minimal transparency. That's basically my point.

BTW...ad hominem attacks work both ways...

"Afaik most of the "spare capacity" is in saudi arabia and even george dubya is contemplating whether or not they actually have spare capacity."

(Sarcastically) I guess all the oil producers are lying. It's all a big conspiracy. Saudi Arabia has no spare capacity...they lied to us. We're SCREWED. RUN FOR THE HILLS.

Clearly, this type of argument structure really doesn't add any value.

 
At Wednesday, May 14, 2008 at 9:24:00 PM PDT, Anonymous Babun said...

Like I said, if you think fundamentals justify the price, show me evidence of a supply drop over the past six months that is commensurate with the price increases. Like Jerry McGuire says, "SHOW ME THE MONEY". (And by shortage I don't mean some forecast that shows a future shortage)

You seem to have missed the point. My argument wasn't based on any supply drop. It was based on demand remaining high even though prices are high. Although as you yourself pointed out with your link - it's the high season of refinery maintenance in asia!

If we had a shortage, like you two are suggesting, it would show up in everyone's inventories. Iran would have no problem selling their sour crude b/c there'd be a shortage and everyone would need the oil.

You seem to be talking about peak oil now. I'm talking about current market fundamentals.

Every time I bring this up to the peak oil proponents, there's always an excuse for the supply builds. Iran can't market their oil, you're a conspiracy theorist b/c oil companies have warehouses. The market sure doesn't think there's a imminent shortage looming. If they did, oil for future delivery would be more expensive than oil today (scarcity economics) on the pricing curve.

Haha, excuse? Refinery maintenance is an excuse? Banks getting involved with distribution is an excuse? It's no excuse, it's the real explanation.

Please just consider your arguments before you write them down. Your whole reply is based on a claim I never made.

I understand that there are many reasons that have driven more money to the market and I believe that's fully sensible. It does not however mean that you can draw any conclusions about the direct effect on the price from that alone, because the effect imo is quite impossible to quantify.

The logic in my argument however, is based on just common sense.

"BTW...ad hominem attacks work both ways...Clearly, this type of argument structure really doesn't add any value."

I agree. Ad hominems are irritating and stupid.

Unfortunately, reality doesn't coincide with the oildrum, LATOC, and Simmons' wet dreams of imminent oil shortages right now. Sorry guys.

When bullshit like this disappears from this site (probably never, since this is a site practically dedicated to ad-hominem attacks against peakists) I'll also stop my ad-hominem arguments. As you said yourself, the door swings both ways :)

I sure consider it better discussion to leave them out, but many here still seem to believe that ridiculing makes for a good argument. I agree that it probably is appropriate concerning some information sources (dieoff, latoc, whatever), but most should be in the normal scope of argumentation.

 
At Thursday, May 15, 2008 at 12:01:00 AM PDT, Blogger JD said...

You seem to have missed the point. My argument wasn't based on any supply drop. It was based on demand remaining high even though prices are high.

In that case, I'd like to see your evidence for high demand. WTI spot prices have risen from about $102 to $126 in the last 6 weeks. Where are the demand figures which explain that? The latest word from the IEA is that demand is falling. Meanwhile, prices rose $5 in the last week.

 
At Thursday, May 15, 2008 at 3:49:00 AM PDT, Anonymous Luis Dias said...

from your source, JD:

"The IEA said demand will grow by 1.03 million barrels a day, 230,000 barrels a day less than the previous forecast"

That means falling forecast growth on demand, not falling demand. Demand is increasing.

 
At Thursday, May 15, 2008 at 5:41:00 AM PDT, Blogger JD said...

Thanks luis, you're right. But the question still stands: Why is the price rising at such a feverish pitch, if demand is slowing down?

How about this data point: "A decline in China's oil imports in April, the first year-on-year drop in 18 months, also raised questions over demand. China is the world's second-largest oil consumer after the United States." Link

In April, Chinese imports were down 3.9%, and the price of crude rose from $100 to $120. Where was the demand that caused that price rise?

 
At Thursday, May 15, 2008 at 7:50:00 AM PDT, Anonymous Luis Dias said...

I don't know JD. But I think you are nitpicking trees, rather than looking at the forest, because the forest numbers aren't helping the speculation case. You'll always find queer trees in an otherwise boring forest.

 
At Thursday, May 15, 2008 at 8:17:00 AM PDT, Anonymous Babun said...

Thanks luis, you're right. But the question still stands: Why is the price rising at such a feverish pitch, if demand is slowing down?

As luis dias pointed out, demand is still rising. I believe in another thread you were arguing that slowing global economic growth meant nothing and here you apparently argue it means everything. I think your views are biased.

Imo it's economics 101 that when the growth of the economy is slowing down we're heading for worse times but when demand growth slows down it's demand growth nonetheless. That means someone is willing to buy the product at these prices.

How about this data point: "A decline in China's oil imports in April, the first year-on-year drop in 18 months, also raised questions over demand. China is the world's second-largest oil consumer after the United States." Link

In April, Chinese imports were down 3.9%, and the price of crude rose from $100 to $120. Where was the demand that caused that price rise?


Someone else out-payed the chinese? Global demand is what matters in this issue, and I believe we don't get accurate numbers about this before some time has passed (at least usually EIA and IEA data have quite some lags). Also there may be short-time fluctuations in long time trends. What matters imo is long time trends. So if you could e.g show that demand has actually slowed down after entering this year I'd be very surprised. Another thing to look for would be producers being unable to sell their product for the current prices.

I have yet to see this kind of information. If this would be in the news, my view of the situation would change without doubt.

However as it stands, it seems like you are really taking a biased view and trying to nitpick whatever information you can find to support your views instead of looking for the stuff that matters.

 
At Thursday, May 15, 2008 at 8:19:00 AM PDT, Anonymous Babun said...

Clarification, i did not mean that demand growth would slow down, but that it would actually have decreased

 
At Thursday, May 15, 2008 at 10:14:00 AM PDT, Anonymous Babun said...

For the record, I do expect these trends to change. In fact I believe they're changing right about now. But that doesn't mean that recent development hasn't been based on fundamentals. All I'm saying is that the fundamentals is a moving target. Today I invested some money in oil prices going down. So I really hope they do :) That's a short position however. I believe that in the long run they will rise again.

 
At Thursday, May 15, 2008 at 5:44:00 PM PDT, Blogger JD said...

I believe in another thread you were arguing that slowing global economic growth meant nothing

If you want to attribute statements to me, please cite the actual quote. I'm getting pretty sick of addressing fake quotes that addled people like yourself fabricate for me.

Someone else out-payed the chinese?

That's about the lamest evidence I've ever seen on this blog. LOL. Your belief that the run-up from $100 to $120 in April was due to supply and demand is clearly based on no evidence whatsoever.

 
At Thursday, May 15, 2008 at 9:49:00 PM PDT, Anonymous Babun said...

If you want to attribute statements to me, please cite the actual quote. I'm getting pretty sick of addressing fake quotes that addled people like yourself fabricate for me.

Sorry, I may have been wrong on this one. Dunno where i got the idea from.

That's about the lamest evidence I've ever seen on this blog. LOL. Your belief that the run-up from $100 to $120 in April was due to supply and demand is clearly based on no evidence whatsoever.

About as much as your evidence that it's because of speculation. LOL. Why don't you try making arguments instead?

 
At Thursday, May 15, 2008 at 9:53:00 PM PDT, Anonymous Babun said...

Oh yes, and I agree of course that there are multiple factors affecting the price of oil (including speculation), but I believe strong demand and rather stagnant supply has been the driver for a long time. I don't believe speculation has been the driving, but rather contributing cause to rising prices.

 
At Thursday, May 15, 2008 at 10:18:00 PM PDT, Anonymous Babun said...

JD : http://www.eia.doe.gov/steo

 
At Thursday, May 15, 2008 at 10:23:00 PM PDT, Blogger JD said...

I don't believe speculation has been the driving, but rather contributing cause to rising prices.

I agree with this, and have said so a few times. Much of the price rise since 1998 has been driven by strong demand and stagnant supply.

That said, financial components like dollar flight, "dot commodity" mania and speculation are a large part of the price. I still haven't seen any evidence that the runup from $100 to $120 in April of this year was due to a rapid drop in supply, or surge in demand. In fact, all the evidence available at the moment suggests exactly the opposite: stable supply and slackening demand.

 
At Friday, May 16, 2008 at 1:31:00 AM PDT, Anonymous Babun said...

That said, financial components like dollar flight, "dot commodity" mania and speculation are a large part of the price. I still haven't seen any evidence that the runup from $100 to $120 in April of this year was due to a rapid drop in supply, or surge in demand. In fact, all the evidence available at the moment suggests exactly the opposite: stable supply and slackening demand.

From the article i linked to :

The oil supply system continues to operate at near capacity and remains vulnerable to both actual and perceived supply disruptions. The supply and demand balance for the remainder of the year is tighter than in last month’s Outlook. World oil markets are particularly tight during the first half of 2008, with year-over-year growth in world oil consumption outstripping growth in non-Organization of the Petroleum Exporting Countries (OPEC) production by over 1 million bbl/d. The combination of rising global demand, fairly normal seasonal inventory patterns, slow gains in non-OPEC supply, and low levels of available surplus production capacity is providing firm support for prices.

The flow of investment money into commodities markets and ongoing geopolitical concerns in a number of producing countries, including Nigeria, Iraq, and Venezuela, have contributed to crude oil price volatility. OPEC appears satisfied with current market conditions, given recent statements by some members, suggesting that there are no plans to review OPEC production until the next scheduled meeting on September 9th. Also weighing on market expectations is Saudi oil minister Naimi’s public statement suggesting no need to add production capacity beyond the announced plan to expand Saudi oil production capacity to 12.5 million bbl/d by 2009.


You seem to think that in order for these prices to be supported by fundamentals fundamentals it would require an even tighter market situation. I argue that the market has been and still is tight, and as long as demand or supply doesn't give - higher prices are mostly supported by fundamentals. I don't believe the price has ever followed any smooth curve of demand and supply. It's a bumpy ride, but the basic situation of supply and demand is what matters most. I'd see further tightening of supply/demand as a reason for the prices to rise even more.

In order for the price to come down we need to see some loosening, and I think we will see that relatively soon, mostly because demand will fall.

 
At Friday, May 16, 2008 at 2:32:00 AM PDT, Anonymous Luis Dias said...

Demand destruction, here we go.

 
At Friday, May 16, 2008 at 8:06:00 AM PDT, Anonymous econogeek said...

Two points.

1. Babun: If you don't like what people are saying here, go back to the oil drum or LATOC or one of the other doomer sites.

2. Interesting article on CNN Money

http://money.cnn.com/2008/05/16/news/
economy/oil_speculator/index.htm?
postversion=2008051607

Some interesting points:

- Many of the traditional oil speculators agree that large fund movement from large investors that don't usually invest in oil as a major cause of the most recent part of this run-up.

- CalPers, California State Pension's view of why big funds are in the market (Hint: it's the Fed).

"We are following for us what is a prudent strategy to maximize investment returns, said Clark McKinley, a spokesman for CalPERS, California's pension fund for workers in the public sector. "Obviously, there's some unintended consequences."

- Deutsche Banks woefully inadequate commodity analysis to deflect attention away from oil market speculation:

Deutsche Bank took a somewhat novel approach in investigating the role of speculative money.

"Analysts there looked at the price of commodities that do not trade in a futures market and came to basically the same conclusion.

"The rally in non-exchange traded commodity prices since the end of 2002 has been similar if not greater in magnitude," the bank's analysts wrote in a research note. "We believe this refutes the claim that speculators have been the primary drivers of rising commodity prices during this cycle."" (CNN Money)

Well...if your input prices to produce your commodities double, triple, quadruple, etc. (e.g. oil, coal, nat gas), then you need to raise the prices of your commodity to compensate. That's called input price inflation. Their argument only proves that there are knock-on effects from oil to other commodities. Nice try guys.

In other positive news, the Enron loophole was finally closed by Congress yesterday.

How did the investment banking community respond? Let's up the target price and throw more irrationality into the market. (Goldman Sachs report that oil will average $140+ the rest of the year was the main driver of the market today).

 
At Friday, May 16, 2008 at 9:47:00 AM PDT, Anonymous Luis Dias said...

"1. Babun: If you don't like what people are saying here, go back to the oil drum or LATOC or one of the other doomer sites. "

Quoting Jon Stewart:

"And who tha FUCK are YOU?"

Seriously, we're having a civil discussion. Why this "my way or the highway" posture, within a blog that's not even yours? Chill out.

"Well...if your input prices to produce your commodities double, triple, quadruple, etc. (e.g. oil, coal, nat gas), then you need to raise the prices of your commodity to compensate. That's called input price inflation. Their argument only proves that there are knock-on effects from oil to other commodities. Nice try guys."

Well, but as POD has also being saying, peak oil does affect overall prices, but not by much. Check out JD's posts about this subject. So that refutes your refutation of the banks refutation. Ding!

Peace out. I think it difficult for us to reach a "consensus" here.

 
At Friday, May 16, 2008 at 12:32:00 PM PDT, Anonymous Babun said...

1. Babun: If you don't like what people are saying here, go back to the oil drum or LATOC or one of the other doomer sites.

I'm sorry if you don't like your views being disputed. That's called life.

 
At Sunday, May 18, 2008 at 5:42:00 PM PDT, Anonymous Anonymous said...

About the speculation issue.
Speculators never go against the trend, the trend supported by the fundamentals.
And there doesn't have to be an actual supply drop for the prices to go up; in an environement where production is plateauing and demand is strong, you know that the chances of falling short (due to whatever above ground event) are increasing every month because spare capacity is shrinking and risks are growing.
Speculation adds maybe $10-20 but that was also the case when it was $70

 
At Sunday, May 18, 2008 at 9:26:00 PM PDT, Anonymous Juan said...

gqwhhmdiLucario; "I'd still like to know what an ordinary citizen can do about speculation."
---

Perhaps trivial but give your local representatives a call and demand modification of the Commodity Futures Modernization Act (CFMA) which effectively exempts index funds from normal position limits as these funds operate through the conduit of swaps dealers.

Additionally, I would mention lack of regulation of Over The Counter markets and 'the Enron loophole' since the recent Farm Bill attachment intended to deal with this merely pretends to and is much weaker than the earlier Senate version.

 
At Sunday, May 18, 2008 at 9:36:00 PM PDT, Anonymous juan said...

Frank Veneroso's 2007 presentation to the World Bank is worth a read and can be downloaded
here:
http://www.venerosoassociates.net/index.html

 
At Sunday, May 18, 2008 at 11:59:00 PM PDT, Anonymous juan said...

econogeek.

I'm not sure whether you were quoting CNN or what but - assuming you were speaking about the Farm Bill attachment's (supposed) closing of 'the Enron loophole', well, not much closing took place.

As the Business Spectator noted:

"...lawmakers working on a US farm law last week agreed on less restrictive proposal that would close the Enron Loophole by giving the CFTC limited authority to regulate certain trades on ICE on a case-by-case basis.

Officials at ICE do not oppose this narrower language because it would apply to contracts on a case-by-case basis and codifies much of the reporting procedures already in place.
"

'Limited authority' and 'case-by-case' means 'lawmakers' caved to industry pressures hence the applause from the Futures Industry Association (FIA) and the International Swaps and Derivatives
Association (ISDA) as they and others successfully prevented the earlier and stronger Senate version while at same time obtaining a codification of already in place procedures.

 
At Monday, May 19, 2008 at 12:30:00 AM PDT, Anonymous juan said...

Finally, even though Goldman's Murti is now predicting a 2H08 average of $141/bl

A majority of oil and gas executives surveyed by the KPMG consulting firm expect oil prices to fall below $100/barrel by the end of this year because fundamentals do not support prices at current levels, according to Bill Kimble, executive director of KPMG's Global Energy Initiative.
[...]
"Markets don't support this price," said Kimble, agreeing with the survey. "Demand will adjust this summer and we'll see prices coming back down."
(Platts, 13 May, 2008)

But, according to the API, U.S. demand began adjusting downwards last year.

And, on the stocks side, Tokyo Electric Power Company has been topping up with a 163.1% year on year increase in crude oil for April. (Platts, 19 May, 2008)

 
At Monday, May 19, 2008 at 1:01:00 AM PDT, Anonymous Luis Dias said...

"Markets don't support this price,"

Damn. I've been hearing that phrase since oil hit the 50s!

 
At Wednesday, May 21, 2008 at 9:01:00 AM PDT, Anonymous aram said...

LD-

"Markets don't support this price,"

Damn. I've been hearing that phrase since oil hit the 50s!


There's a reason you've been hearing that argument- because it's true.

It's the reason that the guesses for drops in price forecasts by Bloomberg have been mostly for drops in price- they're looking at fundamentals, not the doomer predictions, not the works of "green peakers" like the guy from Goldman who all but says to you that he's making his prediction because it's what he wants to see, and not the rantings of Boone Pickens who hasn't correctly predicted anything of consequence in recent history (he's only been wrong about supply and demand numbers for the past three years and lost 14,000,000.00 shorting in February).

It's the reason the EIA keeps revising their demand numbers down- they're looking at the fundamentals.

It's the reason that OPEC cut production in the first place and has not "officially" brought it back up- they see the fundamentals, not flawed predictions of supply and demand pulled out of the assholes of people who either have a big time long position in oil or who are looking to "green" up the world and save us from the global warming lie.

Actually, a price of around $70.00 per barrel is probably the ideal target. It's elevated historically, but justified.

You pass $70.00 and the fundamentals are out the window.

 
At Saturday, May 24, 2008 at 3:46:00 AM PDT, Anonymous Anonymous said...

This is a good example, really a great one, of the "Jevon's Paradox." We use the oil vastly more efficiently today, therefore it does more work for us. This lowers the implicit price, making economic growth cheaper. In other words, when people drove 5% efficient internal combustion engines in the `50s, they were getting a fifth the work from their oil as we do today with 25% efficient ICEs. In that sense, the work the oil does for our economy is much cheaper, since economic growth has been from more efficiency and oil, not more oil exclusively.

 
At Monday, November 10, 2008 at 7:05:00 PM PST, Anonymous Anonymous said...

"DISCLAIMER FOR IDIOTS: This site officially accepts that oil is finite, and will peak someday."

But of course, that "someday" can never be in YOUR lifetime because it would inconvenience your current lifestyle. Are you also going to tell us that the U.S. oil peak in 1970 is still pending?

 

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