free html hit counter Peak Oil Debunked: 366. FUTURES PRICES DETERMINE PHYSICAL OIL PRICES

Wednesday, July 02, 2008

366. FUTURES PRICES DETERMINE PHYSICAL OIL PRICES

A number of high-profile economists, like Paul Krugman, have recently been making the argument that trading in oil futures can't really influence the price of physical oil because it doesn't remove any oil from the market. Here's a classic statement of this argument by Jon Birger, a staff writer from Fortune:
Here's a suggestion: The next time a Congressional committee wants to hold a hearing on how "speculators" are driving up oil prices, each committee member should first be required to demonstrate - preferably in their opening remarks - a basic understanding of the mechanics of futures trading.

Even better, they should be required to explain in detail how it is that investors who never take delivery of a single barrel of crude - and thus never remove a drop of oil from the open market - are causing record high oil prices.Source
I will now provide that explanation, and in the process show that both Krugman and Birger are grossly misinformed about the way physical crude is actually priced in the global oil market.

Most crude oil is traded based on long-term contracts, and the prices in those contracts are set by a system known as "formula pricing". In this system, the price of delivered crude is set by adding a premium to, or subtracting a discount from, certain benchmark or marker crudes, namely: West Texas Intermediate (WTI), Brent and Dubai-Oman. Generally, WTI is used as the benchmark for oil sold to North America, Brent for oil sold to Europe and Africa, and Dubai-Oman for Gulf crude sold in the Asia-Pacific market (Source1, Source2).

Originally, the benchmark prices were spot prices, but over time problems began to arise due to the depletion of the benchmark crudes:
In the early stages of the current oil pricing system which emerged in the period 1986-88, crude oil was priced off the spot market quotations of these benchmarks (namely dated Brent, spot WTI and Dubai) as assessed by oil reporting agencies such as Platts and Petroleum Argus. In the last few years [i.e. since the early 2000s] however, there have been some serious doubts about the ability of the spot physical market to generate a price that reflects accurately the margin of the physical barrel of oil. One of the main problems is that very little actual trading occurs in these crudes which makes the process of price discovery very difficult.Source
The rapidly declining size of spot markets for the benchmark crudes led to chronic problems with speculators cornering those markets with a technique called the "squeeze":
Low volumes of crude oil available for spot trading make price discovery problematic and increase the vulnerability of markets to squeezes, distorting prices and undermining market confidence. A squeeze refers to a situation in which a trader goes long in a forward market by an amount that exceeds the actual physical cargoes that can be loaded during that month. If successful, the squeezer will claim delivery from sellers who are short and will obtain cash settlement involving a premium. It is true that all markets are prone to squeezes and in the last few years there have been occasions on which the Brent market was subject to successful squeezes. But it is also true that it is easier to squeeze thinner markets.Source
The Brent spot market in particular was plagued by frequent squeezes in the early 2000s, and this is well attested to by numerous sources here, here(pdf), here, here, and here etc.

Here's an interesting tidbit on the subject:
Dated Brent, which acts as a price marker for many international grades, is physical crude traded on an informal market, rather than a regulated futures exchange. This lack of regulation poses problems for oil producers and consumers seeking a fair price, said Robert Mabro, director of the Oxford Institute for Energy Studies and a leading Brent expert.

"There are regular squeezes in the Brent market," Mabro said. "In the trading community, people are fed up. This general view that you can do whatever you like in an informal market is okay, as long as you regulate the market a bit. But if it's a free-for-all, you're back to the cowboy age."

A typical Brent squeeze involves a company quietly building a strong position in short-term swaps called contracts for difference, or CFD's, for a differential not reflected in current prices. The company then buys enough cargoes in the dated Brent market to drive the physical crude price higher, which boosts the CFD differential, Mabro said.

The company may lose money on the physical side, but it's more than compensated from profits on its offsetting paper position in the short-term swaps market, Mabro said.

"The whole trick is to collect more money in CFDs than you lose on the physical squeeze," Mabro said. "People seem to do it in turn. It depends on who's smart enough to move in a way that nobody notices until it happens."Source
To deal with this problem, many key oil exporters shifted away from the spot market, and began to use futures prices as the benchmark in formula pricing:
The declining liquidity of the physical base of the reference crude oil and the narrowness of the spot market have caused many oil-exporting and oil-consuming countries to look for an alternative market to derive the price of the reference crude. The alternative was found in the futures market. When formula pricing was first used in the mid-1980s, the WTI and Brent futures contracts were in their infancy. Since then, the futures market has grown to become not only a market that allows producers and refiners to hedge their risks and speculators to take positions, but is also at the heart of the current oil-pricing regime. Thus, instead of using dated Brent as the basis of pricing crude exports to Europe, several major oil-producing countries such as Saudi Arabia, Kuwait and Iran rely on the IPE Brent Weighted Average (BWAVE).11 The shift to the futures market has been justified by a number of factors. Unlike the spot market, the futures market is highly liquid which makes it less vulnerable to distortions. Another reason is that a futures price is determined by actual transactions in the futures exchange and not on the basis of assessed prices by oil reporting agencies. Furthermore, the timely availability of futures prices, which are continuously updated and disseminated to the public, enhances price transparency.

[11] The BWAVE is the weighted average of all futures price quotations that arise for a given contract of the futures exchange (IPE) during a trading day. The weights are the shares of the relevant volume of transactions on that day. Specifically, this change places the futures market, which is a market for financial contracts, at the heart of the current pricing system.Source(pdf)
As you can see, Krugman and Birger are profoundly confused about the way the international oil markets actually function. Futures aren't a paper bet on the direction of prices determined by some independent process. Futures themselves *determine* the price of most physical oil traded today. The futures price (+ or - the differential) literally *is* the price of oil.

-----

Further information on this topic is available in The Oil in the 21st Century: Issues, Challenges and Opportunities, Ch. 3 "Origins and Evolution of the Current International Oil Pricing System" (P. 41-100) and in Petroleum Refining: Separation Processes, Ch. 3 "International Oil Markets" (P. 77-114)
by JD

108 Comments:

At Thursday, July 3, 2008 at 12:44:00 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.

I will be continuing with the moderated format for the time being to keep the spammers and idiots under control. I'll do my best to pass through legit comments as quickly as I can. Sorry for the inconvenience.
JD

 
At Thursday, July 3, 2008 at 3:30:00 AM PDT, Blogger Barba Rija said...

I'm even more confused than before, JD. I can safely say that I'm completely dumbfounded at all this mess of oil price markets. If the future markets is what you say and what other people you quote seem to say, then it should be a consistent solid market, no?

You seem to contradict yourself up there, but I admit that the discussion has evolved to a state that I can barely understand it.

Very dangerous stuff, really. The question then is between the fact of it being totally speculation without any contact with supply-demand realities, or not.

Let's pray it is connected with reality. Because if it is not, then it is bound to collapse even in the face of peak oil, which would be the worst of outcomes if one believes that a change of lifestyles is the only answer to it.

Imagine. If it pops, who will again state that oil price increases is definitely due to physical limits and be believed? Too many peter's tales will eventually alienate everybody to have a coherent and efficient response when the wolf finally comes. Because it will, it's a matter of time. So, I'd rather have it now and deal with it, than risk having the people being fooled once again to only claim "fool me once..." and then buy themselves SUVs again.

 
At Thursday, July 3, 2008 at 3:34:00 AM PDT, Anonymous Marc said...

http://www.nytimes.com/2008/07/02/business/02oil.html?ref=todayspaper


Honestly. I am absolutely speechless. How much longer can this go on?

 
At Thursday, July 3, 2008 at 4:18:00 AM PDT, Blogger ScubaSteve said...

I always wondered about this. I figured the futures prices had to adjust to the spot price (which was driven by actual oil) as the contract expired. If they didn't, a arbitrage opportunity would exist that would correct the imbalance.

But given this explanation, I guess not. I guess the "spot" prices adjusts to the futures price.

The downside to this approach is that supply/demand fundamentals don't necessarily determine the price.

This makes me more convinced that the situation we are in now is more capital driven than supply/demand fundamentals.

 
At Thursday, July 3, 2008 at 5:02:00 AM PDT, Anonymous Anonymous said...

I agree with Barba in many ways.

I wouldn't mind if prices stayed up like this, it would buy us more time...But I do know that speculation is a major player I've got a quote here.

"In early June, a prediction by Morgan Stanley analyst Ole Slorer that oil prices could reach $150 by the July 4 weekend caused the Nymex contract to jump nearly $11 in a single day."

Just this sentence tells me it's not supply related...but rather it is speculators....I just hope that Oil doesn't ever melt down to $60 a barrel because we need to get off of Oil as much as we can in as short amount of time as possible.

-Justin.

 
At Thursday, July 3, 2008 at 5:57:00 AM PDT, Anonymous Stuck in Shizuoka said...

Marc Said;

" Honestly. I am absolutely speechless. How much longer can this go on?"

What about the article renders you speechless? I am surprised that even the NYT (as opposed to USA Today, Fox News and their ilk) won't temper their "outlook" on forthcoming supplies with the declines rates, especially those just reported on by the IEA. At this point, it's not as if they can get away with "those in the 'so-called Peak Oil theory' camp" nonesense anymore. If the gains made by fields that are due to come online are rendered negative by decline rates and the usual geopolitic factors and lack of investment/shutting out of oil majors (e.g., Russia, Venezuala), it doesn't give the reader much understanding of what the future will hold.

I agree with JD on more than a few points as I've shown before, but future prices still seem to be connected to supply/demand issues that are looking less and less rosy. With the apparently gloomy new IEA report coming out in..what...November (after the election oddly enough...), and much of the report has been leaked anyway, will there not be yet another spike, this time to that $200 Bl marker.

At what point does demand destruction by choice transmogrify into economic destruction. Yes--switching to scooter, driving less and carpooling are answers by all means. But when futures prices mean the closure of medium and small businesses and massive layoffs from larger corporations,REGARDLESS of whether they are connected to fundamentals, are we not into the territory of the doomerish predictions? I suppose I'm repeating what Barba rija just said above....

And, Justin, why wouldn't that quote suggest that another rise in prices isn't supply/demand related? Nigeria (premier Bonny Light btw) is down, Saudi is sending out heavy sour crude, and Canterell is absolutely tumbling. The news is never good so......

Stuck

 
At Thursday, July 3, 2008 at 8:10:00 AM PDT, Blogger Mark said...

JD,

I actually have to agree with you about this. But do you understand that this is a *good thing*? If oil is going to get more scarce in the near future, we really really really need a mechanism for driving the current price up today, so that we start motivating conservation and efficiency improvements _now_, rather than later.

 
At Thursday, July 3, 2008 at 9:01:00 AM PDT, Anonymous CT said...

The main point about futures isn't that they have nothing to do with the price of physical oil. That's wrong, of course.

Rather, it is that the supply of futures contracts is unlimited.

There can't be a bubble unless the oil sellers are hesitating.

Why don't they sell more aggressively?

Because the fundamentals & sentiment have banished them to the sidelines. Not for lack of futures contracts.

So, it's in principle impossible to blame speculators alone. Somebody is not selling oil futures.

BTW on June 25, the EIA in their International Energy Outlook called a peak in conventional oil production in 2010. (look at their high price case)

 
At Thursday, July 3, 2008 at 9:37:00 AM PDT, Anonymous benny "peak demand" cole said...

Another best post of all time.
I think speculators are playing a huge role in this market. We must at least EXPECT that OPEC nations, acting though cloaks and financial quislings, will try to manipulate prices. It is in their interest to get the highest prices possible.
But, the artifically high price is having an impact on the real world -- demand is waning. At some point, we end up with a glut.

 
At Thursday, July 3, 2008 at 10:49:00 AM PDT, Anonymous Anonymous said...

I cannot believe this guy said that. I learned how to trade futures for profit. Once I understood the process, I did not actually trade because I have moral issues with it. Where does the profit on the trade actually come from? One of two places - either some other sap that bet the wrong way or an inflated end price or a combination of both. To me, this is nothing more than gambling. I don't believe in making a buck at someone else's expense any more than I believe in adding a "guy who doesn't want to work" surcharge to every barrel of oil or bushel of corn. It is one thing to "loan money" (buy stock) in a company that uses the capital to expand operations. It's another to bet on the direction a market is going to go. Horse racing at its finest. And we're all paying for it. Whatever happened to the American work ethic?

Liz

 
At Thursday, July 3, 2008 at 11:04:00 AM PDT, Anonymous John said...

Your post has made me more convinced that this current run-up in prices has more to do with speculation then supply/demand issues. Which is unfortunate, because eventually this bubble will pop, and I'm one of the people who believes we need $4 gas to ween us off of oil, before it's too late.

 
At Thursday, July 3, 2008 at 11:40:00 AM PDT, Blogger regeya said...

That NYT article IS a little dumbfounding, because it seems nowadays that the IEA is a bit disconnected from reality. Their own reports show a massive increase in production this year...yet they say that production is declining. They say that speculation plays no part in futures prices...yet when people talk about supply-and-demand reasons, they point to IEA and EIA projections.

And when that fails, they'll point you toward the U.S. Federal Reserve, toward China, toward any damn thing that will distract you from the fact that the U.S. has the reputation for having the poorest-regulated futures market out there. Why would people run to Dubai if the U.S. started cracking down? They're stricter than us! Why wouldn't they be?

http://www.khaleejtimes.com/DisplayArticle.asp?xfile=data/business/2008/June/business_June657.xml§ion=business

 
At Thursday, July 3, 2008 at 12:02:00 PM PDT, Anonymous Anonymous said...

Because it was a prediction and Oil jumped $11 in one day because of a prediction. Now of course Morgan Stanley will parade around how they were right, even though it appears as though they fell a little short...

Did you ever consider that perhaps if Ole Slorer never made that prediction that Oil would be $11 cheaper than right now?

How is that you know what grade Saudi Arabia is sending out...Do you have something to back that up? Same thing for Nigeria.

Do you now think perhaps it too late for us to mitigate? Do you know subscribe to doom? I am curious, your post sounds awefully gloomy...

Where can I find any of these..leaked pieces of the IEA report, or where are the articles that talk about it?


Thanks
-Justin

 
At Thursday, July 3, 2008 at 1:34:00 PM PDT, Anonymous Anonymous said...

Sorry for my uneducation, but I imagine the case the offer overcomes the demand. At the end of the day, in the last hours, someseller should see clearly he will not be able to sell its oil at the setted price, and should start to sell it al lower price if he wants to sell it, no other ways. How speculators can change this basic mechanism is still unknown to me. And when some is not clear (and nobody really understand it) it means that some is wrong. Please change my mind, with simple clear words, otherwise people will remain convinced that the problem is demand/offer

 
At Thursday, July 3, 2008 at 4:13:00 PM PDT, Anonymous jetstream said...

Yes, I believe the price is severely inflated by the futures markets. When I was involved in the industry in the 1980s, the oil futures market was driven by the physical market and could truly be used for it's principal purpose (then) of hedging. Sadly, few people outside the industry understand the mechanisms. They do not understand the complexities of arbitrage trading between exchanges and between commodities. They do not understand the cash settlement processes on expiring months (on ICE), or switch trading (differentials between futures months). They do not understand the involvement of commodity index trading, which has nothing to do with the physical commodity.

Remember that the credit crunch was caused by CDOs (Collateralised Debt Obligations) and SIVs (Securitised Investment Vehicles) whereby dubious mortgages were amalgamated, sold on, dressed up, amalgamated and sold on again, to the extent that many premier financial institutions thought they were buying A+ rated debt, whereas they were actually buying worthless junk. The complexity of financial instruments is such that many organisations hire mathematicians that learn trading, rather than the other way round! The complexity of 21st century financial instruments lend themselves to precisely the situations we now see.

At over $145bbl, oil is clearly extremely over-priced and does not reflect true demand and supply. I would guess that the true market value is around $60 - $70. The bubble will burst (my guess is in September, but it could be earlier or later). When it does burst though, expect a few investors to, using market jargon, "catch a cold" on the way down, for it will, in my opinion nose-dive quite sharply as everyone tries to offload their positions, while others will rush in to "go short" and take advantage of the fall.

To those who say that the current price level is "good" in order to wean ourselves off oil, they are, in my opinion, sadly naive. If we really want to (and we do!) develop new technologies, specifically in the field of electrical storage, we absolutely need a vibrant economy to pay for the R&D to achieve that goal. Hoping that alternative energy supplies and technologies will somehow rise from the ashes of a toasted global economy is, well, just plain wrong.

 
At Thursday, July 3, 2008 at 4:20:00 PM PDT, Anonymous benny "peak demand" cole said...

From a website named france24, in late June...

"Khelil, Algeria’s energy minister since 1999, insisted that there was no current need for OPEC to increase its oil production. “OPEC’s statute asks the organisation to satisfy the needs of the international oil market. We have always done that… now, it’s very difficult to find a market… I put my oil on the market, but I don’t find any buyers.”"

The is the second reference to a country that cannot find buyers for its oil. Iran is filling up oil tankers.

Is something fishy going on?

 
At Thursday, July 3, 2008 at 5:19:00 PM PDT, Blogger pgtl100 said...

"We must at least EXPECT that OPEC nations, acting though cloaks and financial quislings, will try to manipulate prices."

I think OPEC is probably not the main cause. Otherwise why didn't they do this years. OPEC has to sell physical shipments and if there are no buyers because of demand destruction then speculation ultimately hurts them.

This probably has more to do with the financial sector (Goldman Sachs, Morgan Stanley etc...) trying to find an investment to avoid inflation and recoup losses from the housing sector.(Well Goldman didn't really invest in sub-prime mortgages but they maybe the main culprit in speculation.)

 
At Thursday, July 3, 2008 at 6:44:00 PM PDT, Anonymous mike S. said...

From yahoo's World news section;

http://news.yahoo.com/s/ap/20080702/ap_on_re_eu/oil_congress;_ylt=Am0YrFGXFweI7uoU7RGWQ7kPLBIF

>>>>
Urging the world to brace for a "really big reshuffle" in energy expectations, Christophe de Margerie, CEO of French energy giant Total SA, said he expected oil production to plateau in just 12 years at 94 million barrels a day — less then 10 million barrels more than available now. And he warned the forecast was optimistic.

>>>>

Conventional crude is holding within 1% of 2005 levels, (unless the Saudi's really do increase production) so this 85 to 94 million barrels/day increase includes the "unconventional" oil too.

No wonder the EIA is changing their tune. From Pollyanna of Positivity to Nattering Nabob of Negativism...

 
At Thursday, July 3, 2008 at 7:05:00 PM PDT, Anonymous Shiner said...

I'm pretty sure rampant oil speculation was one of the predicted consequences of peak oil. To try to use speculation to disprove peak is silly when most people who claim to know predicted it. All of the predictions seem to be coming true. Just because the timeline is off a little does not change much from where I stand.

 
At Thursday, July 3, 2008 at 7:14:00 PM PDT, Anonymous benny "peak demand" cole said...

How is going to 94 mbd, and then hitting a plateau, a negative outlook?
Given that world demand may already be in retreat, going to that level of output would likely result in gluts.
At more than $100 a barrel, likely we will see annual decreases in demand, not increases. But production could hit 94 mbd, up from 86mbd now?
To get to the level of demand, prices will have to come down, down, down, down.....

 
At Thursday, July 3, 2008 at 8:18:00 PM PDT, Anonymous philip said...

Anyone now where there is some "heavy lifting" type reading on oil trading and oil futures? I am prepared to do several days of reading, since I think the down side of this may be the trade that makes my second half of 2008.

 
At Thursday, July 3, 2008 at 8:59:00 PM PDT, Anonymous enplaned said...

How does this address Krugman's fundamental objection?

My understanding of that objection is that if we agree that the price of oil has somehow been driven above the underlying supply-demand equilibrium, then more oil should be supplied to the market than is demanded, meaning that oil should be piling up somewhere.

Yet apparently inventories aren't increasing.

Everything in the post is very interesting, but I don't see that it addresses Krugman's objection.

 
At Thursday, July 3, 2008 at 10:50:00 PM PDT, Anonymous Anonymous said...

Interesting tidbit, but you aren't clear on the mechanism at work. How does this (admittedly) odd pricing mechanism enable speculators to drive prices up regardless of the underlying supply/demand dynamics?

 
At Friday, July 4, 2008 at 2:39:00 AM PDT, Blogger Barba Rija said...

To those who say that the current price level is "good" in order to wean ourselves off oil, they are, in my opinion, sadly naive. If we really want to (and we do!) develop new technologies, specifically in the field of electrical storage, we absolutely need a vibrant economy to pay for the R&D to achieve that goal.

And I'm the naive one? You idiot, without the economic incentive, no one will R&D the alternatives! Therefore, if conventional energy pops its price, we should expect another decade of stagnant evolution of renewable energy, something that I sincerely don't want to happen. The 90s were already as bad as they were in that regard (though I am not arguing how good they were for the rest of the economy, I'm not stupid)

 
At Friday, July 4, 2008 at 2:57:00 AM PDT, Anonymous marc said...

I unfortunately have to agree with Shiner. Oil is like 146 dollars a barrell now. Something like a dozen airlines went out of business this year and Wall Street just keeps cracking under the pressure.

Honestly, I don't see how there's any debate at this point. Demand destruction and the alleged 'huge' increases in stockpiles ain't doin a damn thing. It pretty much points to one thing.

 
At Friday, July 4, 2008 at 3:39:00 AM PDT, Anonymous jetstream said...

barba rija said: "And I'm the naive one? You idiot, without the economic incentive, no one will R&D the alternatives! Therefore, if conventional energy pops its price, we should expect another decade of stagnant evolution of renewable energy, something that I sincerely don't want to happen. The 90s were already as bad as they were in that regard (though I am not arguing how good they were for the rest of the economy, I'm not stupid)"

I don't appreciate being called an idiot for expressing my opinion. Still, such a comment says more about you than it does about me.

When I say people who think these oil price levels are a good thing are naive, I mean they are being too simplistic, in my opinion, for a very complex issue.

At $60 -$70bbl, oil would not be exactly cheap and most would expect upward price creep in real terms over the coming decades. Thus, as energy bills (for gasoline and home electricity etc.) rise, so the market for more efficient items, whether cars or cookers, will become ever larger and industry will produce what the consumers' demand. As for renewables, the demand for solar power over the last few years (which began before the current oil price bubble) has prompted a great deal of R&D with the result that nanotechnology film panels are just a year or two away from production. In time, these alternatives will become cheaper and thus more accessible to the general public, something which they are not at present. In the current climate, the vast majority of householders are simply not in a position to lay out thousands upfront for solar heating, for example, even though they may recoup the cost in energy savings over two or three years.

The current unsustainable price of oil has yet to reap its full effect. The commercial world reacts relatively slowly to such price hikes, but that does not hide the potential long-term damage. Companies are currently absorbing the increased costs, but sooner or later the lack of profitability will cause a rash of corporate liquidations. Unless the price is reduced sometime soon, unemployment will shoot up and inflation will go through the roof. In such a recession, or even depression, you can wave goodbye to a lot of the the R&D and you can even also wave goodbye to the market for solar panels and windmills. In such a climate, people will be even less able to lay out cash on such capital products, while the government will become shorter on tax revenue and cut down on subsidies for renewals.

The economic incentive for R&D will only be there in a vibrant economy which can safely accommodate a GRADUALLY increasing oil price, in real terms.

 
At Friday, July 4, 2008 at 3:47:00 AM PDT, Anonymous stuck in shizuoka said...

OK JD, here's some more ammo for you...and I pulled out one of the big guns as well--Dr. Vaclav Smil, Professor Emeritus, Energy Studies, University of Manitoba.

A short but succinct article, worth the read

http://home.cc.umanitoba.ca
/~vsmil/pdf_pubs
/TCS%20Daily-Peak%20Performance
.pdf

Daughter crying, not time to make a a shorter link.

Stuck

 
At Friday, July 4, 2008 at 3:49:00 AM PDT, Anonymous Brother Cadfan said...

Ive checked out the EIA report and can't find any reference to peaks in production. Apologies if im wrong though.

Although high oil prices will spur evolution of newer technologies we need to make the following caveats:

1. A price which is too high could well trigger some doomerish world war or mass unrest. We've already seen how authoritarians are loving the idea of peak oil. Tin-foil hat alert.
2. It could also cause mass economic problems. With substantial economic disruption, as a scientist I will be less able to conduct my work.
3. High oil prices make very nasty alternatives such as G/CTL look very nice indeed. Notice how purely synthetic SASOL jet fuel has recently been approved for use? The peak oilers can whinge on about EROEI or whatever all they like. It will happen. this underground coal gasification looks promising and may get over the problem of mining the stuff at a suitable rate. How bad will this be for the environment?

 
At Friday, July 4, 2008 at 5:16:00 AM PDT, Blogger Barba Rija said...

JD, you should end this moderation crap. I know it is a bugger all those morons invading your blog, but it is easier for us to simply minimize their comments and stick to the discussion at hand rather than waiting full days to see the discussion unfold as if it is a planet-to-planet light-speed discussion.

 
At Friday, July 4, 2008 at 5:30:00 AM PDT, Blogger Barba Rija said...

jetstream,

Sorry for being an idiot by calling you an idiot. I have a bad temper.

I do think however that current prices are the main driving forces of renewables, and that your claim:

"The current unsustainable price of oil has yet to reap its full effect."

is quite subjective and perhaps wrong. Who is to say which price is sustainable or not? My only fear is that it is unconnected with the demand/supply issue. The real economic problems in the USA didn't come from peak oil, they were born with the housing bubble, and if there are consequences in the economies, they will be worse for those companies highly dependent on cheap oil, and less on those which invest on renewable energy, or efficiency, etc. The judge is still on it.

The economic incentive for R&D will only be there in a vibrant economy which can safely accommodate a GRADUALLY increasing oil price, in real terms.

If the economy understands this issue as a BAU problem, it will create that incentive, as it was already. If it understands that this issue is really a big problem mankind faces, the incentive will be ten times higher. It was in the WW2 that the biggest technological achievements were made in those decades.

People now will invest on energy alternatives, rather than on exuberant excentricities or tourism deals or whatever not-that-relevant economies out there.

 
At Friday, July 4, 2008 at 5:40:00 AM PDT, Blogger al fin said...

Fascinating, JD. When Saudi Arabia, Kuwait, Iran, etc. started using the Brent Weighted Average (BWAVE) in November 99 to establish pricing of crude exports to Europe, they started a tidal wave that is nearing its crest.

Why do Krugman and his colleagues try so hard to deny what is clearly true--futures prices determine real oil prices?

 
At Friday, July 4, 2008 at 6:15:00 AM PDT, Blogger JD said...

JD, you should end this moderation crap.

barba, I really want to. Unfortunately it's gone beyond the minor nuisance stage. The people I'm filtering out are doing things like posting dozens of 800 line long comments that say nothing but "JD is a fucking tosser" etc.

 
At Friday, July 4, 2008 at 6:33:00 AM PDT, Anonymous Anonymous said...

shiner: I'm pretty sure rampant oil speculation was one of the predicted consequences of peak oil.

Whether or not 'peak oil' predicted speculation doesn't mean that because we have speculation, peak oil is upon us.

Google up "affirming the consequent".

 
At Friday, July 4, 2008 at 6:59:00 AM PDT, Anonymous Anonymous said...

How does this (admittedly) odd pricing mechanism enable speculators to drive prices up regardless of the underlying supply/demand dynamics?

Overwhelmingly, a future contract is not oil.

Actual oil traded on these exchanges is in the very low single digit percent range.

Everything else is pure speculation, essentially by definition.

Now, the contract price is decided by piles of money screaming at each other in a small room. (Almost literally: google "nymex open outcry"). In the near and medium terms, it doesn't really matter how they resolve the bickering. Pistols at 10 paces on the trading floor, bubble gum balloon making contest, who has the stinkiest armpit ... who knows?

My personal guess is "who has the scariest story to tell". I can picture the trading floor, room lights off, the traders setting up little camp fires from the scraps of papers they scribble on, they gather around them and each one taking turns telling ghost stories...

Fear!
Uncertainty!
Doubt!

Whatever it takes to get the other guy to buy the contract.

Don't forget! This is not oil they are selling: they are contracts.

This is the basic disconnect from physical reality. Naturally, it can't go on forever -- people eventually get terror fatigue. But while it does, the price can be set almost at will: +$11 because someone started to scream in the dark?

Why the hell not?

 
At Friday, July 4, 2008 at 7:45:00 AM PDT, Anonymous Anonymous said...

JD, question. How does the decline in Brent sea production influence pricing? Is the decline in the underlying asset tied to price increases?

John Robb

 
At Friday, July 4, 2008 at 7:59:00 AM PDT, Anonymous ndallasj said...

JD--If you are reading comments, I'd appreciate your response to this post.
If more contracts for delivery are being tied to futures prices it seems as if that practice reduces the desire for suppliers to actually hedge future deliveries by selling contracts. If this is true, then there would be less sellers in the futures market which, ceteris parabus, would lead to higher futures prices, which is precisely what the suppliers want!
Am I missing something???

 
At Friday, July 4, 2008 at 8:12:00 AM PDT, Anonymous Shiner said...

Hey anon "affirming the consequent". guy. I notice you left out out the part of my post about " All of the predictions seem to be coming true". Nice try at a pretty obscure straw argument though I wont be taking the bait.

 
At Friday, July 4, 2008 at 9:26:00 AM PDT, Anonymous Anonymous said...

Nice try JD but...the price of oil is what Saudi Arabia says the price of oil is.

Remember Bush's visit to Saudi? Right before the crack up boom?

Saudi - Bush - Iran - Iraqi Oil - US Election = The Price Of Oil

Simple, old fashioned monoply.

 
At Friday, July 4, 2008 at 10:58:00 AM PDT, Anonymous benny "peak demand" cole said...

JD-
That is interesting, your need to enable moderation to avoid many ad hominem attacks.
Several months back, I asked TOD if they were a front for speculators, and used the phrase "financial quislings" to describe hedge funds, private equity funds, commodity funds and others who run huge sums of OPEC money to play the NYMEX crude future market. If Internet postings could kill, I would be dead, and I was banned from TOD.
It seems whenever someone raises the possibility that oil-producers are manipulating oil prices, especially through the futures market, all hell breaks loose.
Why? It seems obvious to me that oil producers would at least try. Are we going to throw the King of Saudi Arabia in prison?
I remember when some said it was just impossible for Enron to fix California electricity markets. They did.
Believe me, billions of dollars at stake. If there is a way to rig the system, it will be used. End of story.
Even if you are nearly convinced that it is impossible to rig the system, you stance should still be, "But we must be ever-vigilant, and always keep an eye out to see if it is happening."

 
At Friday, July 4, 2008 at 11:03:00 AM PDT, Anonymous Anonymous said...

shiner: All the predictions seem to be coming true.

Which predictions? How specific are they? I can't comment on what you don't say.

Nice try at a pretty obscure straw argument though I wont be taking the bait.

You made the argument, not me. I only noted its weakness. Why not try and make a better one instead of giving up?

 
At Friday, July 4, 2008 at 11:46:00 AM PDT, Anonymous otherjustin said...

Both Enplanned and ndallasJ have made great points. JD, or someone who is on board with the ideas of this post should respond, because I certainly don't have an answer.

Enplanned seems to hit it on the head; Krguman would probably be in agreement with JD about speculators causing all of this IF the stockpiles were there to prove that it all is a distortion in the market. Instead, stocks have risen on evidence that stockpiles in the US are at their lowest since January: http://www.bloomberg.com/apps/news?pid=20601087&sid=aBSJB8CFTcl0&refer=home

It is this key piece of missing evidence that causes me concern. You can argue that the market is disconnected from supply and demand, but if that is the case, then supply\demand should in turn respond to said distortion, and that doesn't seem to be happening. Any further explanation would be appreciated.

 
At Friday, July 4, 2008 at 12:25:00 PM PDT, Anonymous Ryan said...

Futures contracts are inherently flawed as pricing mechanisms.

There is no penalty for rolling over your contract from one month to the next. The investment banks have been taking losses on the physical side and then making opposite bets on the non-physical side that more than compensate for them.

As for the comment on the affirming the consequent. Just because I predicted three hundred consequences of one thing happening that did happen does not mean that the thing actually happened.

Many people during the dotcom boom predicted that we were in a new era and as part of it, internet companies were all going to be worth more. Yah...lots of things that were predicted by this group, but the main predictive event did not occur. This has happened many many many times in history.

 
At Friday, July 4, 2008 at 12:41:00 PM PDT, Blogger gaius marius said...

There can't be a bubble unless the oil sellers are hesitating. Why don't they sell more aggressively? Because the fundamentals & sentiment have banished them to the sidelines. Not for lack of futures contracts.

i think (with civilized respect for the commenter, of course) that this does not discount the primary market mechanism -- which is behavioral, not mechanical. what is suppressing the supply of sellers is fear of higher prices -- manias are characterized by a near-universal expectation of higher prices which becomes self-manifesting. that fear can easily overpower any 'rational' calculus which would compel them to write calls.

as was said long ago and so well, the market can stay irrational longer than you can stay solvent. potential sellers are just getting out of the way at this point, reason be damned. when the worm turns, though, expect them to emerge from their bunkers in a tsunami.

 
At Friday, July 4, 2008 at 1:03:00 PM PDT, Anonymous mordred said...

Shiner, there have been so many "predictions" about what will happen, some of them are bound to come true. Colin Campbell has been calling peak for years. One day he will get it right. That doesnt mean he "predicted" it. Shall i list all the "predictions" that havent come true?

 
At Friday, July 4, 2008 at 5:04:00 PM PDT, Anonymous Brother Cadfan said...

Benny Cole:

Have they not banned quite a number of contra-TODers from their blessed website? Didn't they ban the really quite innocuous and useful Freddy Hutter? Its quite amusing to consult the Hutter website. To see how Stuart Staniford's predictions are going. Which is wrong. But I have immense respect for Prof Staniford for having the guts to reveal himself openly unlike 'Prof Goose' or 'Gail the Actuary'. But I do wish, as an academic, that he would subject himself to peer-review (and I don;t mean other TODers).

Its taking me some time to get my head around JD's post. And I am a physicist. Which goes to show that they don't know everything!

 
At Saturday, July 5, 2008 at 12:22:00 AM PDT, Anonymous Anonymous said...

Interesting article.

So, the gist of the article is and I try to shorten/paraphrase here:

1. Most oil sold on long contracts

2. Price differential added/subtracted to long contract is based on a market X. 'X' may vary depending on contract/crude type

3. Market X can either be a tight/low volume physical oil trading market or a market that is more futures oriented

4. By squeezing the physical market (low volume) and/or adjusting the futures curves, one can adjust the spot price considerable, and in turn the long contract price differential higher

5. Any potential losses from this action in market X can be covered and exceeded through derivatives (CFD, etc)

6. Some of these market X's (like in the case of Brent) are unregulated and opaque - we can't even see who has positions

7. In short, it's a money making machine with a guaranteed net positive arbitrage (my reading, not your claim)?

The fact that several AOPEC members are saying the markets are well supplied, would appear to at least not contradict with the above model.

There is supposedly enough crude, but as prices are set on the low volume markets / futures markets, speculators do not have to stock a lot of oil that they end up with due to the price leveraging scheme above.

However, as this causes the price to rise, there may be oil for sale, but no buyers, because of the high price.

Now, this is all plausible to my non-expert reading.

However two things stick out for me and bring up questions that need to be answered:

A) AOPEC members have several times stated they are NOT happy with the current oil price. This makes sense as if oil is too expensive it can cause a severe demand response and even long term demand destruction. This in turn can lead to a case where oil consumption crashes AND AOPEC members lose their only source of income. Once this happened in the 80's even the biggest sellers, like KSA, went into severe debt spiral, which took them 10 years to dig themselves out of. They swore to NEVER let the same mistake happen again. They do NOT want demand destruction - they want a price that the world can tolerate. However, even the cut demand of US (as reported by EIA/IEA/Goldman) is already showing that demand is responding, maybe even destructing. This is on top of the financial uncertainty and clear risk of worldwide recession. Clearly the price is too high for the world, and thus to AOPEC members.

B) Further, it's economically calculated that the optimal pricing strategy for oil exporters is to get high enough price for their good to make profit, but low enough for the users so that price does NOT encourage development of alternatives (see: Liski et al, on this). This balance needs to be maintained until the countries are in their respective total oil production peaks. Until then, the countries need to vehemently deny even the possibility of peaking. Otherwise, importers might start moving into the alternatives too early, thus reducing the actual income (volume * price) gained from the remaining oil production.

Now, let's assume points A & B above are correct (and I believe they are - at least to the extend that JD's model is), then my questions are:

- Why don't the producers bring the price level down to where they want it? Remember: it's too high for them and too high for the world, risking their future profits). They could easily do this through pricing mechanism changes.

- Why does not IEA/EIA believe that speculation shows a major part in the current run up of price (past year)? Even the June's MTOMR from IEA clearly claimed that yes, there's been some short temporal periods of correlation between futures volumes and price run ups, but no evidence to support of major speculation. Do their 20+ respective teams not understand the futures market or major crude spot price formation mechanisms?

Further, it would be very nice to see some actual measurements, numerical data from the market that at least correlates with the model presented here (i.e. initial points 1-7).

Otherwise it remains an argument with very little proof, which is maddening in the current situation of uncertainty.

The counterargument side can draw up data/figures about:

- Non-OPEC production shrinking
- OPEC productions plateauing
- OPEC exports shrinking
- inventories and commercial stocks at below historical averages
- rising price differential between low and high API crudes (i.e. markets are supplied with 'wrong' type of crude)
- historically low spare capacity in supply
- non-OECD demand rising rapidly - in fact much faster than the OECD demand is shrinking (i.e. demand outpacing supply)

... all of which would point to the case that the current run up is a classic supply & demand fundamental issue, not one of speculation. The data for all of the above can easily be gathered from public data sources and presentations from EIA, IEA, BP, Goldman, CERA, Lehman and Deutsche Bank.

BTW, all of this does not require any assumptions of peaking. Just thinking about the supply and demand now and where each appears to be trending on the short term.

Please continue writing these articles and filling in the holes, if you can.

-- vasra

 
At Saturday, July 5, 2008 at 1:45:00 AM PDT, Blogger bc said...

Futures themselves *determine* the price of most physical oil traded today

That's BS. Producers are not compelled to use formula pricing, they set whatever price they want.

The Saudis are keen to blame speculators. They say they have oil to sell - but they won't cut the price. Why the hell not? It's because they believe that the spot markets set the "fair price", and they are not willing to sell short. This contradicts their PR, they say one thing, but do another.

To be honest JD, I really thought you were smarter than this.

 
At Saturday, July 5, 2008 at 2:52:00 AM PDT, Blogger JD said...

How does this address Krugman's fundamental objection?

My understanding of that objection is that if we agree that the price of oil has somehow been driven above the underlying supply-demand equilibrium, then more oil should be supplied to the market than is demanded, meaning that oil should be piling up somewhere.

Yet apparently inventories aren't increasing.


enplaned,
In this post, I've shown that a key foundation of Krugman's analysis is grossly in error due to his ignorance of the facts of the petroleum industry. In fact, given the facts I have shown, this post of his is truly comical in its combination of ignorance and arrogance. At this point, we need to seriously entertain the possibility that the ivory tower analysis of Krugman et al. does not adequately capture the realities on the ground in the petroleum industry.

Personally, I'm not convinced that speculatively-driven high prices should lead to higher inventories. Why should refiners and other inventory holders load up on something that is costly to store, when a) there is no significant contango, b) numerous signs indicate that supply is stable and demand is collapsing, and c) prices are at totally unprecedented levels? It goes against common sense.

That seems to be the view from people in the industry:

The same government report showed that an increase in refining activity to 89.2% of capacity continued to build gasoline supplies as demand declined just prior the July 4 US Independence holiday, which usually is a peak demand period. The DOE's Energy Information Administration reported commercial US crude inventories fell 2 million bbl to 299.8 million bbl in the week ended June 27, the lowest level since January and exceeding the Wall Street consensus of a 400,000 bbl draw. Gasoline stocks escalated by 2.1 million bbl to 210.9 million bbl in the same week. Distillate fuel inventories grew by 1.3 million bbl to 120.7 million bbl (OGJ Online, July 2, 2008).

Refining margins are under pressure and are being sustained "only by heating oil" with the crack for the August contract for reformulated blend stock for oxygenate blending (RBOB) trading below $5/bbl, said Olivier Jakob at Petromatrix, Zug, Switzerland. "With processing margins low and even worse in the back months of 2008, refineries are not volunteering to build up crude stocks at $140/bbl while they have to plan for lower operating rates and are keeping instead to a minimum of crude inventory," he said.

Link

There is growing evidence that consumers are rejecting new oil. I presented a number of data points in 362. MORE SURPLUS OIL PROBLEMS and there are more points here.

So when you say "inventories aren't increasing", what *exactly* do you mean by that? The lack of inventory builds in the OECD (which is about the only place with half-decent inventory statistics) can be explained by the fact that nobody wants the extra oil at this time, for the reasons I gave above. So the "inventory" ends up on the producer side where nobody is monitoring it. And the party continues because "inventories" aren't building up -- thus "proving" that speculators aren't involved.

 
At Saturday, July 5, 2008 at 3:20:00 AM PDT, Blogger JD said...

They say they have oil to sell - but they won't cut the price.

"Kuwait and Iran on Wednesday joined Saudi Arabia in slashing the price of their heavy crude exports to the deepest discounts in at least nine years, seeming to support OPEC's view that the world has enough of its supplies."Source

Your comments are generally based on zero homework, and completely at odds with the facts.

 
At Saturday, July 5, 2008 at 3:22:00 AM PDT, Blogger JD said...

Trackback for this article:
Naked Capitalism

 
At Saturday, July 5, 2008 at 8:35:00 AM PDT, Anonymous Vox P said...

JD,
check this link about driving habbits,
http://blogs.wsj.com/economics/2008/07/03/4-gasoline-higher-tolls-and-less-driving/

 
At Saturday, July 5, 2008 at 9:08:00 AM PDT, Blogger pgtl100 said...

Hey JD

You might to challenge some the comments on naked capitalism. Some of them have quite good challenges.

 
At Saturday, July 5, 2008 at 9:17:00 AM PDT, Anonymous otherjustin said...

JD, thanks for responding to the "stockpiling" questions. If, as you argue, the excess supply of oil is out of the ground, awaiting shipments in OPEC's ports, then I would say -

1. This is immensely underreported, but I wonder if that is just because of journalistic incompetence, or the fact that the amount of oil sitting around there is not sufficient to explain the "missing stockpiles." Without more info and analysis from on this particular point, I am not fully convinced.

2. You write: "Why should refiners and other inventory holders load up on something that is costly to store, when a) there is no significant contango, b) numerous signs indicate that supply is stable and demand is collapsing, and c) prices are at totally unprecedented levels? It goes against common sense."

I don't think it goes against common sense in January 08', if you were a speculator then and expected prices to be where they are now. Over the past few months, stockpiling physical oil seems like it would be the MOST logical thing to do. If market insiders could look at the way oil futures are traded and draw the same conclusions that you did, why would they effectively say, "oil will cost 50% more in 6 months, but, meh, lets not buy low and sell high."

3.If indeed your analysis is true, it seems like the oil market has developed a mind of its own, since these "speculative" price increases are not being intentionally caused, no hoarding is happening, and thus no one will benefit from the situation. Would you call that accurate?

If so, would you then argue that if futures trading in oil were banned\restricted\monitored, that prices would fall?

 
At Saturday, July 5, 2008 at 5:21:00 PM PDT, Anonymous benny "peak demand" cole said...

“We’ve asked all the international oil companies that buy from us if they want more oil,” Mr. Nasser said. “But we can’t find customers.”
The above is quote in today's NYT, from an Aramco officials. They are in the middle of developing another field, and adding 1.2 mbd to the market.
Okay, so we have Iranians storing oil in tankers, the Algerian oil minister saying he has no buyers, and Aramco saying they "can't find customers."
And oil hitting all-time new highs.
Yes, yes, some of the oil is heavy and sour, and the prices on the NYMEX are for sweet nd light.
Still, this isn't adding up.
Even skeptics have to wonder if the NYMEX is being manipulated.

 
At Saturday, July 5, 2008 at 5:38:00 PM PDT, Blogger JD said...

"The most surprising e-mail came from Chris Cook, a former director of the London Petroleum Exchange—now ICE Futures Europe. Cook wrote: "I am convinced there has been manipulation of the Brent Complex [the term that defines North Sea Brent crude prices] by ICE members for the last 10 years at least. I think it is quite likely that the Brent forward price is being kept artificially high—which does require deep pockets and accounts for the continuing barrage of Goldman [Sachs] forecasts and much of the other oil market hype that passes for news.""
Link

 
At Saturday, July 5, 2008 at 7:33:00 PM PDT, Anonymous Juan said...

mpvJustin 12:02;

You asked 'what grades the Saudis are sending out...same for Nigeria'.

Here's something from Energy Intelligence which gives an idea of the different grades and their particular production rates for most exporting nations. My recollection is that condensates are adjusted out, so totals may not jive with those supplied by IEA or EIA [+ they are from last year].

The Crude Oils and their Key Characteristics
http://www.piwpubs.com/DocumentDetail.asp?document_id=200017

This might permit some rough estimation of different nations' export profiles but fact remains that prices are a greater/lesser differential to financially determined benchmarks.

I may be wrong but some seem to still believe that futures contracts must result in physical delivery, no matter that Nymex says this takes place with less than 1% of contracts and IMF says less than 5%.

 
At Saturday, July 5, 2008 at 7:59:00 PM PDT, Anonymous Juan said...

enplaned,

Krugman fails to take production management into account which is also to say that he does not recognize storage to be both above and below ground. In a question/statement to me last month, James Hamilton considered that, by holding production off market, such management would justify high price. Arguments like that fail to understand the modern oil price regime; fail to explain what has been a multi-year rise, and do so in the attempt to apply flawed theories of competitive markets and efficient pricing. That is, there is what I would call ingrained bias.

 
At Saturday, July 5, 2008 at 8:20:00 PM PDT, Anonymous Juan said...

Barba Rija,

Here's the deal. New investment responds to changes in the average rate of profit, which almost always declines during recessions. To hope that the same thing which exacerbates recession, high energy prices, will provoke large scale investment into alternatives is also to hope that one of capitalism's basic relationships will somehow be repealled. The potential for such investment rises when there is a rising, not declining, rate of profit and when owners of capital believe that rise will be durable.
There are objective limits which have become more difficult to surpass with this system's aging.

 
At Saturday, July 5, 2008 at 9:01:00 PM PDT, Anonymous Juan said...

vasra,

respectfully, this is not "JD's model" but a particular price regime which developed out of the mid-1980s collapse of OPEC administered pricing. That is, it is not a matter of one and another person's opinion but of actual and verifiable history which has been experienced, written about, but generally ignored by mainstream media, pundits, politicians and their constituents.

'why don't the producers bring the price down?'

simply because they do not control the price regime which has become centered in financial markets. it is no longer a matter of an oligopoly of international oilcos or a producers cartel.

the iea was formed as a consumers club and essentially remains one; its observations are not devoid of political bias.

 
At Saturday, July 5, 2008 at 9:21:00 PM PDT, Anonymous Juan said...

otherjustin,

as the wall st journal outlined last year, the oil storage trade depends greatly on the shape of the forward curve and can be conducted without physical oil changing hands.

insofar as 'what can be done?', a starting point might be application of laws already on the books.
Steven Briese goes into a little detail in a recent article here:
http://commitmentsoftraders.org/?p=39#more-39

 
At Saturday, July 5, 2008 at 9:23:00 PM PDT, Anonymous econogeek said...

http://www.simmonsco-intl.com/files/012798.pdf

I love this article. Matt Simmons basically proves right here that speculation drives the price of oil.

I know JD has a post about this earlier on his blog, but I figured now would be a good time to let this nugget resurface.

 
At Saturday, July 5, 2008 at 9:53:00 PM PDT, Anonymous Shiner said...

I would say the main predictions were.
War in the middle east.
Financial instutions failing.
An increase in world hunger.
Real estate devaluations (expecially in the US burbs).
High fuel prices and rampant speculation.
All of these things are taking place and as I stated above timelines mean nothing to me.
Until the dollar is dumped by the world the true effects will not be felt.
If the US dollar is not ruined I will be shocked.
Unfortunatly your peak oil is a non event theories are not holding up. The real world is feeling the pinch thats for sure. As for all the other predictions I believe most are for after the "crash" which has only just begun.

 
At Sunday, July 6, 2008 at 1:44:00 AM PDT, Anonymous Anonymous said...

Shiner

I don't think a "crash" is going to happen and frankly you don't know either.
Also I doubt "Peak Oil" is here...yet.

So because some predictions have come true does not mean that we'll "crash" You have no idea what will happen, like the rest of us.


I also noticed that some are saying we MAY be on our way to a slow recovery as a lot of the smaller stocks have been going up and usually this means that recovery ha begun...Only time will tell.

-Justin

 
At Sunday, July 6, 2008 at 2:09:00 AM PDT, Blogger JD said...

Shiner, most of your "predictions" describe chronic conditions which have been ongoing for the last 50 years. Major problems and crises are routine events, and have always been with us.

Also, the message of this blog is not that peak oil is a non-event. Why would I describe solutions to a non-event? The message of this blog is that peak oil is a serious but manageable technical problem which will drive human civilization to evolve to the next level, not collapse. As I've said, biology teaches us that increasing scarcity of a certain resource does not cause collapse, it causes succession. These are also good summaries of my views: #59 and #136. I don't mind you arguing with my position, but please make sure that you know what it is first.

 
At Sunday, July 6, 2008 at 2:26:00 AM PDT, Blogger JD said...

An informative trackback from Prof. Jayanth R. Varma's Financial Markets Blog here.

 
At Sunday, July 6, 2008 at 7:35:00 AM PDT, Anonymous Shiner said...

JD, I guess its my fault for not being crystal clear expecially knowing how you guys love to throw the straw.
The predictions were for the USA and they are not "my predictions" but common to most peak oil studies. I realize the world has been screwed up along time but again all the predictions seem to be coming true for the USA which has not been screwed up for that long.
Also JD not long ago you posted somewhere something to the effect that peak oil will be mitigated I.E.: a "non event". (Y2K was a non event because it was mitigated)You even stated that its set in stone as far as your concerned

Do you ever get tired of trying to twist the arguments with semantics? The non event argument you put forth in this comment section is pure semantics (I don't beleve for a minute you thought my non event comment meant I took it you believe peak oil won't happen)and has no buisness in polite debate. It is intellectually dishonest.
The argument that most of "my predictions" have been happening for 50 years is semantics because we both know I was posting about the indusrialized states. Which have not been falling down like they seem to be now for 50 yrs. How about a little intellectual honesty?

Justin I believe another prediction was fluctuations in the markets as investors scramble to find safe places for their $$$
That said I hope you are right and a recovery is coming.

 
At Sunday, July 6, 2008 at 8:24:00 AM PDT, Anonymous Shiner said...

One more thing
Justin from where I sit everything is pointing to a crash. You are correct that I don't "know" what will happen but I think I am a pretty good judge of the conditions I see around me. I also think I posted good reasons for my beliefs.
I tried to stop thinking and reading about peak oil. No more peak oil site's Just go back to the old days of reading 10 or 15 newspapers from around the world every day. Guess what? The world seems to have caught up with peak oil. It seems the only real news (not who Brad Pitt is fucking or some stupid grown men and a ball) is about energy. Saying I don't "know" what will happen does not refute my statement and does nothing constructive at all. It is not an argument. I guess what i'm trying to say to all the people who constantly try to use the "you don't know" psuedo argument, try to refute the logic of an argument instead. The "you don't know" argument really just makes you seem dumb. No offense intended.

I may not know a everything about oil (I learn more every day)but I graded way to many debate's in my classes not to recognise bullshit straw as a cover for, in most cases, a lack of even an attempt at critical thinking. Lets elevate the debate people.

I spent many years of my life looking at both sides of an argument objectivly. I was always sure there was no topic that could not be argued successfully either way. The effects of peak oil topic has thrown a monkey wrench in my theory. Many people who are really not that sharp have poked big holes in most of your posts JD.

 
At Sunday, July 6, 2008 at 11:22:00 AM PDT, Anonymous akihockey said...

Off-topic, but relevant to the doomer attitude. From Marshall Berman's All That Is Solid Melts Into Air, 1982: "The gathering energy crisis of the 1970's, with all it's ecological and technological, economic and political dimensions, generated waves of disenchantment, bitterness and perplexity, sometimes extending to panic and hysterical despair; inspired healthy and trenchant cultural self-scrutiny, which, however, often degenerated into morbid self-laceration and self-hate."

 
At Sunday, July 6, 2008 at 3:06:00 PM PDT, Anonymous Brother Cadfan said...

Ok can I have a go at one doomer argument?

Lets look at airlines.

The high fuel prices are doing to US based airlines what should have happened a long time ago. Going bust. I don't mean to offend any of our American readers. But US airlines are just c*ap and no amount of peak oil can emoliate that!

As for house prices, I nearly bought a house in Florida this time last year when house prices were collapsing. Sorry, not related to peak oil.

 
At Sunday, July 6, 2008 at 3:17:00 PM PDT, Anonymous benny "peak demand" cole said...

On manipulatin, here is what Simmons said back in 1998 (thanks to an earlier poster for this gem:

Matthew R. Simmons
January 27, 1998


Is Another “MG” At Work?
(Or, What is Driving Down the Price of Oil?)


Four years ago, crude oil prices plunged over a period of six months. Simmons & Company was
among the first to identify the unwinding of the German company, Metallgesellschaft’s (MG)
extensive oil contracts as the likely reason. We also suggested at the time that oil might surprise
all the bears, who were predicting prices would either stay in a $12 to $14/bbl band forever or
perhaps even fall to lower levels. We felt that, if we were right about the MG situation, it was a
short-term phenomenon and oil prices would recover because the underlying fundamentals for
oil were still “strong as horse radish.” (See “Is MG the Culprit?”, February 1994).

It is now widely accepted that MG’s forced liquidation of their crude positions caused oil prices
to fall from its $18/bbl base to under $14/bbl in the course of a few months. Moreover, once
MG’s position was unwound, crude bounced back to $18 once more."

--30--

If Simmons is correct, a single financial house, liquidating its financial positions, caused the physical price of oil to fall 22 percent.

If Simmons is correct, we may soon see the "Mother of all Oil Price Collapses" coming.

Those of you who say the physical price of oil cannot be influenced by a financial house must at least consider this alternative perspective.

 
At Sunday, July 6, 2008 at 6:01:00 PM PDT, Anonymous Anonymous said...

Shiner

Why does it make "dumb" for stating the truth?

If you ask me it makes people look dumb when they say things like
"this is just the beginning of the crash"

Being all into peak oil surely you have seen Matt Simmons' slide show, no?
Even Simmons' thinks we can make it! Sure I know he generally always been a pessimist and all..But in his slide show he makes it clear that we CAN mitigate, there is still time yet.

And while he may think we're at peak, I highly doubt that we are. Colin Campbell has declared paek...again! You say timelines don't matter to you, maybe so but it gets old, and frankly people stop listening when you've cried wolf for 20 years!
With the amount of mega projects and the projected capaity coming underway one can see that peak more likely than not isn't here...Though it will be soon enough.
You may be seeing all of these "predictions" coming true..that's bound to happen, somewhere, someone who makes many, many predictions is bound to get some right.
The main issue for our recession in the U.S. is due to housing and credit. How do these two things have anything to do with Oil? Before we even hit recession Oil was still a ways under $100.
And the dollar does have quite a bit to do with the price. I've seen some days where when the dollar gaind a little strentgh Oil drops $3-5.

I am no expert, but I refuse to believe in a "crash" I refuse to give up!
If even ol' Matt Simmons' thinks we can make it...that should tell you something.
Campbell thinks we can make it too.
One field being developed here in the U.S. is the Bakken. WHile it isn't our savior it will help, and as I hear it's going on rather nicely. Where there is a will there is a way.

So maybe I am not some "debate expert" like you're. I just say what is on my mind. Take it how you will.
One fact that we know of is that none of us here really know if it is speculation or supply/demand. If we knew, really knew what the cause was we wouldn't be arguing over it now.
I believe that speculation is playing a major role in this along with the dollar.
Perhaps who ever takes office as president can bring our dollar back up by pulling out of Iraq for one. And try to pull us out of debt, it's not impossible it can be done. This will certainly add value I'm sure.
Who knows...We live in uncertain times...But I think every generation lives in uncertain times..

-Justin

 
At Sunday, July 6, 2008 at 7:13:00 PM PDT, Blogger JD said...

Shiner: Justin from where I sit everything is pointing to a crash.

Yah, well you be sure to give us a heads up when it actually does crash. I'll run a full retraction and apology. Until then, you're just blowing hot air.

Your position is that peak oil will cause civilization to collapse. My position is that peak oil is a manageable problem, which will cause a massive transformation, but civilization will muddle through, and continue to advance and prosper.

You can talk yourself blue in the face, and vouch for your own credibility until the cows come home, but debate isn't going to prove you right. Only the outcome can do that.

I disagree with Hirsch about the near-term severity of peak oil, but we are in complete agreement about the survival of civilization and the prosperity of the world in 2050. As he says:
"Looking ahead to 2050, things are going to be much better than they are today." Watch the video.

TPTB have only just woken up to this issue, and the mitigation effort is in its infancy. But you can be sure of one thing: policy and planning will be in the hands of grown-ups like Hirsch, not defeatist losers like yourself.

 
At Sunday, July 6, 2008 at 8:37:00 PM PDT, Blogger Ari said...

shiner,

The examples you cite as predictions of what follows peak oil are, at best, not that interesting.

Plenty of those things can happen independently of rising oil costs-- and have. It's entirely possible that they are independent of "the peak." The housing market crash, for example, is almost certainly at least largely independent of the cost of energy. The bubble was growing long before energy went up to its current levels. If anything, one could make an argument that it's partly the housing market crash (and the retraction of credit), that has led to commodities prices skyrocketing.

After all, people invest in commodities during bear markets, and this is a grizzly (to say the least.)

As anyone who does econometrics will tell you (I know enough to be dangerous), it's entirely possible to have correlated variables that do not demonstrate causation. One must always have both theory and a well-developed model (and data set!) to really demonstrate causation properly. Otherwise, you might just be trying to peg shark attacks on ice cream sales, so to speak.

That is not to say that energy prices don't play a part in all of the things listed, but they are by no means the only, or necessarily even the most important, factor in any one of them (and certainly not all of them.)

As for war in the Middle East: really? Let's just list a few wars in the past few decades or so that have occurred there:

Iran-Iraq War
Lebanese Civil War
Yom Kippur War
Six Days War
First Gulf War
Libia-Egypt
Jordan-Syria
Iraq-Kuwait (yes, even before Desert Storm)

Do we count the Intifadas as well?

War in the Middle East is not new, and it's almost always impossible to explain why any particular conflict occurs. Religion, geopolitics, power struggles, and many other factors have been thrown out for almost all of the conflicts, and I'm wont to believe that all factors play a role. Simple explanations for complex international relations problems are usually lacking. Look at the broad range of opinions that the "best" international relations scholars have historically had for ME conflicts, and try to find two that concur on anything.

marc,

I could have predicted that airlines would go out of business even if you didn't add in "peak oil." Airlines are, even at the best of times, hardly profitable businesses. Factoring in the fact that competition tends to reduce economic rent (profits) to little or nothing, and any right shift in variable costs or left shift demand will spell doom for some in the market-- this is not really much more than simple micro econ.

Does this mean that doom is upon us? Hardly. It just means that some uncompetitive (read: many airlines) airlines went bust. You can partly blame deregulation for that. I was paying like $300 a flight for a 1 or so hour flight in Japan even back in 2003. Even today in the US I expect to pay around $160 for the same flight.

The difference? Japan's airline industry has historically been much more regulated (despite recent deregulations), and airlines have duopoly power-- this means they do not compete and can achieve economic rents. The consumer always pays more, but the industry is more stable. Plus, we tend to find that the industry goes through good and bad cycles anyway: I could have predicted a "bad" cycle around this time independently of "the peak."

 
At Sunday, July 6, 2008 at 10:01:00 PM PDT, Blogger JD said...

Interesting article on China for doomcopians invested in the idea of infinite, ever-growing demand.

Of course I loved this bit:
"Those who claim that derivatives (crude futures) cannot drive spot prices have overlooked a key point. The Saudis and others use the IPE Brent Weighted Average of futures contracts as their pricing mechanism. Futures now set the spot price."

Yup, the cat is now officially out of the big and filtering into the MSM.

 
At Sunday, July 6, 2008 at 10:18:00 PM PDT, Blogger JD said...

Another data point on Chris Cook:

"In addition, I have an e-mail from Chris Cook, a former director of the London Petroleum Exchange (now ICE Futures Europe), who wrote to say, "If ICE is not actually a conspiracy to defraud the public, then it's close….""
Link

 
At Sunday, July 6, 2008 at 10:31:00 PM PDT, Anonymous Shiner said...

Justin, Much better.
I poked you a little and the "you don't know" argument went away. It was replaced with one full of ideas for your beliefs. I bet you would have made an interesting student.

In a debate anything other than backing up your ideas or refuting someone else's is a waste of time.
This is why it makes you look dumb.
This whole comments section is a debate.

As far as 20 years of predictions I first read about peak oil over 20 years ago in a Omni magazine. I remeber thinking how much sense it made and that I might want to prepare a little bit.
Then I promptly forgot for a long time. The prediction in the Omni was between 2005-10. I have seen a few predictions claiming 2001 but they were obivously wrong. Kinda makes it hard to be wrong for 20 years dontcha think. Anyway anyone who got worried about peak oil a few years ago jumping the gun.

As far as the mortgage crises is concerned it is impossible to know why the PTB got so loose with the credit. All tracks seem to lead to shady behavior by our leaders. I have learned over the years to be taken seriously you have to ignore stuff like that even if it is true.

Are the new mega projects going to do more than pick up slack for older fields that are in decline?

I believe high oil prices effect the economy greatly. If you spend more on gas that is less you spend elsewhere. I spend around $50 more on gas a month. A large portion of that wealth probably leaves the country That is $50 less being spent on things that keep the wealth created here. $50 times how many US drivers?

I have stated in an earlier post that my peak oil fears are political and economic. I don't believe in the end of civilization and never ever claimed I did JD. What are we gonna do forgot all our knowledge overnight?

To call someone a loser because they gave you constructive critism is childish.

I am anything but defeatest I have kids to take care of. No time for that. I am starting a small alternative energy manufacturing plant as we speak. Its in my garage but I will make and install custom wind turbines and small hydro turbines. Hopefully the banks will hold and materials I can't make myself will be available.

This comment section is a debate JD and of course we wont know the outcome till it shakes out.

"You can talk yourself blue in the face, and vouch for your own credibility until the cows come home, but debate isn't going to prove you right. Only the outcome can do that"

That is a souped up version of the psuedo "you don't know" non argument.

Oh well at least Justin was smart enough to get it.

JD come to the USA and tell 10 people you think we are gonna have a depression. 8 of them will instantly tell you we already are having one. None of them will have a clue about peak oil. People are hurting.

Ari this is already a long post so I will be short

I hope you are right about all the predictions but it sure seems like a helluva coincidence to me. The prediction was that the USA would be at war in the Mid-East now. Care to go into more detail about the airlines. Most were profitable last year.

 
At Monday, July 7, 2008 at 1:05:00 AM PDT, Anonymous Anonymous said...

I live in Texas. Maybe we're not "feeling" the effects of the economy it is funny how you mention that 8 people out of 10 claim we're in a depression. That just isn't so. Last quater we grew, not very much at all, but we still grew all the same. These folks must not know what a "depression" really is. My grandfather told me stories. He was in his teens during the depression before going off to war.
While many are hurting they're not hurting nearly as bad as those during the great depression.
Anyways th point here is in my hometown. Things are going on a usual. The parking lots of the Wal-Marts, Old Navys, shopping malls are jammed packed nearly every day, like usual.

Allow me to clarify, Shiner.
Pretty much every year for 20 years Colin Campbell has been claiming that Peak Oil is here! Yet we continously break production records. We did again this year...But for how long can it all keep up? As for those Mega projects. I believe that they will add enough excess until probably about 2015, then we'll begin to run into some problems...However I will say that you've got so many different people and organizations going every which way with peak oil that it does tend to get confusing. Though these experts, most of them tend to agree that Peak oil can be managed. They also present a strong argument that the decline will be quite slow.


It's funny how you mention that as quite a few folks have been getting themselves arrested because of housing fraud or something along those lines.....Good. They need to be.

Yes, Oil does have a negitive impact on the economy, what I think though is that Oil is so high because it has more to do with the devaluation of the U.S. dollar than anything else. As I've pointed out I've seen Oil jump $11 dollars in one day just because of the dollar! I've also seen Oil fall $9 in two days because the dollar gained!
I feel that when we recover form this recession and that when our dollar gains...That Oil will go down quite a bit.
But as I've said in my last post...No one really knows what is causing Oil to go so high! So we sit and argue about the reason behind it. People tend to cast the dollar to the side, but I don't. I see the dollar playing a vital role here.

War in the middle east has been going on for hundreds of years...There has never really been any peace ove there.

And while folks like Matt Savinar argue that the Iraq war was in prepartion for 25 years so that we could take thier Oil!?!
Here is where that fails...Dessert Storm. When we rolled into Iraq the first time, we could have stayed, not only this but we would have had a much easier time "taking" the oil then too.

Anyways, Shiner. I do hope that your "feelings" are wrong for our sakes and your children. Hopefully something will happen soonish so that we can all kind of lay our heads down and breath in relief.
My life is just now beginning. I've a home, wife, and child as well.
So yes I do not want to see them suffer, to be honest I don't want anyone to suffer anywhere, but because of the fact that there are people in this world who do suffer it reminds me just how vulnerable we are to becoming like those in Africa. Why should we be "special" Just because we live in America? I ask myself that often. But I really do hope that this problem can be dealt with in a fashion that does not cause too much pain for people.

-Justin

 
At Monday, July 7, 2008 at 6:53:00 AM PDT, Anonymous Anonymous said...

THat's so lovely dovey Justin, not wanting people to suffer - the reality is that massive numbers of people suffer everyday just so that the first world can satisfy its rapacious appetite for STUFF. The american lifestyle is not evem remotely close to sustainable.

JD you are problably right that we will prosper into the future but that "we" are going to probably be only about 5% of the population. So I really hope you are a multimillionaire without debts so that you can be part of the glorious future.

I honestly can't see the resources being available to keep a middle class afloat for too much longer in the lifestyle they are accustomed too.

TED

 
At Monday, July 7, 2008 at 7:38:00 AM PDT, Blogger Ari said...

shiner,

As far as 20 years of predictions I first read about peak oil over 20 years ago in a Omni magazine. I remeber thinking how much sense it made and that I might want to prepare a little bit.
Then I promptly forgot for a long time. The prediction in the Omni was between 2005-10. I have seen a few predictions claiming 2001 but they were obivously wrong. Kinda makes it hard to be wrong for 20 years dontcha think. Anyway anyone who got worried about peak oil a few years ago jumping the gun.


Actually, it's not that hard for them to be wrong for 20 years if they framed the issue incorrectly (read: focused only on light sweet crude.) Yes, it's true that light sweet crude is potentially peaking. It's not true, however, that all sources of liquid fuel have, or will peak. If Omni included the mitigatory supplies, then I'd be more impressed. If not, then it seems that we have a while to go before Omni was on the mark.

As far as the mortgage crises is concerned it is impossible to know why the PTB got so loose with the credit. All tracks seem to lead to shady behavior by our leaders. I have learned over the years to be taken seriously you have to ignore stuff like that even if it is true.

How about simple incompetence? It seems to me that the people in charge of regulating the credit markets just didn't have the cajones to call it in time. Not every crisis is the result of smoke-filled rooms and cigar chomping politicos planning ways to screw over the little guy.

I believe high oil prices effect the economy greatly. If you spend more on gas that is less you spend elsewhere. I spend around $50 more on gas a month. A large portion of that wealth probably leaves the country That is $50 less being spent on things that keep the wealth created here. $50 times how many US drivers?

This is a very small view of oil.

Spending $50 on oil doesn't mean that the money "vanishes." Some of it does go to OPEC, but a lot of it just gets transferred to Exxon, BP, Shell, etc. These companies don't just stick the money into CDs and wait for a shitty return: they invest. Many of these companies are investing in the "next stage." BP gave something like $500m to Berkeley to research biofuels, for example.

Yes, it's $50 less for you to spend on your next iPod, but it's also possible that like me you just give up driving and start taking more transit.

Rising oil prices don't necessarily HAVE TO mean that you spend more on gas.

JD come to the USA and tell 10 people you think we are gonna have a depression. 8 of them will instantly tell you we already are having one. None of them will have a clue about peak oil. People are hurting.

Depression? Really? I don't think most people I talk to would say "depression." Recession, maybe. I mean, NPR and the NY Times have gotten pretty gloomy lately, but nobody's really talking seriously about the next depression.

The most I've heard is a prolonged recession, 1980s-style.

I hope you are right about all the predictions but it sure seems like a helluva coincidence to me. The prediction was that the USA would be at war in the Mid-East now. Care to go into more detail about the airlines. Most were profitable last year.

We were at war in the Middle East since the 90s! We were fighting proxy wars in the Middle East during the Cold War!

Airlines have historically not run at a profit. How many times have American airline companies had to be saved by government intervention? Just because they had a few good years prior to the oil price jump doesn't mean that they're solvent in the long-run.

 
At Monday, July 7, 2008 at 9:46:00 AM PDT, Anonymous sameu said...

JD wrote: " Also, the message of this blog is not that peak oil is a non-event. Why would I describe solutions to a non-event? The message of this blog is that peak oil is a serious but manageable technical problem which will drive human civilization to evolve to the next level, not collapse."

Simple question: did or did you not state some time ago that 'peakoil is a non-event'?

ow and technical problem? It's also a social, political, economic, and cultural problem.
Technical, we can solve the aids problem and hunger in the world, but for some reason it isn't happening...

 
At Monday, July 7, 2008 at 10:23:00 AM PDT, Anonymous Shiner said...

Justin I do not agree with you that there has been much growth. When you mention the FED and the inflated dollar you refute your growth argument. It is a false growth in numbers only, real growth involves the creation of goods and services.

The Bush administration has played games with numbers since the beginning. here is a classic example.

The administration claimed computer workers in the USA make $79,000 a year on avg. If you just take Bill Gates out of the avg pool it goes down around $40,000 per person. Take out Bills partner Paul Allen and it goes down another 11 or 12 thousand. The avg computer worker in the USA earns around $27,000 ask any one you know who works on a computer. If you think Bill Gates and Paul Allen are avg computor workers and belong in that equation that is a new debate.

Unfortunatly the Bush admin is simply put, not really honest about anything.

Read Eliot Spitzers letter to the New York Times about the sub prime mortgages and how the Federal Gov't stoped his investigations of lenders.
(of course the FBI busted him in a prostitution sting a few weeks later effectly shutting him up for good) The people being charged are all low level scapegoats. Personally I believe they knew the economy was going to tank and are trying to incite class warfare by allowing poor people to get in over their heads just before the predicted for 50 years energy crises begins. If you have a better reason for why the lending rules were relaxed so stupidly by the federal gov't I would like to hear it.

Also oil nationalism seems to have made the actual geologic peak a moot argument. If less is exported then for non export countries, for all intents and purposes peak oil is here. When I realized this I lost almost all interest in arguing geologic peak. I would love to lose that argument tommorrow with the discovery of several elephant fields in the USA though.

I am curious as to how you think the US dollar can gain? Unless the currency is devalued by taking currency out of the system the dollar can not possibly gain much.
Bernanke is on record stating we can print our way out of any economic troubles. The Federal Reserve bankers are nothing but greedy scummy thieves and it seems they want it all. They cannot stop printing because they now have to pay the compound interest on the national debt. Fiat money always inflates out of existence, every time. Google "compounding money supply". This is a huge problem the USA faces in the very near future. It is something akin to the old give me a penny a day doubling it every day for 30 days idea. This is happening independant of peak oil. Oil wars fought on credit don't help so oil is speeding it along a bit though.

Slow crash/fall has no profit. For the bankers to mitigate this would mean they would have to work together. They do not seem to do that very well. Not one of them seems to be willing to accept less profits first. This is a major reason why we are going to crash in my opinion.

Lastly, try asking 10 people before you decide i'm wrong about the perception of depression. I agree we are not in one till runs on the banks occur (which may not happen because not many people have savings anymore to run and get)Try to ask a few people who are not white middle aged and fully established in life. The fact that the Walmart parking lot is full just means more US wealth is leaving not to mention its a discount store of last resort for most people I know.

Damn I had kind of put the compounding money problem out of my head. In my opinion this is a bigger problem than peak oil for the US economy.

Fuck

JD you may want to look into the compounding dollar problem in the USA. If I were holding your side on the peak debate I would make this my #1 point when trying to take blame off of the oil for economic crises.

 
At Monday, July 7, 2008 at 10:54:00 AM PDT, Anonymous Anonymous said...

Justin about the "kind of lay our heads down and breath in relief"
thing. Buy a few hundred watts of solar power and all the fixins. Tell yourself its for if you go camping or something. Fill a few shelves with canned goods and bags of rice and beans because a good parents make sure they can feed the kids no matter what. Grow a garden abd some fruit trees for the same reason. These things may bring a little relief to your mind anyway and they sure can't hurt anything.

 
At Monday, July 7, 2008 at 5:49:00 PM PDT, Blogger JD said...

Simple question: did or did you not state some time ago that 'peakoil is a non-event'?

Simple answer: I did. I once stated that for me peak oil is a non-event because it has no significant impact on my daily life. At the time, that statement was a fact, and indeed it remains true, even today. If you blindfolded me, put me in a time machine, and then asked me whether I was in 1998 with really low oil prices, or in 2008 with the highest real oil prices in history, I honestly couldn't tell the difference by looking at the city and going through my daily routine. The differences are there, but they are extremely subtle.

Now, that may not sit well with you, but like I said, it's just the truth.

You can play "gotcha" games all you want, Sameu. But you're not really acting in good faith. I've written extensively on peak oil from many different angles, and only a complete fraud would try to summarize the basic drift of that work as "peak oil will be a non-event".

 
At Monday, July 7, 2008 at 6:58:00 PM PDT, Blogger Ari said...

THat's so lovely dovey Justin, not wanting people to suffer - the reality is that massive numbers of people suffer everyday just so that the first world can satisfy its rapacious appetite for STUFF. The american lifestyle is not evem remotely close to sustainable.

I don't necessarily disagree with the American lifestyle as being a problem, but who says that the entire First World is to blame?

JD you are problably right that we will prosper into the future but that "we" are going to probably be only about 5% of the population. So I really hope you are a multimillionaire without debts so that you can be part of the glorious future.

Hmmm, OK. So at present, the world's population is about 6.6 billion. 5% of that is about 330,000,000. Let me get this straight: you're arguing that we won't even be able to sustain what the Qing Dynasty managed in China alone in the 1800s?

Really?

Interesting.

So you're suggesting a return to 1000 AD populations worldwide?

I honestly can't see the resources being available to keep a middle class afloat for too much longer in the lifestyle they are accustomed too.

Just because Americans give up Hummers and 6 bedroom houses doesn't mean the world goes back to being 19th century China.

 
At Monday, July 7, 2008 at 7:17:00 PM PDT, Blogger Ari said...

shiner,

Justin I do not agree with you that there has been much growth. When you mention the FED and the inflated dollar you refute your growth argument. It is a false growth in numbers only, real growth involves the creation of goods and services.

Inflation is controlled for in real growth figures. This is not something that economists have managed to miss.

The administration claimed computer workers in the USA make $79,000 a year on avg. If you just take Bill Gates out of the avg pool it goes down around $40,000 per person. Take out Bills partner Paul Allen and it goes down another 11 or 12 thousand. The avg computer worker in the USA earns around $27,000 ask any one you know who works on a computer. If you think Bill Gates and Paul Allen are avg computor workers and belong in that equation that is a new debate.

Source? Extraordinary claims call for extraordinary evidence.

I am curious as to how you think the US dollar can gain? Unless the currency is devalued by taking currency out of the system the dollar can not possibly gain much.

Why does the dollar HAVE TO gain?

Not everyone loses when the dollar is weak. Exporters, for example, do better when the dollar is cheaper relative to other currencies. Manufacturing will be brought back to the US (look at BMW.) The Chinese and Japanese have both fought long and hard to keep their currencies cheap. This is why.

Slow crash/fall has no profit. For the bankers to mitigate this would mean they would have to work together. They do not seem to do that very well. Not one of them seems to be willing to accept less profits first. This is a major reason why we are going to crash in my opinion.

I call BS on this.

A slow crash gives lenders the opportunity to invest money. A hard crash will dry up the money supply and further reduce available credit.

Why would bankers and lenders in general want to repeat a depression? That makes ZERO sense. Bankers don't want borrowers to go bankrupt any more than the borrowers do.

Honestly, this argument is strange.

Lastly, try asking 10 people before you decide i'm wrong about the perception of depression. I agree we are not in one till runs on the banks occur (which may not happen because not many people have savings anymore to run and get)Try to ask a few people who are not white middle aged and fully established in life. The fact that the Walmart parking lot is full just means more US wealth is leaving not to mention its a discount store of last resort for most people I know.

If you're going to do really bad social science (and claim figures), at least try to do a random sample of sorts. Otherwise, you're just blowing a lot of stink around for no good reason.

People don't have savings today because there are higher return investments (401Ks, IRAs, etc.) available. Ever wonder why the Japanese all saved so much? No, it's not their extreme frugality and austere nature (they're big consumers as well). It was a combination of regulations and investment availability. The only chance you really had for a real return on an investment was a savings account with the Postal Savings (thanks to the way the Ministry of Finance had things structured), so people saved money in savings accounts.

In the US, people just don't throw money in savings accounts, but many have things like 401Ks to do the trick for them.

Why get 3% at some podunk bank when you can get around 5% or more in a well-managed IRA?

Also, your anti-Wal*Mart attitude reeks of faux-superiority. If Wal*Mart was just a "discount retailer of last resort" as you say, how come it has been so successful during both strong and weak economies?

Or is it that you're just that much smarter than the rest of us?

Also, get off the "MONEY GOING AWAY!" argument. Just because some portion of Wal*Mart's goods are made abroad doesn't mean:

1. That the money vanishes into thin air
2. That Americans don't benefit from the savings
3. That there is no opportunity for investment in the US if people buy goods from Wal*Mart.

It sounds to me like you really don't like Wal*Mart. Fine. I'm not particularly enamored with it, myself. But a "discounter of last resort?" You really ought to try reducing the hyperbole in your arguments a bit-- clearly, the vast majority of Americans do not agree with you on this, year after year.

 
At Monday, July 7, 2008 at 7:18:00 PM PDT, Anonymous Anonymous said...

Ted.

Really you mean people are suffering all over the world so that I can have my first world lifestyle...I had no idea....That was sarcasm in case you didn't pick that up. I know what "reality" is, what is it that you doomers ahve to go round parading "reality" like it's going to make you look bettet, or that you're "in the know" and no one else is.
There was no need for your smart ass remark. Next time contribute something other throwing that "reality" bullshit around. We all know.
How do you know what is or what isn't sustainable? Of course we won't be able to be as wasteful the style of living will be altered, bit I highly doubt the collapse of the "evil American empire" will happen....You may want to hold onto your box of tissues and KY for the next doom event.


Shiner

You're in an an area of which I don't understand.
But I will say some of the things you have said sound awefully like a conspiracy theory and I do not subcribe to that shit. I don't buy the whole "9/11 was setup by Bush" or any of that.
The whole with elliot, I don't buy that either.

Hmmm...So I guess you're right, I guess I have nothing to look forward to because we're going to crash and we're all going to die, is that it? So I might as well be as wasteful as I possibly can til the worlds explodes in a fury of nuclear warheads.
You keep pushing on this idea of a crash, yet do you realize that you, your children, as well a me and my children will perish because of nuclear warfare?
You seem to be okay with it. A lot of folks are and I am not saying this is you, but a lot of folks think that they can "survive" I laugh til I piss my pance when I hear this. No one will survive if things do in fact crash. The world will be for a lack of a better term...Over.


-Justin

 
At Monday, July 7, 2008 at 7:24:00 PM PDT, Anonymous Anonymous said...

Oh and Shiner I know a few computer workers and they make much more than $27,000. I know one guy who makes $57,000. He does really well btw.

-Justin.

P.S. I know you'll call me out on a straw man argument, but whatever I didn't really get what you were talking about+ I was robbed blind and in a very testy mood! Also I refuse to accept that we'll all crash and die. Until it happens it's all hearsay to me.
I want answers to solutions to get off of Oil. this is a forum to discuss that. Not to talk about how we're all going to die. In the face of crises the best in mankind comes out. We're very close to seeing the best in mankind.

 
At Monday, July 7, 2008 at 11:21:00 PM PDT, Anonymous marc said...

"Depression? Really? I don't think most people I talk to would say "depression." Recession, maybe. I mean, NPR and the NY Times have gotten pretty gloomy lately, but nobody's really talking seriously about the next depression"

What I can I even say to this? Those 8 out of 10 people are frankly morons. Everyone who falls behind on their bills or who can't trade in for a new car every 3.5 years or doesn't own a house thinks that we're in a 'depression' it seems. Well deal with this; in the Great Depression, 1 out of 3 people were out of work. We ain't close. Hell, that wasn't even the longest or worst depression in American history. The period after the Revolutionary War was real ugly.

People also seemed to think that we were in a recession every single year that Bush was in office. Funny, then how can a recession be happening now? If you call recession now, that means that by proxy you have to admit that there was growth before.

Honestly, who cares what 8 out of 10 people think? 9 out of 10 Americans think the sun revolves around the earth. 7 out 10 Americans don't know what actually happened on July 4th. 6 out of 10 Americans actually think Sasquatch exists. 9 out of 10 adults aren't aware that the first cavemen were around millions of years AFTER the last dinosaurs. These same Americans have not concept of anything outside their own limited existence and if things ain't pie in the sky rosy for them financially, oh, well it must be THE BIG DEPRESSION.

Screw that. And don't get me started on what just quoting this idiocy makes you.

 
At Monday, July 7, 2008 at 11:45:00 PM PDT, Anonymous Anonymous said...

I guess you dislike American's Marc?

I am an American I am knowledgeable, but like everyone else I have my limits and weaknesses. Math is just that for me. Anyways don't go thinking that every American is like Brittany Spears or some other flaky blonde bimbo...
Sure we have stupid people in my country but every country has got stupid people.

We all need to work on a solution together with everyone, though I realize that this won't happen until I can power my car via Methane.

However RBS issued a "alert" today claiming that in the next three months or so the stock and credit markets could experience a full fledge crash.

I hope to hell they'll wrong! Many analyst don't buy it though....
Who knows...

-Justin

 
At Tuesday, July 8, 2008 at 1:39:00 AM PDT, Anonymous Anonymous said...

Ari

you misunderstood my 5% comment (I should have phrased that better). What I meant is only 5% of the population will have a luxurious lifestyle and the rest will be working a lot bloody harder than they are now.

I think your chinese comparison however is a bit misleading because people in the first world today use far, far more energy and resources than the Qing dynasty. It is not a valid comparison.

Justin

i apologise for my rudeness. But I do feel that we are in for a lot more suffering - that does not mean collapse. Fuck man if we collapse I won't have access to KY and tissues and that would suck.

TED

 
At Tuesday, July 8, 2008 at 3:01:00 AM PDT, Anonymous Freak said...

"Just because Americans give up Hummers and 6 bedroom houses doesn't mean the world goes back to being 19th century China."

I have a challenge....
As an American it seems like the most extreme consumption is done by the $100K+ households in America.
So if the US is 5% of the worlds population, what percentage of the population of the US is responsible for most of the US.
Seems to me, as a lower middle lower class income American that while I am taking steps to curtail my fuel usage, there is still plenty of gasoline cheap enough that the yuppies can still burn up 200 gallons of it in their ski boat any given Saturday...seems like somebody could stop this and the Hummers, and empty trucks passing each other on the highway, Maybe residential building codes that limit construction to a set number of square feet, maybe it should cost $5000 to register a non-commercial vehicle over 4500lbs. but no.....not here, i have to roll change to buy bologna...so i can brown bag a lunch to work just so i can afford the gas....Oil crash, what a load of bullshit, allowing irresponsible
waste and consumption of vital resources down to a point where some of these peak-oil scenarios become plausible....screw it NASCAR!

Not trying to be a doomer here but taking action on the part of responsible people of conscience or Governments or leading corporations that have market influence is not some cutting edge technology, it is simply "get off your lazy spoiled ass and earn your keep!"

 
At Tuesday, July 8, 2008 at 6:56:00 AM PDT, Blogger Ari said...

TED,

I thought you were referring to the population crash BS that a lot of megadoomers are so in love with. Mea culpa.

I can see a scenario where people are a bit more pressed than before, but 5% seems a bit hard for me. I'd say the most likely "doomer" scenario is a reversion of the developing world's ability to provide a burgeoning middle class. I doubt us First Worlders will all be starving and eating zombie dogs anytime soon.

Consumption, in and of itself isn't the problem. It's how consumption occurs. For example, plenty of people like video games. As far as their impact goes, thankfully, it's much much less than, say, auto racing. But it's still a form of consumption.

 
At Tuesday, July 8, 2008 at 8:52:00 AM PDT, Anonymous econogeek said...

I was watching television earlier today on CNBC and they had an interview with a major fund manager that basically said

"I'm long energy b/c my valuation model is telling me to be long energy. I don't really care about the fundamentals. If my model tells me to buy, I buy."

This quote got me to thinking how many other people have made this analysis in other markets. During the real estate boom, pension and hedge funds just bought property at any price regardless of the fundamentals of the real estate market because their models told them to.

Valuation models are a good predictive tool if used with good information and in context of the fundamentals. Its not that difficult to make a pro-forma say whatever you want it to say.

 
At Tuesday, July 8, 2008 at 9:38:00 AM PDT, Anonymous Shiner said...

Justin, just because the economy crashes we will have nuclear war? I'm the doomer?

I agree this blog is much better when it concentrates on mitigation alternatives/conservation but that is not what this post is about.

http://www.washingtonpost.com/wp-dyn/content/article/2008/02/13/AR2008021302783.html

Read that article. The federal Gov't actually filed suit to stop the states from investigating the predatory lenders by claiming only the Feds have oversight. This is on the public record and not really debatable.

What do you base not believing Spitzer (and all the other 49 state attorney generals that fought this suit) on? I don't beieve I mentioned 911.

About my computor worker example. I forgot to put that "Bill Gates" represents all the CEO's and "Paul Allen" represents all the I think CFO's. Sorry . The Bush administration is the first to count the executives when figuring out the avg pay for different jobs. Executives used to have their own column. To the guy whose friend makes $58,000 I know three girls who make around $17,000 working full time data entry CPU jobs. $27,000 is an average.

I want solutions too, the problem is I fully understand the concept of EROEI I don't think alot of you do. Read the comments section of this blogs explanation of the concept. JD's comprehension of the concept is terrible. Several people in the comments section explain it perfectly. Without a whole new tech and by that I mean some form of energy we have never heard of or perfected yet EROEI will eventually kick mans ass. I believe something is probably out there (I hope). I understand the current renewables will be used and am all for using all of them. They will be needed to safeguard all the chemicals and other dangerous things we create.

What else explains the lack of a new infrastructure? How can a new infrastructure be built when they don't know what to build? The PTB evidently understand EROEI. BTW I don't for one minute believe the bankers like what is happening they just can't stop it. I am not a NWO person. The bankers already control almost everything so there is no need for them to tear it all down to gain control.

It has been said many times but evidently it needs to be repeated. Not all of us who recognize the trouble are end of civilization doomers. Even if there is no human wieldable energy (not going to happen) some form of civilazation will continue as long as the sun shines and it is not destroyed by man/nature. Some of us are just realists with a firm grasp of the EROEI concept.

No one claims they tried my experiment asking 10 people aobut a depression yet many claim i'm wrong. Perception even when not accurate still counts for a little. With the way the Feds play with numbers lately the 8 people could be right.

Los Angeles CA is letting all 33 of its county owned golf courses grass die because gas and water prices are making them unprofitable. They can't just raise prices because these are courses for the middle class and if they do they lose customers/profitability. Every course employs around 100 people and used to generate millions in revinue for the county. Gas prices are not hurting the economy at all. We're gonna be fine.

Do you guys try to make the money to pay your house payment the day before its due? We figurativly seem to be trying to find a new energy the day before the old one runs out. For all of you who will want to argue peak I believe this example holds even if the peak is 20 years away. Lets hope we find/perfect the new tech before the coal and uranium run out.

 
At Tuesday, July 8, 2008 at 12:36:00 PM PDT, Anonymous Anonymous said...

Aplogie accepted, Ted.
Yes, I do feel that we're due for more. But I just keep hopeing that maybe not so much so.
Some good news today Oil is down $9 on demand concerns. They are all getting worried about demand destruction.
I am sorry about the KY comment.
Though you stock up on KY and tissues now. ;-) Just kidding.

I am hopeing we begin to see some good things appear soon. I am no market expert or anything as math is my weakness. But I can still hope it's what keeps me sane through all of this mess.

Freak I understand where you're coming from. I am in the same situation. It is tough esp. when you have a child. Fortunately my wife is about to graduate from college. She'll be a RN and they make kick ass money in Texas.
Even though we in Texas haven't felt the full effects as everywhere else, it is still tough.

-Justin

P.S. JD we need a new post man. Find something else, I wish we could see a new report showing how much demand has dropped since April.

 
At Tuesday, July 8, 2008 at 3:40:00 PM PDT, Anonymous Anonymous said...

Shiner.


I tried your experiment. Earlier today in a doctors office. Mainly old folks.
One of them was a man who was 88 years old. This guy was alive during the great depression. I asked him if he thought we were in one. He to the point
"No." Then he said "If we were in one I wouldn't be here in this doctors office right now and I wouldn't be able to go to a Mcdonalds or something like that to eat if I wanted to. Much less get my medicine."
I asked 12 people. all of them except for one said no. The one who saud yes did say that we weren't quite there yet, but soon would be. This person was middle aged close to 40 I believe.


You claim you are a realist. How?
Is it because you're under the impression that you better understand something that you're a realist!?
What if your understadning is flawed. What is JD's is correct. What if?
How can earn the title of "realist"

And just because you say civilization will carry does not make you a doomer?
There are many forms of doom.
What you claim will happen, will result in very short but extremely nasty resoruce wars. Resulting in nuclear exchanges.
Or is it that maybe you'd like things to be like "The Long Emergency"
I don't know, Shiner.
But to call yourself a "realist" and kind of say that we're not is BS.
I live in reality. Just because I don't subscribe to your beliefs or opinion doesn't make an "unrealist" or whatever.

I just refuse to believe that everything I know will be gone and be no more. There have been folks just like you for years and years going on and on about how this and that will come to an end. Yet it never did. I wonder what these same people think today. When they predicted in the '70's that everything would come crashing down then...yet it did not. I wonder if they feel as though they wasted years of their life bantering on about some massive problem over which they had no control over. If you really think that we'll crash then why not just spend all of the free time you've got with family and friends, instead of just wasting it on your computer? Enjoy modern life before it's gone? Go see some films put this to the back fo your mind.
Why come on here and cite the crash?
Start thinking positive. Work to come up with solutions in stead of just adding to the problem. Believe it or not but one person alone can discourage many people by spelling out a crash. Then people tend to be depressed and not want to work towards a goal, but rather lay in bad and live like a zombie to mask their depression because they really feel like they're on barrowed time because someone told them the crash is upon us.
We need more optimism, this will motivate more people to actually doing something about our problem.

Of course the BIG question is..Can we make it? I believe so, but time will most certainly tell.

-Justin

 
At Wednesday, July 9, 2008 at 12:31:00 AM PDT, Anonymous TED said...

Justin

I think it is a bit of a catch 22 with talking to people about the possible future. If there is no crisis facing people they won't change their behaviour. But as you say go to far the other way and you demotivate people causing depression (emotional) and therefore inaction.

I believe we need action to address these issues because they are huge but how to do it without being considered alarmist or a doomer. How to inspire people to make positive change without them feeling it will be a negative. It is very difficult.

the other difficulty is that most people just aren't that interested in these issues until it really is hurting them. Maybe we need a bit more hurt to get us motivated.

I personally am excited at some of the issues and possiblilties I am addressing to make things better for me and my family and hopefully the world.

I would love here what others might be doing or whether people think there is really a need to do things.

TED

 
At Wednesday, July 9, 2008 at 3:12:00 AM PDT, Anonymous CommOddity said...

Hi all,
I found this article very well done.
I work in this business and I totally agree with you on the price indexation mechanism.

By the way, when considering the role of speculation I think we must consider that specs must ROLL their positions.

Imagine a huge hedge funds goes long 100k lots on wti 1st nby: he moves the price, let's say, 5 usd up. Let's also say that this translates on spot prices as well for the indexation effect.
BUT, what happens in 30days time when the Hedge funds have to roll the position? He must SELL the 100k lots (that at this point will go to deliver)...here's my point: in order NOT to make the market FALL 5USD back to the original level, he must find somebody on the physical side willing to buy those 100k lots that will deliver.
That means that if futures prices stays 5usd up it is because we have some supply problem on the spot and there are buyer who will buy at any price.

What do you think about this??

 
At Wednesday, July 9, 2008 at 5:24:00 AM PDT, Blogger Ari said...

Ted,

I've been motivating people by simply showing how less oil consumption:

1) Saves them money. Taking the bus is now far cheaper than driving.

2) Reduces greenhouse gas emissions (obvious)

While 2 only works for a small number of people, the first one is a strong motivating factor for a lot of people.

Just because you say "oil is going to become scarce" doesn't mean you have to go all Savinar on people. You can just say, "now is the time to look into changing your habits a bit. Here are some suggestions."

That's why I love this blog. Even if JD is technically wrong or unclear in a post of his, he's an eternal optimist. I believe that JD will do a lot more good by getting people interested in mitigating factors than the doomers do by showing off scary numbers. Whether or not the scary numbers mean anything to us is impossible to say. Whether or not optimistic views of reduced oil dependency will help us through the coming decades is clear: HELL YES.

Washington didn't win the Revolutionary War by whining over the Brit's superior forces. Nobody ever quoted Alexander the odds. The United States didn't think twice about whether or not it would fight the Second World War (once the right impetus was in place). Etc.

Great people, and great societies, don't look only at the limitations presented before them: they look at the opportunities and the greater possibilities.

Shiner,

I want solutions too, the problem is I fully understand the concept of EROEI I don't think alot of you do. Read the comments section of this blogs explanation of the concept. JD's comprehension of the concept is terrible. Several people in the comments section explain it perfectly. Without a whole new tech and by that I mean some form of energy we have never heard of or perfected yet EROEI will eventually kick mans ass.

Bulldoody. I think most of us understand EROEI as well as anyone else on the Internet. But I also think that some of us understand that EROEI is a flawed measure and can be tweaked many ways to give different results.

Also, it's clear that JD understands EROEI, but that he doesn't sit there and mull over it as the Alpha and the Omega like many peakniks do. Ultimately, while it does matter to an extent, it may not matter nearly as much as some people on the Internet claim.

But as for understanding the core concept? I think most, if not all, of us do.

Also, who cares about "eventually?" Why is this the constant focus of the doomer camp? Eventually, the sun will burn out and incinerate the Earth. Why aren't more doomers concerned with "Peak Sun," then?

 
At Wednesday, July 9, 2008 at 9:20:00 AM PDT, Anonymous The Dude said...

I brought up your analysis at TOD: Permalink . I recall a comment from Rapier that not only producing nations were convinced speculators were the primary driver, but IOCs and refiners, and wondered if there were more to it than the usual betting-on-football analogies.

 
At Wednesday, July 9, 2008 at 10:23:00 AM PDT, Anonymous Shiner said...

Justin , did you ask any poor people? Minorities? Many who went through the last depression wear it like a badge and may just never admit to another. Just to be clear I do not believe it is a depression till domestic banks fail. Never mind an answer I agree there should need a new post

Eroei is a simple concept my 13 yr old understood the first time he heard it. There is only one definition of EROEI and JD's posts do not accuratly reflect it. I believe this lack of comprehension explains his positions on this blog. Sorry JD but geez man you should think about taking that crap down. Its building false hope.

I wouldn't worry to much about nuclear war. The threats of MAD still hold. The rest of the world probably knows the USA is savage and will throw nuke's ten for one.

As far as not scaring people I have a 180 view to yours. I am not saying either one of us is 100% correct or that your point has no merit. I just believe we are so far gone that people need to be scared/pushed into action.

I see every movie teenage kids like and I love the modern world and take every advantage of it
I am at work or it is pretty late most of the time I post. If you think my woman or kids would let me sit in front of the cpu all night... not a chance. Besides they are more interesting than you people.
hahahahahahahahaha

I come to this blog because I think if the new energy is found JD will probably be on it early + I really do hope one of you will change my mind.

I agree with Ted these are indeed exciting and interesting times and since we are all essentially born to die I for one refuse to be afraid.

Ted, I have started a custom wind/water turbine fabrication and instaltion buisness. No customers yet but it is a safe place to store my wealth. My garage is full of crap to make several projects already with more piling in every pay day. I also have a few electic hub moter bike rims with batteries and a few of those foldable solar panels to charge em. a bunch of fruit trees and berry bushes were planted in my yard this spring. I'm thinking of tearing out the lawn and planting corn to wake up the neighbors. It will piss my old lady off though.

 
At Wednesday, July 9, 2008 at 12:25:00 PM PDT, Anonymous Anonymous said...

Ted.

We need to break it to people in soft sort of way.

Like tell them about the problem but instead of kicking it off with doom adn gloom. Kick it off instead with some possible solutions...This gets peoples minds working. Then tell people about what all we could face again start with the positive stuff. Then get to the gloomy stuff, followed up with your personal opinion. Then close with a speech that will motivate even more.
ABout how when mankind is faced with a crisis the best in man comes out.
Speak more heavily on positive things...But make sure you inform these people that this is up too all of the biggest help will be conservation...the white coats can only do so much. Everyone needs to do their part...
That's how I do it. And I've seem to have made a differenc too. In a good way.

We just have to get peoples heads around the fact that this will not just go away..Poof! It will stay and get worse as long as we sit on our asses...or wait we should stay on our asses if you get my meaning.
The only thing I can do for now is just not drive a lot. My wife has a Dodge Neon and it gets roughly 30 mpg. So we take her car everywhere we need to go.
-Justin

 
At Sunday, July 13, 2008 at 10:08:00 AM PDT, Anonymous jstanley01 said...

Messing with the futures market is not the answer:

**********
Scapegoating Speculators
by Walter Williams

"Despite Congress' periodic hauling of weak-kneed oil executives before their committees to charge them with collusion and price-gouging, subsequent federal investigations turn up no evidence to support the charges. Right now oil company executives are getting a bit of a respite as Congress has turned its attention to crude oil speculators, blaming them for high oil prices and calling for tighter control over commodity futures trading.

"Let's look at the futures market and for simplicity use corn futures discussed in my May 28th column titled "Futures Market." While corn is different from oil, both obey the laws of supply and demand, just as humans are very different from bricks but both obey the laws of gravity.

"Say that today's price of corn is $7 a bushel. I have a hunch that because of Midwest flooding, higher demand due to droughts and war in other parts of the world, that in May 2009, corn will sell for $12 a bushel. I stand to make a lot of money by buying corn now for $7 a bushel, holding it, and in May 2009 selling it for $12 a bushel. If many speculators share my hunch and buy more corn now, today's price, sometimes called the spot price, is going to rise let's say to $10 a bushel.

"Higher prices for corn, and everything made from corn, might give rise to consumer complaints. While Congress can't stop the Midwest rain, droughts and wars in far off places, it can scapegoat speculators. Let's say that Congress outlaws the corn futures market, or makes futures trading more costly. Doing so will definitely lower the spot price of corn. The price might return to $7 a bushel, making corn consumption once again "affordable." You might exclaim, "Isn't Congress wonderful?" But what about May 2009?

"Suppose the Midwest floods have a significant impact on corn production; there's drought and war in far off places raising the demand for corn exports. What do you predict will be the availability and prices of corn in May 2009 after Congress has outlawed, or made futures trading more difficult? If you answer less corn and much higher prices, go to the head of the class. By outlawing or impeding futures trading in corn, Congress encouraged Americans to ignore the future. Had Congress not interfered, people would use less corn now, making more available in May 2009. Thus, one of very valuable functions performed by the speculator is the allocation of resources over time. It makes sense to take the future into account when making consumption decisions today. The futures market, by the way, is no bed of roses. My hunch about corn supply and demand conditions might be dead wrong. Its May 2009 price might be $3 a bushel and I would have to sell at a loss. Futures trading is risky business.

"Congressional attacks on speculation do not alter the oil market's fundamental demand and supply conditions. What would lower the long-term price of oil is for Congress to permit exploration for the estimated billions upon billions of barrels of oil domestically available, not to mention the estimated trillion-plus barrels of shale oil in Wyoming, Colorado and Utah. Some politicians pooh-pooh calls for drilling, saying it would take five or 10 years to recover the oil. I guarantee you we would begin to see a reduction in today's prices even if it took five to 10 years for us to get the first barrel. Put yourself in the place of an OPEC member knowing there would be a greater supply of U.S. oil five or 10 years, hence maybe driving oil prices lower to say $40 a barrel. What will you want to do now while oil is $130 a barrel? You would want to sell as much oil now and OPEC's collective efforts to do so would put downward pressures on current oil prices. Right now the U.S. Congress is OPEC's staunchest ally."

**********

Of course the futures market affects the current price, just as Prof. Williams outlines. It's supposed to.

The futures market is what informs today's market of factors that go beyond today's marginal costs. Via tomorrow's likely marginal costs as priced by speculators. The word "likely" is why they're called "speculators."

I see two possibilities about what the speculation boom means: 1) The No-Bubble Theory: The peak oil doomsters are essentially correct. 2) The Bubble Theory: There is a worldwide flight of assets from the falling dollar that are looking for a haven "safe" from the wealth destruction of the credit crunch. And finding it in oil (hence "pumping up" demand for it).

If Number 2 is correct, which gets my vote, neither the futures prices nor the current price will "accurately" reflect the underlying supply and demand picture (demand for the commodity itself) until the credit crunch plays itself out. (No slam on free markets. For all their efficiencies, they have always been subject to booms and busts.)

But whether "doom-and-gloom" is correct, or "boom-and-bust," messing with the oil futures market will accomplish nothing. Just the opposite, in fact.

(My guess is that if Congress somehow came to its senses, and opened the US for drilling as Williams and other suggest, the whole speculative house of cards would crumble overnight. That, however, would provide no role for newly-minted govermnent regulations, or for the employment of hordes of newly-hired regulators -- Perish the thought!)

 
At Tuesday, July 15, 2008 at 1:45:00 AM PDT, Anonymous Xoce said...

Check out this article from two months ago:

http://globalresearch.ca/index.php?context=va&aid=8878

One problem is it makes the claim that inventories are indeed increasing but doesn't provide a reference.

However IMHO it's clear that BOTH speculation and demand play a part. As CommOddity pointed out, (7/09/2008 03:12:00 AM) the only reason speculators can roll over their contracts is because they always can find panicked spot buyers at their ask. It becomes a chicken-egg thing.

(After previewing this post:) There's some problem with publishing the URL. I've made an HTML link: click here to go to the article referenced, or search for it as follows:

TITLE: Perhaps 60% of today's oil price is pure speculation
AUTHOR: F. William Engdahl
DATE: May 2, 2008
WEBSITE: globalresearch.ca

Happy reading,
Xoce

 
At Thursday, July 17, 2008 at 10:17:00 AM PDT, Blogger Celal Birader said...

finally somebody who know what he's talking about.

 
At Friday, July 18, 2008 at 12:42:00 PM PDT, Anonymous Anonymous said...

Suppose that OPEC decided, without fanfare, to reduce production by two million barrels a day of physical oil, and Daddy Warbucks decided to go short in futures for say five times that amount. What do you think would happen to the price of physical oil?

I see no reason to answer this, but on the other hand the talk about squeezes in the Brent market is mostly wrong - mostly because there was actually one famous case a number of years ago.

Let's put this another way: Krugman and Birger are correct, and these other people have decided that it's in their interest to tell the blog audience the opposite of the truth.

 
At Friday, September 19, 2008 at 2:01:00 AM PDT, Anonymous Anonymous said...

••Perhaps you could sketch out the wellhead loading price, the flex in size of the tanker, the journey time to a refinery, and the trade changes, in terms of the times a load's original price is adjusted up, until it arrives at refinery storage point. Tell us all the cost to the buyer and seller of each trade, in Broker Fees, to buy or to sell the load, and the transport costs for crew and ship, and transport fuel, and we really naive readers might get to the bottom line....What if I sent in my own boat, the USS Mike, and never sold my shipment, bought it from Iran, but then offloaded it in a)Long Beach, CA, b)SF, CA, c)Houston, TX, or d) in the Port of NY. How much could I buy it for at wellhead, and sell it for, at refinery storage point, assuming I was not getting any markup at all(or only at break even)?? How much do I have in it when it arrives at my own refinery, "untraded", at each of these ports?? The rest is Speculation/Brokerage cost. Is Alaska Oil all delivered to a USA Port?? Why is pipeline oil, from Texas, priced as if it was able to be bothered by a Middle Eastern war/threat situation, when it has little risk??

Mike D

 
At Monday, October 13, 2008 at 4:40:00 PM PDT, Anonymous jack ross said...

http://anti-doomer.blogspot.com/

 

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