Buy Now, It'll Only Go Higher
June 27, 2008 8:38 AM Subscribe
Are pundits a key source of global warming?
posted by ZenMasterThis at 8:59 AM on June 27, 2008 [2 favorites]
posted by ZenMasterThis at 8:59 AM on June 27, 2008 [2 favorites]
Supply is down and demand is up. What did people expect to happen to the price?
posted by demiurge at 9:10 AM on June 27, 2008 [2 favorites]
posted by demiurge at 9:10 AM on June 27, 2008 [2 favorites]
2011 futures are selling for nearly the same as today's spot price. If speculation were the cause of the sharp increase, one would think the futures would be significantly higher. demiurge has it.
posted by netbros at 9:14 AM on June 27, 2008
posted by netbros at 9:14 AM on June 27, 2008
If speculation is the cause, won't speculators be hurt the most when the speculation fueled bubble bursts?
posted by drezdn at 9:20 AM on June 27, 2008
posted by drezdn at 9:20 AM on June 27, 2008
2011 futures are selling for nearly the same as today's spot price.
Spot prices and futures in perishable commodities don't necessarily move in tandem.
I vote that speculation is a huge part of the increase. Oil has almost tripled since February 2007. No way that's all (or even mostly) supply-and-demand.
posted by Benny Andajetz at 9:21 AM on June 27, 2008
Spot prices and futures in perishable commodities don't necessarily move in tandem.
I vote that speculation is a huge part of the increase. Oil has almost tripled since February 2007. No way that's all (or even mostly) supply-and-demand.
posted by Benny Andajetz at 9:21 AM on June 27, 2008
I blame dipsticks.
posted by weapons-grade pandemonium at 9:23 AM on June 27, 2008 [1 favorite]
posted by weapons-grade pandemonium at 9:23 AM on June 27, 2008 [1 favorite]
The issue is whether supply/demand is actually meeting at $135/barrel or whether the price would normally be around $65 and speculators are artificially forcing it higher.
Krugman's op-ed didn't make any sense at all and is probably a poor representative of the "No" argument.
posted by wabashbdw at 9:23 AM on June 27, 2008
Krugman's op-ed didn't make any sense at all and is probably a poor representative of the "No" argument.
posted by wabashbdw at 9:23 AM on June 27, 2008
If speculation is the cause, won't speculators be hurt the most when the speculation fueled bubble bursts?
Only on contracts they're left holding.
posted by Benny Andajetz at 9:23 AM on June 27, 2008
Only on contracts they're left holding.
posted by Benny Andajetz at 9:23 AM on June 27, 2008
If speculation is the cause, won't speculators be hurt the most when the speculation fueled bubble bursts?
Yes, but the beautiful thing is that we are the speculators according to Masters (the speculators being Corporate/Government pension funds, institutional investors, etc.). So we get to pay the higher prices today and then lose big chunks of our pensions tomorrow!
posted by wabashbdw at 9:26 AM on June 27, 2008
Yes, but the beautiful thing is that we are the speculators according to Masters (the speculators being Corporate/Government pension funds, institutional investors, etc.). So we get to pay the higher prices today and then lose big chunks of our pensions tomorrow!
posted by wabashbdw at 9:26 AM on June 27, 2008
Yes. Demand has jumped, but it hasn't jumped as much as barrel prices would have us believe. It's hard to look at any market with this kind of volatility and not assume there is some speculation involved. Methinks the coming oil crisis will end up looking a lot like the California energy crisis from only a few years ago....
posted by elwoodwiles at 9:27 AM on June 27, 2008
posted by elwoodwiles at 9:27 AM on June 27, 2008
For those making the supply/demand argument, has the demand for oil increased 700% over the last 8 years?
posted by ryoshu at 9:31 AM on June 27, 2008 [4 favorites]
posted by ryoshu at 9:31 AM on June 27, 2008 [4 favorites]
Supply is down and demand is up. What did people expect to happen to the price?
The type of demand is in question here, though. You've missed the whole point of the post. Demand from consumption is entirely different than demand from investment, and it has serious implications on policy decisions. Very generally speaking the pattern of speculative investment in the US has gone from the dotcom bubble of the 90s to the housing bubble of the 00s. The money is now moving to commodities.
The housing bubble and the coming commodity bubble has more serious implications on the day-to-day life of the average person. When basic needs are speculated on, it creates severe confusion and imbalance, and people not paying attention lose their asses. Look at the number of foreclosures happening currently, for instance.
Demand from the consumption of food and oil (highly interdependent) is high enough on its own to force prices higher. A speculative bubble in oil and food will have serious worldwide implications, and as usual the big boys will make out like bandits at the expense of us little guys.
posted by jimmythefish at 9:34 AM on June 27, 2008 [4 favorites]
The type of demand is in question here, though. You've missed the whole point of the post. Demand from consumption is entirely different than demand from investment, and it has serious implications on policy decisions. Very generally speaking the pattern of speculative investment in the US has gone from the dotcom bubble of the 90s to the housing bubble of the 00s. The money is now moving to commodities.
The housing bubble and the coming commodity bubble has more serious implications on the day-to-day life of the average person. When basic needs are speculated on, it creates severe confusion and imbalance, and people not paying attention lose their asses. Look at the number of foreclosures happening currently, for instance.
Demand from the consumption of food and oil (highly interdependent) is high enough on its own to force prices higher. A speculative bubble in oil and food will have serious worldwide implications, and as usual the big boys will make out like bandits at the expense of us little guys.
posted by jimmythefish at 9:34 AM on June 27, 2008 [4 favorites]
If speculation is the cause, won't speculators be hurt the most when the speculation fueled bubble bursts?
No, we taxpayers will bail you guys out, no worries.
posted by Blazecock Pileon at 9:35 AM on June 27, 2008 [4 favorites]
No, we taxpayers will bail you guys out, no worries.
posted by Blazecock Pileon at 9:35 AM on June 27, 2008 [4 favorites]
No, we taxpayers will bail you guys out, no worries.
Whoa whoa whoa! I hope you are saying taxes will go up! But as long as we bail out the foolhardy and greedy by reducing services for the poor and middle class, I'm on board.
posted by DU at 9:40 AM on June 27, 2008
Whoa whoa whoa! I hope you are saying taxes will go up! But as long as we bail out the foolhardy and greedy by reducing services for the poor and middle class, I'm on board.
posted by DU at 9:40 AM on June 27, 2008
The Economist's argument for the "no" vote was basically "they're trading in futures, it has nothing at all to do with the oily stuff that comes out of the ground, nope, nothing at all, so leave them alone."
posted by bonaldi at 9:48 AM on June 27, 2008
posted by bonaldi at 9:48 AM on June 27, 2008
(While it did also say that "hoo, there's a lot of money floating around as investors flee to quality. We wonder where it could go -- Commodities, maybe? Still THERE IS NO LINK between all this cash sloshing about and soaring oil and food prices. Nope. None."
posted by bonaldi at 9:50 AM on June 27, 2008 [1 favorite]
posted by bonaldi at 9:50 AM on June 27, 2008 [1 favorite]
)
posted by bonaldi at 9:50 AM on June 27, 2008 [3 favorites]
posted by bonaldi at 9:50 AM on June 27, 2008 [3 favorites]
I think the issue isn't so much skyrocketing demand as it is the decline of spare capacity. The system is tight and getting tighter, whatever Saudi Arabia says they can do (and since they're so opaque it's hard to evaluate their claims). Also, I think Peak Oil is getting much more publicity, and this can only exert an upward pressure on prices as long as demand stays strong.
2011 futures are selling for nearly the same as today's spot price. If speculation were the cause of the sharp increase, one would think the futures would be significantly higher.
This is a claim I don't understand. Can you explain? I mentioned this extremely flat curve in the thread from a day or two ago, but I have no idea what it means.
posted by adamdschneider at 9:52 AM on June 27, 2008
2011 futures are selling for nearly the same as today's spot price. If speculation were the cause of the sharp increase, one would think the futures would be significantly higher.
This is a claim I don't understand. Can you explain? I mentioned this extremely flat curve in the thread from a day or two ago, but I have no idea what it means.
posted by adamdschneider at 9:52 AM on June 27, 2008
has the demand for oil increased 700% over the last 8 years?
The value of the dollar has went down though, so that's got to be at least part of it.
posted by drezdn at 9:53 AM on June 27, 2008
The value of the dollar has went down though, so that's got to be at least part of it.
posted by drezdn at 9:53 AM on June 27, 2008
Yes, but the beautiful thing is that we are the speculators according to Masters (the speculators being Corporate/Government pension funds, institutional investors, etc.). So we get to pay the higher prices today and then lose big chunks of our pensions tomorrow!
So this is what a rock and a hard place feels like?
posted by drezdn at 9:54 AM on June 27, 2008
Now children, stop arguing — you can both be right! Oil prices can go up because of increased demand and speculation. And inflation. And OPEC. And various regional conflicts. And on and on...
It seems like we're only going figure this out once it's long behind us. Maybe not even then, given how murky the oil market is.
posted by Weebot at 9:56 AM on June 27, 2008 [1 favorite]
It seems like we're only going figure this out once it's long behind us. Maybe not even then, given how murky the oil market is.
posted by Weebot at 9:56 AM on June 27, 2008 [1 favorite]
...we're only going figure this out once it's long behind us.
I dunno, are cockroaches and rats any good at math?
posted by DU at 9:58 AM on June 27, 2008 [1 favorite]
I dunno, are cockroaches and rats any good at math?
posted by DU at 9:58 AM on June 27, 2008 [1 favorite]
Olbermann on 'enron loophole', gas prices, speculators.
http://www.youtube.com/watch?v=XaDelhvtQ98
Obama says he wants this taken care of; McCain says Obama is merely following him - which is fairly bogus at this point, although originally McCain did in fact say that. If you watch the video report here though, I wonder exactly how he'll pull that off.
posted by bitterkitten at 9:59 AM on June 27, 2008 [1 favorite]
http://www.youtube.com/watch?v=XaDelhvtQ98
Obama says he wants this taken care of; McCain says Obama is merely following him - which is fairly bogus at this point, although originally McCain did in fact say that. If you watch the video report here though, I wonder exactly how he'll pull that off.
posted by bitterkitten at 9:59 AM on June 27, 2008 [1 favorite]
The value of the dollar has went down though, so that's got to be at least part of it.
Yes, but for a couple reasons. First, since oil is priced in dollars, when the dollar weakens the price of a barrel rises. But more importantly, and more a sign of speculation, is that investors are leaving the dollar and moving to commodities.
And that, my friends, is a bad, bad thing.
posted by elwoodwiles at 10:01 AM on June 27, 2008
Yes, but for a couple reasons. First, since oil is priced in dollars, when the dollar weakens the price of a barrel rises. But more importantly, and more a sign of speculation, is that investors are leaving the dollar and moving to commodities.
And that, my friends, is a bad, bad thing.
posted by elwoodwiles at 10:01 AM on June 27, 2008
Methinks the coming oil crisis will end up looking a lot like the California energy crisis from only a few years ago....
Corporations are guilty of illegal accounting and price-fixing, and they'll get shut down and at least one of their CEOs will kick it? Sweeeet.
posted by LionIndex at 10:04 AM on June 27, 2008
Corporations are guilty of illegal accounting and price-fixing, and they'll get shut down and at least one of their CEOs will kick it? Sweeeet.
posted by LionIndex at 10:04 AM on June 27, 2008
waitwaitwait. I'm almost totally economically ignorant, so maybe that's why I'm confused. are you guys saying we don't know why oil prices are soaring? I thought we all knew that it was because of an agreement between the current administration and OPEC to start a pointless war in the middle east that would give OPEC the opportunity to jointly boost prices while nobody's looking.
I thought the whole deal was that iraq was about to do its oil trading in euros rather than american dollars, so we needed to make it clear that nobody else had better start pulling that shit. the rest of the middle east lets it go without a peep - and continues trading in US$ so that our economy doesn't completely collapse - so long as it we pay more for gas from now on.
posted by shmegegge at 10:04 AM on June 27, 2008 [1 favorite]
I thought the whole deal was that iraq was about to do its oil trading in euros rather than american dollars, so we needed to make it clear that nobody else had better start pulling that shit. the rest of the middle east lets it go without a peep - and continues trading in US$ so that our economy doesn't completely collapse - so long as it we pay more for gas from now on.
posted by shmegegge at 10:04 AM on June 27, 2008 [1 favorite]
jimmythefish: consumption of food and oil (highly interdependent) is high enough
I thought we all grilled and steamed in these health-conscious days...
posted by davemee at 10:17 AM on June 27, 2008
I thought we all grilled and steamed in these health-conscious days...
posted by davemee at 10:17 AM on June 27, 2008
Ok, this comment is going to incorporate a lot of material from a couple of earlier FPPs on the same topic. Apologies if some of you folks read thee comments twice.
My thinking: speculative bubble.
I don't trade in this market so any quantitative tests I might employ probably aren't applicable as commodities are rather different beasts (econometric speak: the underlying data generating processes exhibit stationarity and other peculiar characteristics that we don't see in the equities or fixed income markets, things I consider un-natural).
So the justification behind my conclusion covers more than a few points and is subjective to no small extent. That being said, while there is some quantitative data behind my thinking, I certainly can't put it together in a hard and fast formula.
I tend to note things I read and think a lot about the various pieces, how they all fit together. So in no particular chronological order (some) of the points I've noted:
On to the current hysteria - Peak Oil.
It seems we're being asked to swallow a lot of the current price spikes due to Peak Oil. We've just had another FPP about that which I had the pleasure of posting in, and I'm not totally convinced about the shortage or Peak Oil.
Why? Well, folks are getting all twisted up - it's hard not to with these prices - and demanding an explanation. Peak Oil, that we're running out is very convenient.
But I remember previous oil shortages. We've been though this all before.
Fanning (1950) cataloged six oil scares since the turn of the twentieth century :
1. The Model T Scare — 1916
2. The Gasless Sunday Scare — 1918
3. The John Bull Scare — 1920-23
4. The Ickes’ Petroleum Reserves Scare — 1943-44
5. The Cold War Scare — 1946-47
6. The Cold Winter Scare — 1947-48
Those of course were up to the publication of his book, so we can add atleast two more since :
1. Arab Embargo Scare — 1973
2. Iranian Revolution Scare — 1979
So any student of the markets will know these warning drums have been beaten before. I'll leave it to you folks to review the impact on prices; while less severe than those observed during the current scare, they were, in their own time, equally damaging to the consumer while beneficial to unnamed parties.
Full citation: Fanning, L. M., 1950, A case history of oil-shortage scares, in, Our Oil Resources, McGraw-Hill, New York.
I guess the thing that bugs me the most of all the FUD flying about these days is (besides the fact I don't trade commodities and boy howdy have I left some money on the table!!) Hubbert's curves assume limited, finite resources. Fair enough, oil is indeed finite.
But the size of all reserves?
That's the sticky wicket. We're implicitly talking about the size of all KNOWN reserves, a very critical qualification that seems to be omitted, at least by the mainstream media, all too often. Also relevant: I don't believe (again, personal opinion as this isn't my market) that the oil companies have properly invested in discovering new reserves.
So there you go. Is the Hubbert Curve, the entire Peak Oil argument so clear cut now? Again, I'm not sure.
And I always think back to the last time we hit Peak Oil, and Whale Oil was supplanted by petroleum. Keep in mind that drilling is a relatively new phenomenon, deep drilling even newer, non conventional so new as its still in infancy, that before all this oil was scooped right up off the surface.
So I'm not buying the explanation that's being offered and think there is a lot of speculation involved.
Now for the (possible) collapse - well, already there are reports of speculators moving capital out of this market.
Bubbles are interesting in that professional money always takes from retail. Dot-com? Pro's didn't get fleeced - retail did. Look at other bubbles - it's always the same. Retail loses.
So (if and) when this thing bursts the professional money will move out faster than retail, and it is retail that will get left holding the overpriced assets when (a nod to your point, 'if') a correction comes.
Selling overpriced assets into a declining market? You don't want to be trading that position.
So I don't have data (at least that I would post), buy by putting together lots of disparate data points that I've read, as well as talking to folks who, as previously noted, have either pulled out totally or are sharply cutting back of this market, I think speculative bubble.
Finally, I have no idea if this market is in backwardation or contango at present but either way it doesn't impact what my gut feel says are excessive speculative forces operating here.
I've actually been watching all the fun rather enviously from the sidelines as I don't trade like this, but the longer I watch and the more I read, the more bubble like I think this market is.
posted by Mutant at 10:20 AM on June 27, 2008 [33 favorites]
My thinking: speculative bubble.
I don't trade in this market so any quantitative tests I might employ probably aren't applicable as commodities are rather different beasts (econometric speak: the underlying data generating processes exhibit stationarity and other peculiar characteristics that we don't see in the equities or fixed income markets, things I consider un-natural).
So the justification behind my conclusion covers more than a few points and is subjective to no small extent. That being said, while there is some quantitative data behind my thinking, I certainly can't put it together in a hard and fast formula.
I tend to note things I read and think a lot about the various pieces, how they all fit together. So in no particular chronological order (some) of the points I've noted:
- We know that open interest in NYMEX oil futures has increased some %77 in the past three years to 1.35 million contracts.. My gut feel - no data mind you - is this increase outstrips the demand side, indicating that commercial producers / suppliers are not responsible for such a large increase in such a short time. The same article mentions shipping and storage with regards to increasing oil prices - the next point.
- It appears that some producers, for example, Iran, have been deliberately withholding oil from the market by pumping but storing crude in offshore tankers. The last I'd read Iran had at least 20 million barrels of oil, equal to about 5 days of the country's output. Admittedly five days is very small in terms of the overall markets size, but this is very, very difficult information to come by, and I've seen other reports of intermediaries at all levels engaging in this - potentially very lucrative - practice.
- In April Blooomberg had an interesting story about capital inflows, `Tidal Wave' in Commodities Rises to $400 Billion. Bloomberg identified two agents as driving capital into this sector - Hedge Funds who had increased holdings some %25 YOY, and the favourite of retail investors, ETFs, who had increased holdings by %31 YOY. They noted that roughly $70B in capital - speculative capital had been drawn to this sector in Q1 2008 alone. Also of note (and formative to my thinking about a possible collapse of the bubble) the comment : "The ``tidal wave'' of the past quarter is showing ``signs it is already ebbing,'' Heap and Tonks wrote. ``We don't think it is sustainable.''"
- In February The Economist published an interesting analysis Pumped up:Soaring prices for oil and more where they quoted some Citigroup research as '...the recent rise in the oil price “is driven principally by a sharp uptick in fund flows.” '.
- As long ago as September 2006, Calpers had announced plans to move capital into direct commodity exposure. At that point in time they already had some %8.4 of their total capital invested in shares of commodity related firms e.g., Exxon, and, of course, they had indirect exposure via their $9B investment in hedge funds (of a total portfolio of $208B).
- Calpers is willing to put at least as much as $8B into this market. When asked about these plans a Calpers spokesperson commented "Why would we overlook any potential strategy that would give us good returns?". Calpers has explicitly noted they'll engage in both long & short sides of the trade. The same article notes that The Ontario Teachers' Pension Plan, which has about 2% of its $106 billion (Canadian) in investments allocated to commodities as well.
On to the current hysteria - Peak Oil.
It seems we're being asked to swallow a lot of the current price spikes due to Peak Oil. We've just had another FPP about that which I had the pleasure of posting in, and I'm not totally convinced about the shortage or Peak Oil.
Why? Well, folks are getting all twisted up - it's hard not to with these prices - and demanding an explanation. Peak Oil, that we're running out is very convenient.
But I remember previous oil shortages. We've been though this all before.
Fanning (1950) cataloged six oil scares since the turn of the twentieth century :
1. The Model T Scare — 1916
2. The Gasless Sunday Scare — 1918
3. The John Bull Scare — 1920-23
4. The Ickes’ Petroleum Reserves Scare — 1943-44
5. The Cold War Scare — 1946-47
6. The Cold Winter Scare — 1947-48
Those of course were up to the publication of his book, so we can add atleast two more since :
1. Arab Embargo Scare — 1973
2. Iranian Revolution Scare — 1979
So any student of the markets will know these warning drums have been beaten before. I'll leave it to you folks to review the impact on prices; while less severe than those observed during the current scare, they were, in their own time, equally damaging to the consumer while beneficial to unnamed parties.
Full citation: Fanning, L. M., 1950, A case history of oil-shortage scares, in, Our Oil Resources, McGraw-Hill, New York.
I guess the thing that bugs me the most of all the FUD flying about these days is (besides the fact I don't trade commodities and boy howdy have I left some money on the table!!) Hubbert's curves assume limited, finite resources. Fair enough, oil is indeed finite.
But the size of all reserves?
That's the sticky wicket. We're implicitly talking about the size of all KNOWN reserves, a very critical qualification that seems to be omitted, at least by the mainstream media, all too often. Also relevant: I don't believe (again, personal opinion as this isn't my market) that the oil companies have properly invested in discovering new reserves.
So there you go. Is the Hubbert Curve, the entire Peak Oil argument so clear cut now? Again, I'm not sure.
And I always think back to the last time we hit Peak Oil, and Whale Oil was supplanted by petroleum. Keep in mind that drilling is a relatively new phenomenon, deep drilling even newer, non conventional so new as its still in infancy, that before all this oil was scooped right up off the surface.
So I'm not buying the explanation that's being offered and think there is a lot of speculation involved.
Now for the (possible) collapse - well, already there are reports of speculators moving capital out of this market.
Bubbles are interesting in that professional money always takes from retail. Dot-com? Pro's didn't get fleeced - retail did. Look at other bubbles - it's always the same. Retail loses.
So (if and) when this thing bursts the professional money will move out faster than retail, and it is retail that will get left holding the overpriced assets when (a nod to your point, 'if') a correction comes.
Selling overpriced assets into a declining market? You don't want to be trading that position.
So I don't have data (at least that I would post), buy by putting together lots of disparate data points that I've read, as well as talking to folks who, as previously noted, have either pulled out totally or are sharply cutting back of this market, I think speculative bubble.
Finally, I have no idea if this market is in backwardation or contango at present but either way it doesn't impact what my gut feel says are excessive speculative forces operating here.
I've actually been watching all the fun rather enviously from the sidelines as I don't trade like this, but the longer I watch and the more I read, the more bubble like I think this market is.
posted by Mutant at 10:20 AM on June 27, 2008 [33 favorites]
ryoshu: that seems like a pretty poorly thought out comment. In addition to supply/demand there's a concept of how elastic demand is with respect to price. As well, the econ-minded definition of demand can't exceed supply. If you're pakistan, and you want to buy diesel/crude to run the generators at the electric generators to run some AC and maybe stop the riots over load shedding, you're not going to hold out for $20 old.
If you're in the US and need to commute 40 miles to work, you're going to do that no matter the price. You might cut out a few 10 mile trips on the weekend, but you "need" to get to work to buy food and keep up with the mortgage. One might make plans to relocate closer to work, but how's your house price holding up? Guess you're stuck with the commute. Fuel is curently a small enough of a percentage of the western world's personal budget (recently went up to about 5% instead of 2.5% and was around 5% in the early 70's.), that there's only going to be a small amount of driving that will be eliminated at prices. Heck, if gas went to $10 a gallon there'd be a lot of grumbling, and maybe some people might attempt car pooling, but the majority will ransack the 401k's or kid's education funds and keep the SUV filled up since they can't even dump it except at a great loss.
I love my cheap old Echo - gets about 40mpg, and I live 8km from work. Even better, it will be moving to be about 3k from my house, that's easy biking! I can take 10 gas easy - the only place it will really hurt is when it shows up in continued escalating food prices. But most will see the high price of food as indirect to crude.
posted by nobeagle at 10:22 AM on June 27, 2008 [1 favorite]
If you're in the US and need to commute 40 miles to work, you're going to do that no matter the price. You might cut out a few 10 mile trips on the weekend, but you "need" to get to work to buy food and keep up with the mortgage. One might make plans to relocate closer to work, but how's your house price holding up? Guess you're stuck with the commute. Fuel is curently a small enough of a percentage of the western world's personal budget (recently went up to about 5% instead of 2.5% and was around 5% in the early 70's.), that there's only going to be a small amount of driving that will be eliminated at prices. Heck, if gas went to $10 a gallon there'd be a lot of grumbling, and maybe some people might attempt car pooling, but the majority will ransack the 401k's or kid's education funds and keep the SUV filled up since they can't even dump it except at a great loss.
I love my cheap old Echo - gets about 40mpg, and I live 8km from work. Even better, it will be moving to be about 3k from my house, that's easy biking! I can take 10 gas easy - the only place it will really hurt is when it shows up in continued escalating food prices. But most will see the high price of food as indirect to crude.
posted by nobeagle at 10:22 AM on June 27, 2008 [1 favorite]
there's a simple dynamic that is missing in this thread here, until nobeagle above, and that is the consumer's ability to pay for $140 oil.
While I do think, in my untrained and rather naive way, that futures speculation is leading the spot prices up & up, at the end of the day the spot price must match the market-clearing price.
With 20 gallons of gas per barrel of oil, $30 implies ~$1.50 gasoline. $60 implies ~$3.00 gas. $90 implies the present $4.50 regime.
$140, should it stick, will result in $7 gasoline.
They key question Mr Market is looking at is where does the consumer break in this price discovery? $3 gasoline wasn't it. $4.50? The jury's still out. I'll be surprised if $7 doesn't result in significant demand destruction.
Mutant, I think price-setting on oil is basically determined by the mainstream producer's daily output relative to daily demand.
When the mainstream producers' elephant fields are running flat out, as they are, and the world is taking all they make, and wants more, prices will HAVE to drift up given the general post-peak supply situation the mainstream finds itself in.
Marginal producers like Canada's bitumen operations, while they have immense potential reserves, cannot bring these reserves to market in any quantity to affect prices.
The price is set by the mainstream, and the mainstream is in, at best, slow decline.
posted by yort at 10:40 AM on June 27, 2008
While I do think, in my untrained and rather naive way, that futures speculation is leading the spot prices up & up, at the end of the day the spot price must match the market-clearing price.
With 20 gallons of gas per barrel of oil, $30 implies ~$1.50 gasoline. $60 implies ~$3.00 gas. $90 implies the present $4.50 regime.
$140, should it stick, will result in $7 gasoline.
They key question Mr Market is looking at is where does the consumer break in this price discovery? $3 gasoline wasn't it. $4.50? The jury's still out. I'll be surprised if $7 doesn't result in significant demand destruction.
Mutant, I think price-setting on oil is basically determined by the mainstream producer's daily output relative to daily demand.
When the mainstream producers' elephant fields are running flat out, as they are, and the world is taking all they make, and wants more, prices will HAVE to drift up given the general post-peak supply situation the mainstream finds itself in.
Marginal producers like Canada's bitumen operations, while they have immense potential reserves, cannot bring these reserves to market in any quantity to affect prices.
The price is set by the mainstream, and the mainstream is in, at best, slow decline.
posted by yort at 10:40 AM on June 27, 2008
It's really pretty simple, at its core: too many dollars, not enough oil.
posted by Malor at 10:42 AM on June 27, 2008
posted by Malor at 10:42 AM on June 27, 2008
In related news ...
As Americans suffer at the pump, energy industry basks in luxury.
As Americans suffer at the pump, energy industry basks in luxury.
"Soaring oil and gas prices may be a fiscal drag for much of the nation, but in Houston, they are feeling an economic surge. 'Few places have flourished like Houston, home to hundreds of oil exploration, engineering and oil service firms, including such giants as Baker Hughes and Halliburton.' The Chicago Tribune reports:posted by ericb at 10:46 AM on June 27, 2008 [1 favorite]'Here in Houston, Maserati sales are up 86 percent so far this year, according to the TexAuto Facts Report.'We know that everybody is talking about a recession in the U.S., but we’re not experiencing that here,' said Tracye McDaniel, executive vice president of the Greater Houston Partnership, a business development group. 'We exist in this bubble, if you will.'"
Chanel and Yves Saint Laurent are expanding their luxury stores at the Galleria shopping mall. New construction permits in the city have jumped by almost 30 percent. The region added more than 100,000 jobs last year. And the mayor just proposed a dream budget for next year featuring more cops and lower property taxes.'
ryoshu: that seems like a pretty poorly thought out comment.
It was more snark than a well thought out comment. We are dealing with a complex market that has seen a rash of money flood in after CDOs took a bath. Prior to that bath taking, you can bet some of the hedge funds were already getting into the commodities market.
Mutant pretty much laid out what I've been thinking about commodities, with the added bonus that some of the big boys are taking profits and pulling out (I was waiting to hear about that). You can map the oil happenings to food prices (prior to the tsunami in Asia and flooding in the midwest) and see the same sort of behavior. There was no massive downturn in supply or upswing in demand to explain the price increases. But there was a massive influx of money into the market as financial types were looking for a better return on their cash.
Sure, maybe some people will starve, maybe some will riot, maybe the little guy will get squeezed a lot more, but hey, look at these profits!
The problem is this sort of behavior distorts markets. Buyers get fleeced because they are paying more than what the commodity is worth, sans-speculation. Sellers can get screwed because they are seeing a fake demand that may cause them to increase production, only to see that production got to waste once the bubble pops.
The only people that benefit from this type of behavior are the market makers.
posted by ryoshu at 10:47 AM on June 27, 2008
It was more snark than a well thought out comment. We are dealing with a complex market that has seen a rash of money flood in after CDOs took a bath. Prior to that bath taking, you can bet some of the hedge funds were already getting into the commodities market.
Mutant pretty much laid out what I've been thinking about commodities, with the added bonus that some of the big boys are taking profits and pulling out (I was waiting to hear about that). You can map the oil happenings to food prices (prior to the tsunami in Asia and flooding in the midwest) and see the same sort of behavior. There was no massive downturn in supply or upswing in demand to explain the price increases. But there was a massive influx of money into the market as financial types were looking for a better return on their cash.
Sure, maybe some people will starve, maybe some will riot, maybe the little guy will get squeezed a lot more, but hey, look at these profits!
The problem is this sort of behavior distorts markets. Buyers get fleeced because they are paying more than what the commodity is worth, sans-speculation. Sellers can get screwed because they are seeing a fake demand that may cause them to increase production, only to see that production got to waste once the bubble pops.
The only people that benefit from this type of behavior are the market makers.
posted by ryoshu at 10:47 AM on June 27, 2008
"The first point that I think needs stressing is that oil and gas prices have been on a sustained upward trajectory for years. A gallon of unleaded regular was $1.55 in November 2000, and has more or less risen steadily ever since -- people were making a big fuss about $2.00 a gallon oil in 2004! The price of oil in 2000 was about 25 bucks a barrel, and it too, obviously, has risen relentlessly. Remember, in 2000, $60 dollar a barrel an oil would have seemed sky-high! Now it seems cheap. So what we are currently experiencing isn't a sudden break from past trends, but the rapid acceleration of a trend already well in place."
--Andrew Leonard in Salon
he makes another very salient point... the traditional response to increased prices is increased production. after all, commodity producers are incentivized to sell at the highest possible price. so the best saudi arabia can come up with is 200k barrels/day when world production is 85 million or so?
i think blaming this increase on speculative activity is a whole boatload of wishful thinking and continued denial about the reality of peak oil does us all a disservice. remember, we have to look no further than the good ol' USA since 1973 to see peak in action. we were once the world's largest producer. now we're the world's largest consumer. that was fine because there were other places to get oil. but when we hit peak (now) on a global level, there's nowhere else to go. except maybe the giant oil lakes on the moon.
posted by Hat Maui at 10:47 AM on June 27, 2008 [2 favorites]
--Andrew Leonard in Salon
he makes another very salient point... the traditional response to increased prices is increased production. after all, commodity producers are incentivized to sell at the highest possible price. so the best saudi arabia can come up with is 200k barrels/day when world production is 85 million or so?
i think blaming this increase on speculative activity is a whole boatload of wishful thinking and continued denial about the reality of peak oil does us all a disservice. remember, we have to look no further than the good ol' USA since 1973 to see peak in action. we were once the world's largest producer. now we're the world's largest consumer. that was fine because there were other places to get oil. but when we hit peak (now) on a global level, there's nowhere else to go. except maybe the giant oil lakes on the moon.
posted by Hat Maui at 10:47 AM on June 27, 2008 [2 favorites]
Can someone explain to me how speculators can affect the market price?
The only mechanism that allows them to do that is hoarding, and hoarding oil (by keeping tankers out at sea instead of unloading them) is horrifically expensive and also stupid, because if oil was in a bubble, it could crash any moment, losing the speculators vast amounts of $$.
Speculators can certainly affect futures, but futures in oil (as in coal) are trading around the market price.
posted by unSane at 10:50 AM on June 27, 2008
The only mechanism that allows them to do that is hoarding, and hoarding oil (by keeping tankers out at sea instead of unloading them) is horrifically expensive and also stupid, because if oil was in a bubble, it could crash any moment, losing the speculators vast amounts of $$.
Speculators can certainly affect futures, but futures in oil (as in coal) are trading around the market price.
posted by unSane at 10:50 AM on June 27, 2008
Gosh re-reading my comment I must apologise - it comes off as terribly unhelpful in terms of the data I've got. I just didn't want to post it as I'm still mulling through the data.
But anyway, in my profile I maintain links to pricing data for multiple asset classes, Oil included.
EIA also has supply & demand data, downloadable in .xls format, both for current month as well as historical. I've linked to this source as well.
Also available are electricity and natural gas data. Some of these series I've corroborated against other sources (always important), specifically Bloomberg and DataStream, and this is very reliable. And free.
If anyone can recommend a data source please pass it along and I'll add it to my list as well.
Now you folks know what I know -- hope this helps somebody!
posted by Mutant at 10:52 AM on June 27, 2008 [3 favorites]
But anyway, in my profile I maintain links to pricing data for multiple asset classes, Oil included.
EIA also has supply & demand data, downloadable in .xls format, both for current month as well as historical. I've linked to this source as well.
Also available are electricity and natural gas data. Some of these series I've corroborated against other sources (always important), specifically Bloomberg and DataStream, and this is very reliable. And free.
If anyone can recommend a data source please pass it along and I'll add it to my list as well.
Now you folks know what I know -- hope this helps somebody!
posted by Mutant at 10:52 AM on June 27, 2008 [3 favorites]
Also, I love the idea that there's all these untapped reserves out there which we just have to go out and find. Sure, but they only become economic at higher prices. Canada's oil sands only became economic when the long term price of oil passed $40. There was a time when that seemed expensive.
posted by unSane at 10:52 AM on June 27, 2008
posted by unSane at 10:52 AM on June 27, 2008
Buyers get fleeced because they are paying more than what the commodity is worth,
whoah, whoah, hold on their a second.
$4.50 gas is still an immense bargain compared to any other consumer good I buy.
1 gallon of gas can get me all around town for the day . . . eg, yesterday: Safeway, Wal-Mart, Panda . . . quickly and efficiently compared to taking the bus. Hah! So in my shopping trip yesterday, I spent about $100, and $4.50 went to Big Oil.
Big deal. 4 gallons of gas . . . $20 . . . can get me up to the City for the day. The caltrain 4-zone pass is $15. I'll drive, thanks.
We got used to cheap oil in the late last century ... which was essentially too much supply at low cost of production -- $2/barrel overwhelming the world's then-current ability to consume it.
The situation is different now. Demand has grown while supply -- since the North Sea fields peaked in the 90s -- hasn't kept up.
posted by yort at 10:54 AM on June 27, 2008
whoah, whoah, hold on their a second.
$4.50 gas is still an immense bargain compared to any other consumer good I buy.
1 gallon of gas can get me all around town for the day . . . eg, yesterday: Safeway, Wal-Mart, Panda . . . quickly and efficiently compared to taking the bus. Hah! So in my shopping trip yesterday, I spent about $100, and $4.50 went to Big Oil.
Big deal. 4 gallons of gas . . . $20 . . . can get me up to the City for the day. The caltrain 4-zone pass is $15. I'll drive, thanks.
We got used to cheap oil in the late last century ... which was essentially too much supply at low cost of production -- $2/barrel overwhelming the world's then-current ability to consume it.
The situation is different now. Demand has grown while supply -- since the North Sea fields peaked in the 90s -- hasn't kept up.
posted by yort at 10:54 AM on June 27, 2008
While I do think, in my untrained and rather naive way, that futures speculation is leading the spot prices up & up, at the end of the day the spot price must match the market-clearing price.
Spot prices are more affected by present conditions. They generally take into account actual costs to receive a commodity immediately. In other words, the commodity itself + shipping costs + storage costs + political costs + etc.
posted by Benny Andajetz at 10:55 AM on June 27, 2008
Spot prices are more affected by present conditions. They generally take into account actual costs to receive a commodity immediately. In other words, the commodity itself + shipping costs + storage costs + political costs + etc.
posted by Benny Andajetz at 10:55 AM on June 27, 2008
For those making the supply/demand argument, has the demand for oil increased 700% over the last 8 years?
That's only half the question. Has the supply dropped? It has in a goodly number of fields, and the replacement fields costs significantly more to extract from. That raises the base cost (remember, if you can only sell for $15, you don't extract oil at $20.)
Furthermore, supply/demand of consumable goods as a simple function only works with infinite supply -- that is, that the total demand can always be satisfied, no matter what the price. Simple supply/demand curves fail in the face of constrained supply.
What happens -- part of the demand goes to infinite price. If the demand is 75 frobnitz, and there are only 60 frobnitz available, then the price of 15 of them is infinite. After 60 of them are sold and consumed, you cannot buy a frobnitz that day, no matter how many zorkmids you're willing to pay.
So -- the simple supply/demand curve cannot meet. You cannot set a price to satisfy the demand. Now, do you think the supplier is going to sell frobnitz to the 60 people willing to pay the least for those frobnitz, or the most? Thus, the price rises faster than the S/D curve would imply. A single producer can decide to drop his price -- and will quickly sell out. Since there's still more demand than supply, the rest of the producers will soon realize that they don't have to drop their prices. That single producer, if he's smart, will realize that he can make more by raising his price. Since they're selling everything they can produce, there's no cost to them to not raise prices.
In an infinite supply, a producer deciding to sell at 1 Frobnitz means you won't sell at 2 -- demand will flow to the lower price. In constrained supply, a low price supplier can be exhausted, which means that he's not locking the top price.
Now, if Frobnitz are just a tasty snack, this won't push prices very high. However, if you are required to have Frobnitz to live, the price will go very high -- because you cannot afford to not have that Frobnitz.
This leads to another concept to watch for in the future. What if that was literally true? If you did not get your Minimum Daily Allowance of frobnitz every day, you died?
What we have here is "demand destruction." Inability to satisfy the demand leads to the demand disappearing. In this case, during the next days auction, there's not so much demand. 15 have died, there are now only 60 bidders for frobnitz. Thus, the frobnitz supplier finds himself not making nearly as much as he did yesterday.
Unless he's the only supplier. But that's another lesson.
In the cases of constrained supply of needed good, the demand will eventually fix itself. Demanders who cannot afford the good either find other ways to live, or, well, to be brutally honest, they don't. In either case, their demand for the good drops dramatically.
However, this can be a nasty process. Many rapid transit orgs found that when they closed a line for two-three years to rebuild it, they had almost no riders when it reopened. Why? Demand destruction. People found other ways of going to work in the face of an infinite cost of usage for that line.
This is the eventual result of peak oil. Demand destruction, as people realize they simply cannot afford to use oil. How that destruction takes place is another question -- and the answers are almost certainly not going to be pretty.
So. If we're looking at constrained supply, we're seeing only the high end of the demand curve satisfied. We're already starting to see some people reducing usage. The question is if this is the start of demand destruction -- they're going to get out of buying oil -- or if this is just temporary shortfall -- they're still in the market, but limiting purchases because of price.
As to speculators being part of this? Sure. All markets have them. They're betting that oil prices will continue to climb. Given that there's very little apparent demand destruction yet -- plenty of people are buying and using oil -- there's the strong implication that demand is strong and supply is constrained.
posted by eriko at 10:57 AM on June 27, 2008 [10 favorites]
That's only half the question. Has the supply dropped? It has in a goodly number of fields, and the replacement fields costs significantly more to extract from. That raises the base cost (remember, if you can only sell for $15, you don't extract oil at $20.)
Furthermore, supply/demand of consumable goods as a simple function only works with infinite supply -- that is, that the total demand can always be satisfied, no matter what the price. Simple supply/demand curves fail in the face of constrained supply.
What happens -- part of the demand goes to infinite price. If the demand is 75 frobnitz, and there are only 60 frobnitz available, then the price of 15 of them is infinite. After 60 of them are sold and consumed, you cannot buy a frobnitz that day, no matter how many zorkmids you're willing to pay.
So -- the simple supply/demand curve cannot meet. You cannot set a price to satisfy the demand. Now, do you think the supplier is going to sell frobnitz to the 60 people willing to pay the least for those frobnitz, or the most? Thus, the price rises faster than the S/D curve would imply. A single producer can decide to drop his price -- and will quickly sell out. Since there's still more demand than supply, the rest of the producers will soon realize that they don't have to drop their prices. That single producer, if he's smart, will realize that he can make more by raising his price. Since they're selling everything they can produce, there's no cost to them to not raise prices.
In an infinite supply, a producer deciding to sell at 1 Frobnitz means you won't sell at 2 -- demand will flow to the lower price. In constrained supply, a low price supplier can be exhausted, which means that he's not locking the top price.
Now, if Frobnitz are just a tasty snack, this won't push prices very high. However, if you are required to have Frobnitz to live, the price will go very high -- because you cannot afford to not have that Frobnitz.
This leads to another concept to watch for in the future. What if that was literally true? If you did not get your Minimum Daily Allowance of frobnitz every day, you died?
What we have here is "demand destruction." Inability to satisfy the demand leads to the demand disappearing. In this case, during the next days auction, there's not so much demand. 15 have died, there are now only 60 bidders for frobnitz. Thus, the frobnitz supplier finds himself not making nearly as much as he did yesterday.
Unless he's the only supplier. But that's another lesson.
In the cases of constrained supply of needed good, the demand will eventually fix itself. Demanders who cannot afford the good either find other ways to live, or, well, to be brutally honest, they don't. In either case, their demand for the good drops dramatically.
However, this can be a nasty process. Many rapid transit orgs found that when they closed a line for two-three years to rebuild it, they had almost no riders when it reopened. Why? Demand destruction. People found other ways of going to work in the face of an infinite cost of usage for that line.
This is the eventual result of peak oil. Demand destruction, as people realize they simply cannot afford to use oil. How that destruction takes place is another question -- and the answers are almost certainly not going to be pretty.
So. If we're looking at constrained supply, we're seeing only the high end of the demand curve satisfied. We're already starting to see some people reducing usage. The question is if this is the start of demand destruction -- they're going to get out of buying oil -- or if this is just temporary shortfall -- they're still in the market, but limiting purchases because of price.
As to speculators being part of this? Sure. All markets have them. They're betting that oil prices will continue to climb. Given that there's very little apparent demand destruction yet -- plenty of people are buying and using oil -- there's the strong implication that demand is strong and supply is constrained.
posted by eriko at 10:57 AM on June 27, 2008 [10 favorites]
If you're not shorting oil you're crazy, or at least oil ETFs. Oil rises fast and then goes down slow. Pretty soon the squeeze will be on the other side as retail realizes there is no fear in oil producers meeting contractual obligations at much lower prices. It could take awhile to happen, but if you told someone in the 70s when oil got to ~$105 that in twenty years it would actually be back down to $20bbl, they'd think you were crazy.
posted by geoff. at 11:02 AM on June 27, 2008
posted by geoff. at 11:02 AM on June 27, 2008
The jury's still out. I'll be surprised if $7 doesn't result in significant demand destruction.
Oh, it will result in "demand destruction", but not of gas, per se.
We still have several dozen million people (at least) who live in semi-rural suburbs 1+ hours drive from their job. They can't just take the bus or the subway (especially here in Houston, where mass transit is virtually non-existent). So, no, they'll keep buying gas, even at $7/gal. They won't have a choice. They'll still drive to work every day, because if they don't, they can't eat.
The real demand destruction will be in other areas. People will stop going to the doctor, or start having spam'n'eggs for dinner 4 nights a week. Thats the real "demand destruction" wrought from high gas prices: demand for everything else will go down.
posted by Avenger at 11:05 AM on June 27, 2008 [4 favorites]
Oh, it will result in "demand destruction", but not of gas, per se.
We still have several dozen million people (at least) who live in semi-rural suburbs 1+ hours drive from their job. They can't just take the bus or the subway (especially here in Houston, where mass transit is virtually non-existent). So, no, they'll keep buying gas, even at $7/gal. They won't have a choice. They'll still drive to work every day, because if they don't, they can't eat.
The real demand destruction will be in other areas. People will stop going to the doctor, or start having spam'n'eggs for dinner 4 nights a week. Thats the real "demand destruction" wrought from high gas prices: demand for everything else will go down.
posted by Avenger at 11:05 AM on June 27, 2008 [4 favorites]
ryoshu: as snark I guess it makes a bit more sense. Yes, some people are making profits on the upward price trajectory, but at the end of the month either 1) someone is left holding an expensive bag for a front month contract and can't take delivery, or 2) someone who can take delivery decides that the price is worth paying.
I'm sure that speculation has helped the price up a bit. Iran paying tankers to idle full also helps. But increasing worldwide demand (despite falling african and US demand), coupled with stagnant supply I think is the bigger factor.
I like how Saudi Arabia makes a big announcement how they'll increase production. But it also happens to coincide with a new field coming online. That really makes it look like they're pumping full speed ahead, and that their spare capacity is their Manifa crude - crude so full of Hyrdrogen Sulfide and Vanadium that the Saudi's are building a special refinery just for it because no one will by it. So when you hear about the Saudi's 2mbd spare capacity, ask if it's from Manifa or a better quality well. Have fun getting an answer.
Over at econbrowser, Prof. James Hamilton has a number of recent (and older) posts addressing speculation.
Sure, maybe some people will starve, maybe some will riot,
Um, check out google news, almost every day there's a new energy riot in some major city. Oh wait, those are in developing nations. The price is starting to make US/Canadian consumers cut back a bit. At $60 is strongly started making developing nations which didn't/couldn't subsidize fuel cut back. More drought in Australia and flooding in the midwest - I bet it will be a bumper food crop this year. Or not. How's your victory garden coming?
posted by nobeagle at 11:11 AM on June 27, 2008 [1 favorite]
I'm sure that speculation has helped the price up a bit. Iran paying tankers to idle full also helps. But increasing worldwide demand (despite falling african and US demand), coupled with stagnant supply I think is the bigger factor.
I like how Saudi Arabia makes a big announcement how they'll increase production. But it also happens to coincide with a new field coming online. That really makes it look like they're pumping full speed ahead, and that their spare capacity is their Manifa crude - crude so full of Hyrdrogen Sulfide and Vanadium that the Saudi's are building a special refinery just for it because no one will by it. So when you hear about the Saudi's 2mbd spare capacity, ask if it's from Manifa or a better quality well. Have fun getting an answer.
Over at econbrowser, Prof. James Hamilton has a number of recent (and older) posts addressing speculation.
Sure, maybe some people will starve, maybe some will riot,
Um, check out google news, almost every day there's a new energy riot in some major city. Oh wait, those are in developing nations. The price is starting to make US/Canadian consumers cut back a bit. At $60 is strongly started making developing nations which didn't/couldn't subsidize fuel cut back. More drought in Australia and flooding in the midwest - I bet it will be a bumper food crop this year. Or not. How's your victory garden coming?
posted by nobeagle at 11:11 AM on June 27, 2008 [1 favorite]
there's a simple dynamic that is missing in this thread here, until nobeagle above, and that is the consumer's ability to pay for $140 oil.
I would say that consumers are being held over a barrel, so to speak. Consumers will be compelled to pay whatever the market dictates. The only other choice is to starve.
More expensive gasoline is both a cause, and an ancillary effect of higher oil prices. Basically, consumers cannot opt out of a market of higher gas prices by refusing to drive, because everything else in life is connected to the price of oil. No matter what, consumers are going to be forced to pay for higher transport costs for food, higher costs for plastics (you know, the stuff that is used in everything). And that's just a start.
posted by KokuRyu at 11:16 AM on June 27, 2008
I would say that consumers are being held over a barrel, so to speak. Consumers will be compelled to pay whatever the market dictates. The only other choice is to starve.
More expensive gasoline is both a cause, and an ancillary effect of higher oil prices. Basically, consumers cannot opt out of a market of higher gas prices by refusing to drive, because everything else in life is connected to the price of oil. No matter what, consumers are going to be forced to pay for higher transport costs for food, higher costs for plastics (you know, the stuff that is used in everything). And that's just a start.
posted by KokuRyu at 11:16 AM on June 27, 2008
but if you told someone in the 70s when oil got to ~$105 that in twenty years it would actually be back down to $20bbl, they'd think you were crazy
You really need to internalize what this chart implies.
Supply shocks prompt nasty episodes of price discovery.
I'm not a Kunstler-esque doom & gloomer, though, I think alternatives will be productized soon enough. I hope to convert my Miata to battery power early next decade (I actually bought it in 2000 with this expectation).
posted by yort at 11:17 AM on June 27, 2008
You really need to internalize what this chart implies.
Supply shocks prompt nasty episodes of price discovery.
I'm not a Kunstler-esque doom & gloomer, though, I think alternatives will be productized soon enough. I hope to convert my Miata to battery power early next decade (I actually bought it in 2000 with this expectation).
posted by yort at 11:17 AM on June 27, 2008
One clarification on peak oil: peak oil does not mean oil is drying up, it means cheap oil is drying up. That's the immediate consequence. Tar sands, shale, etc. make no sense to extract at $20/bbl, but it makes complete sense at $140/bbl. iirc, tar sands make sense around $70/bbl.
There are also a number of untapped areas we haven't touched yet. Brazil made a huge discovery off their coast last year - somewhere between 30-70 billion barrels of light crude. Oil companies have lease rights across the US, but have yet to start any drilling (which is why the cry for opening ANWR is so much bullshit). True, some of the worlds larger fields are on the decline -- hi Mexico!
It's true that oil has been going steadily up for quite a while. You can look at several issues for that: war in the Middle East, declining dollar, two oil men in the White House, etc.
So what's caused other commodities to increase so much? Gold, silver, platinum, corn, wheat, rice, etc.? Are we experiencing peak rice? Peak corn? Peak gold?
I do think Xurando nailed it with the title of the post: "Buy Now, It'll Only Go Higher."
Sounds vaguely familiar...
posted by ryoshu at 11:22 AM on June 27, 2008
There are also a number of untapped areas we haven't touched yet. Brazil made a huge discovery off their coast last year - somewhere between 30-70 billion barrels of light crude. Oil companies have lease rights across the US, but have yet to start any drilling (which is why the cry for opening ANWR is so much bullshit). True, some of the worlds larger fields are on the decline -- hi Mexico!
It's true that oil has been going steadily up for quite a while. You can look at several issues for that: war in the Middle East, declining dollar, two oil men in the White House, etc.
So what's caused other commodities to increase so much? Gold, silver, platinum, corn, wheat, rice, etc.? Are we experiencing peak rice? Peak corn? Peak gold?
I do think Xurando nailed it with the title of the post: "Buy Now, It'll Only Go Higher."
Sounds vaguely familiar...
posted by ryoshu at 11:22 AM on June 27, 2008
Sounds vaguely familiar...
The housing bubble 2004-2006 was caused due to buyers being allowed to mix investment (speculative) activity with housing consumption on massive -- in many cases infinite, zero-down -- leverage with loans explicitly designed to self-destruct 2-5 years down the road.
In the housing bubble markets, purchase prices far, far outstripped equivalent rents; the bubble was obvious to anyone once they understood the lending practices that were allowed to exist 2003-2006.
$5 gas does not seem to be an unsupportable pricepoint to me. How much are YOU cutting back?
posted by yort at 11:39 AM on June 27, 2008
The housing bubble 2004-2006 was caused due to buyers being allowed to mix investment (speculative) activity with housing consumption on massive -- in many cases infinite, zero-down -- leverage with loans explicitly designed to self-destruct 2-5 years down the road.
In the housing bubble markets, purchase prices far, far outstripped equivalent rents; the bubble was obvious to anyone once they understood the lending practices that were allowed to exist 2003-2006.
$5 gas does not seem to be an unsupportable pricepoint to me. How much are YOU cutting back?
posted by yort at 11:39 AM on June 27, 2008
$5 gas does not seem to be an unsupportable pricepoint to me. How much are YOU cutting back?
Well, since I telecommute and most everything I need is within walking distance, I haven't really cut back. I don't own a car (public transportation is great in NYC), so gas prices haven't affected me as much as the people that have to drive everyday. Food prices have certainly increased, not only because of the speculation in the commodities market, but the increase in the price of oil ripples throughout every industry. I have cut back spending on non-necessities. But that's because I hate America.
Still, looking at the supply/demand curve, I just can't see anything that has made oil jump as much as it has. Over the last few months, ANY news would cause the price of oil to go up. Supply goes up? Price goes up. Demand goes down? Price goes up. Brazil discovers 30-70 billion barrels of oil? Price goes up.
That's not rational market behavior.
posted by ryoshu at 11:49 AM on June 27, 2008
Well, since I telecommute and most everything I need is within walking distance, I haven't really cut back. I don't own a car (public transportation is great in NYC), so gas prices haven't affected me as much as the people that have to drive everyday. Food prices have certainly increased, not only because of the speculation in the commodities market, but the increase in the price of oil ripples throughout every industry. I have cut back spending on non-necessities. But that's because I hate America.
Still, looking at the supply/demand curve, I just can't see anything that has made oil jump as much as it has. Over the last few months, ANY news would cause the price of oil to go up. Supply goes up? Price goes up. Demand goes down? Price goes up. Brazil discovers 30-70 billion barrels of oil? Price goes up.
That's not rational market behavior.
posted by ryoshu at 11:49 AM on June 27, 2008
I just can't see anything that has made oil jump as much as it has
The market is seeking the price level where demand declines to buy.
This process, as you hinted at above, is similar to the housing bubble price move.
The spot price move from $90 to $140 was made, partly, because consumers told the producers that they could pay $90, no problem. This summer's driving season will determine, to some extent, how sticky this new $140 level is.
posted by yort at 12:00 PM on June 27, 2008
The market is seeking the price level where demand declines to buy.
This process, as you hinted at above, is similar to the housing bubble price move.
The spot price move from $90 to $140 was made, partly, because consumers told the producers that they could pay $90, no problem. This summer's driving season will determine, to some extent, how sticky this new $140 level is.
posted by yort at 12:00 PM on June 27, 2008
Not rocket science, folks:
Oil Price = Intrinsic value of oil + Speculation + dollar devaluation
Intrinsic value of oil = f(immediate supply, immediate demand, long-term supply outlook, long term demand outlook).
Too see the dollar devaluation component of the dollar price of oil, compare the dollar oil price chart to a euro oil price chart. The separation between the two is the currency component.
The speculative component is best seen as the difference between the currency-depreciation adjusted slope of the price graph compared to the slope of the short and long term supply and demand graphs. This will not give you a mathematically precise figure, but it will show you right away whether the effect of speculation is large or small.
posted by Pastabagel at 12:04 PM on June 27, 2008 [3 favorites]
Oil Price = Intrinsic value of oil + Speculation + dollar devaluation
Intrinsic value of oil = f(immediate supply, immediate demand, long-term supply outlook, long term demand outlook).
Too see the dollar devaluation component of the dollar price of oil, compare the dollar oil price chart to a euro oil price chart. The separation between the two is the currency component.
The speculative component is best seen as the difference between the currency-depreciation adjusted slope of the price graph compared to the slope of the short and long term supply and demand graphs. This will not give you a mathematically precise figure, but it will show you right away whether the effect of speculation is large or small.
posted by Pastabagel at 12:04 PM on June 27, 2008 [3 favorites]
The market is seeking the price level where demand declines to buy.
But why is it just now so aggressively seeking that price level? What's so unique about this point in recent history that producers suddenly realized, "Hey, geez, turns out we could be selling this here oil stuff for a lot more than we do and people will still buy it--we've been such saps!"
posted by saulgoodman at 12:05 PM on June 27, 2008
But why is it just now so aggressively seeking that price level? What's so unique about this point in recent history that producers suddenly realized, "Hey, geez, turns out we could be selling this here oil stuff for a lot more than we do and people will still buy it--we've been such saps!"
posted by saulgoodman at 12:05 PM on June 27, 2008
What's so unique about this point in recent history that producers suddenly realized
1. Non-OPEC suppliers are post-peak. This was not the case in the late 80s and 90s, where they had a hand in breaking the OPEC price regime.
2. As Pastabagel ably mentioned above, the falling dollar is causing OPEC to de-facto re-price in Euros.
3. Mutant's "speculators-at-work" posting above is a factor, too. Big money saw a play here and moved in.
4. Global economies -- Russia, Asia -- have recovered from the various pit-falls they fell into in the 90s, and they are burning oil again bigtime.
5. OPEC itself is apparently running, at best, flat-out, to meet demand. There is no swing producer left who can oversupply the market to control prices (for strategic & geopolitical reasons).
posted by yort at 12:14 PM on June 27, 2008 [1 favorite]
1. Non-OPEC suppliers are post-peak. This was not the case in the late 80s and 90s, where they had a hand in breaking the OPEC price regime.
2. As Pastabagel ably mentioned above, the falling dollar is causing OPEC to de-facto re-price in Euros.
3. Mutant's "speculators-at-work" posting above is a factor, too. Big money saw a play here and moved in.
4. Global economies -- Russia, Asia -- have recovered from the various pit-falls they fell into in the 90s, and they are burning oil again bigtime.
5. OPEC itself is apparently running, at best, flat-out, to meet demand. There is no swing producer left who can oversupply the market to control prices (for strategic & geopolitical reasons).
posted by yort at 12:14 PM on June 27, 2008 [1 favorite]
I keep telling my wife we gotta go and build ourselves that bunker. You know, the bunker with food, radios, and weapons; the one that may keep us safe from the riots and the zombies.
Meanwhile, I looked at dumping my SUV, but even with gas at $2 per litre I don't recover the loss I would take on the sale of the vehicle.
posted by Vindaloo at 12:18 PM on June 27, 2008
Meanwhile, I looked at dumping my SUV, but even with gas at $2 per litre I don't recover the loss I would take on the sale of the vehicle.
posted by Vindaloo at 12:18 PM on June 27, 2008
ryoshu: since you keep mentioning brazil, you might want to keep in mind that those barrels, are in some extremly deep water, deep under the ground, and under a salt dome (meaning every will is drilled blindly). This is oil which likely won't make sense to produce under $80 right now. And when $140 oil, increasingly expensive steel ore, and increasingly expensive steel making coal are all priced in in 2011 when they're ready to do some serious work, it could be $200 oil to make it worth while. This isn't a Texas 1000 ft deep gusher circa 1940, or some pennsylvania oil that annoyingly is spurting up out of the land with no drilling circa 1800's. This is capital intensive deep water oil.
Additionally, if you're looking at supply/demand, in addition to looking at world supply demand, look and india and china's demand. Look at South Africa and Pakistan's demand. In addition, look at supply and then look at exports, and look at the supply/demand curves just for the UK and indonesia. Maybe take a gander at how Cantarell's doing. But I'm sure that just as Mexico claims, they'll get Cantarell's production back up. Never mind that they said they were doing work to make sure it didn't peak in the first place.
saulgoodman: what's so important right now? It's the first time that there isn't spare oil on the market. Every producer is likely pumping as much as they can. Saudi claims 2mbd excess capacity, but it's almost assuredly from their manifa field. If they put it on the market it will come back no bid. Not $20, but no bid. They're making a special refinery to attempt to handle it because they can't find a buyer. As soon as Saudi got their newest field online and developed they put that oil on the market.
These signs point to *no* excess capacity, and the developing nations having recurring power problems and load shedding, points to a worse problem; inadequete capacity. So it becomes a bidding war. It turns out that poor nations aren't very rich. Worse, if China and India keep demanding more, it will just raise the price further; someone needs to be outbid.
posted by nobeagle at 12:19 PM on June 27, 2008 [1 favorite]
Additionally, if you're looking at supply/demand, in addition to looking at world supply demand, look and india and china's demand. Look at South Africa and Pakistan's demand. In addition, look at supply and then look at exports, and look at the supply/demand curves just for the UK and indonesia. Maybe take a gander at how Cantarell's doing. But I'm sure that just as Mexico claims, they'll get Cantarell's production back up. Never mind that they said they were doing work to make sure it didn't peak in the first place.
saulgoodman: what's so important right now? It's the first time that there isn't spare oil on the market. Every producer is likely pumping as much as they can. Saudi claims 2mbd excess capacity, but it's almost assuredly from their manifa field. If they put it on the market it will come back no bid. Not $20, but no bid. They're making a special refinery to attempt to handle it because they can't find a buyer. As soon as Saudi got their newest field online and developed they put that oil on the market.
These signs point to *no* excess capacity, and the developing nations having recurring power problems and load shedding, points to a worse problem; inadequete capacity. So it becomes a bidding war. It turns out that poor nations aren't very rich. Worse, if China and India keep demanding more, it will just raise the price further; someone needs to be outbid.
posted by nobeagle at 12:19 PM on June 27, 2008 [1 favorite]
Mutant: I'm wondering about that point you made about countries like Iran withholding oil. I remember reading that demand for Oil within Iran and Venezuela have been artificially increased because of oil subsidies (Iran is a major oil importer, actually). Iran had to institute a rationing program last year, much to the populaces' consternation [Wiki].
That was last year though; I was wondering if you know if this is still an ongoing concern?
posted by Weebot at 12:27 PM on June 27, 2008
That was last year though; I was wondering if you know if this is still an ongoing concern?
posted by Weebot at 12:27 PM on June 27, 2008
weebot: are you sure that iran is a net importer? I know that they have few refineries, and are a net importer of finished products, but finished products and crude are separate monkeys.
posted by nobeagle at 12:34 PM on June 27, 2008
posted by nobeagle at 12:34 PM on June 27, 2008
Iran is a major oil importer, actually
uh, no. Iran is a gasoline importer due to lack of refinery capacity and insane 9c/gallon subsidized pricepoint, but as of 2006 the #4 oil exporter.
posted by yort at 12:36 PM on June 27, 2008
uh, no. Iran is a gasoline importer due to lack of refinery capacity and insane 9c/gallon subsidized pricepoint, but as of 2006 the #4 oil exporter.
posted by yort at 12:36 PM on June 27, 2008
my understanding is that if speculating on oil prices, essentially you are making a bet on where you believe oil prices will be in the future. That bet could be $20 or $20 billion dollars-either way it has no bearing on the actual price of the commodity.
If on the other hand you were putting $20 billion into the market to actually buy oil-that would affect the price.
As it is the former (rather than the later) that is happening-perhaps we should be asking ourselves why it is that such confusion exists and why.
posted by jaksoul at 1:15 PM on June 27, 2008
If on the other hand you were putting $20 billion into the market to actually buy oil-that would affect the price.
As it is the former (rather than the later) that is happening-perhaps we should be asking ourselves why it is that such confusion exists and why.
posted by jaksoul at 1:15 PM on June 27, 2008
Weebot -- "That was last year though; I was wondering if you know if this is still an ongoing concern?"
Yes. Bloomberg mentioned on May 2nd that Iran was withholding oil from the market by idling ten fully loaded tankers, and on June 2nd they mentioned Iran had apparently increased the number of tankers idling fully loaded in The Gulf to fourteen, while The US Energy Secretary says The Saudi's are also withholding oil and some folks speculate that CFTC has evidence that oil companies are withholding oil from the market.
Once again looking to the public record for clues, we take a brief read through Solutions To Competitive Problems in the Oil Industry, hearings that were held before the FULL House of Representatives, on March 29th 2000, April 7th 2000 and June 28th 2000.
Our particular interest is not, of course, the full spectacle but the minor details, specifically Page 76 -- " I am 51 years old, and I remember very vividly back in 1974, 1975, hearing about and seeing on the news oil tankers sitting off the coast of New England, waiting day by day for the price to increase before they brought in the crude oil. We yelled and hollered about it. We changed our energy policy altogether as to what we were going to do in the future."
So the more things change the more they stay the same. I always tell folks whatever is new in finance was new at least once before. Probably more than once as this sordid little episode shows.
Same broad themes, different minor details, same end result.
Everytime.
posted by Mutant at 1:16 PM on June 27, 2008
Yes. Bloomberg mentioned on May 2nd that Iran was withholding oil from the market by idling ten fully loaded tankers, and on June 2nd they mentioned Iran had apparently increased the number of tankers idling fully loaded in The Gulf to fourteen, while The US Energy Secretary says The Saudi's are also withholding oil and some folks speculate that CFTC has evidence that oil companies are withholding oil from the market.
Once again looking to the public record for clues, we take a brief read through Solutions To Competitive Problems in the Oil Industry, hearings that were held before the FULL House of Representatives, on March 29th 2000, April 7th 2000 and June 28th 2000.
Our particular interest is not, of course, the full spectacle but the minor details, specifically Page 76 -- " I am 51 years old, and I remember very vividly back in 1974, 1975, hearing about and seeing on the news oil tankers sitting off the coast of New England, waiting day by day for the price to increase before they brought in the crude oil. We yelled and hollered about it. We changed our energy policy altogether as to what we were going to do in the future."
So the more things change the more they stay the same. I always tell folks whatever is new in finance was new at least once before. Probably more than once as this sordid little episode shows.
Same broad themes, different minor details, same end result.
Everytime.
posted by Mutant at 1:16 PM on June 27, 2008
But more will be economic at $xxx a barrel, no problem!
See: Physical reality, aka EROEI
posted by anthill at 1:28 PM on June 27, 2008 [1 favorite]
See: Physical reality, aka EROEI
posted by anthill at 1:28 PM on June 27, 2008 [1 favorite]
increased the number of tankers idling fully loaded in The Gulf to fourteen
~30 million bbl . . . $4.5B . . . wow . . . guess I should learn Arabic and/or Farsi.
posted by yort at 1:29 PM on June 27, 2008
~30 million bbl . . . $4.5B . . . wow . . . guess I should learn Arabic and/or Farsi.
posted by yort at 1:29 PM on June 27, 2008
Keep in mind also that it's not really a question of how much oil is out there. For the record, I'm on the side of "not much". It doesn't much matter, though, because the question has never been about reserves, it's about production capacity. So the question isn't "is there enough oil," it's, "can we find and pump it quickly enough to satisfy the rising demand". I'm going to go with no. With all respect to Mutant, I think it is different this time. If we come up with an alternative or we start pumping enough to bring the price back down to $10/bbl, I will gladly eat my hat, because frankly the other option is pretty grim.
posted by adamdschneider at 1:41 PM on June 27, 2008
posted by adamdschneider at 1:41 PM on June 27, 2008
Iran...the #4 oil exporter.
And, as of May, trades their oil in Euros and Yen. Not Dollars.
posted by Thorzdad at 1:54 PM on June 27, 2008 [1 favorite]
And, as of May, trades their oil in Euros and Yen. Not Dollars.
posted by Thorzdad at 1:54 PM on June 27, 2008 [1 favorite]
The question is: who's hoarding the oil? It's not the people holding futures, since they have to sell them (or else store barrels of oil in their basements, which I suppose a few people might do)
No, whats happening is that the Oil rich nations understand that they have a finite resource. Oil isn't really produced it's extracted. And once you give it all away, that's the end of it. So they have an interest in selling it for as much as they can get. And if they can't sell all of it today at those prices, they can sell that same barrel a month later and still make more money.
So there really is no downward pressure. People need oil and they'll pay almost anything, since switching to something else requires massive investment.
(Sure, you could switch to a Prius, but it would take years to see the profits from lowered driving costs)
Finally, who cares? High oil prices means people actually have motivation to invest in alternative, sustainable energy programs. I hope it goes to $200 a barrel.
posted by delmoi at 1:58 PM on June 27, 2008
No, whats happening is that the Oil rich nations understand that they have a finite resource. Oil isn't really produced it's extracted. And once you give it all away, that's the end of it. So they have an interest in selling it for as much as they can get. And if they can't sell all of it today at those prices, they can sell that same barrel a month later and still make more money.
So there really is no downward pressure. People need oil and they'll pay almost anything, since switching to something else requires massive investment.
(Sure, you could switch to a Prius, but it would take years to see the profits from lowered driving costs)
Finally, who cares? High oil prices means people actually have motivation to invest in alternative, sustainable energy programs. I hope it goes to $200 a barrel.
posted by delmoi at 1:58 PM on June 27, 2008
Gee, trust a bunch of cartels to self-report production capacity for a vital resource, directly determining the market price: what could go wrong?
With all respect to Mutant, I think it is different this time.
Even if it is different this time, why is that difference having such a dramatic impact on prices in such a short period of time? Most estimates of peak oil anticipate production going into gradual decline (and even taking the signs at face value, that's what's happening). And sure, real demand is growing steadily, but there's been no recent sudden increase in demand that I know of.
Finally, who cares? High oil prices means people actually have motivation to invest in alternative, sustainable energy programs. I hope it goes to $200 a barrel.
As someone who's seen the value of his own disposable income slip to the point that, without any changes in monthly spending, my household now ends each month somewhere in the range of $200 bucks in the red each month, I care. My wife is having to go back to work now to make up the difference (which means we'll have to put our son in daycare). If we get to $7.00 a gallon gas without seeing corresponding wage inflation (and at best, we're seeing wage stagnation these days), many of us will probably have to declare bankruptcy.
posted by saulgoodman at 2:12 PM on June 27, 2008
With all respect to Mutant, I think it is different this time.
Even if it is different this time, why is that difference having such a dramatic impact on prices in such a short period of time? Most estimates of peak oil anticipate production going into gradual decline (and even taking the signs at face value, that's what's happening). And sure, real demand is growing steadily, but there's been no recent sudden increase in demand that I know of.
Finally, who cares? High oil prices means people actually have motivation to invest in alternative, sustainable energy programs. I hope it goes to $200 a barrel.
As someone who's seen the value of his own disposable income slip to the point that, without any changes in monthly spending, my household now ends each month somewhere in the range of $200 bucks in the red each month, I care. My wife is having to go back to work now to make up the difference (which means we'll have to put our son in daycare). If we get to $7.00 a gallon gas without seeing corresponding wage inflation (and at best, we're seeing wage stagnation these days), many of us will probably have to declare bankruptcy.
posted by saulgoodman at 2:12 PM on June 27, 2008
Gee, trust a bunch of cartels to self-report production capacity for a vital resource, directly determining the market price: what could go wrong?
Lots of things. (Do I know what rhetorical means?) However, the consumers have been forced to rely on the opaque markets for so long it almost seems normal. Production numbers are brought about by private companies hiring people to see how low in the water a tanker is as it moves by. All guess work.
In the meantime, some of the guess work is interesting. Satellite over the desert used google maps to look at where the saudi's are drilling within the fields. One can examine how production's ups and downs match field maintenance or new fields coming on line. It's a bit better than blindly swallowing what we're told and only what we're told.
You mention that demand has only gone up slightly so why the price increase? Spend some time researching elasticity of demand (or more specifically inelasticity of demand). Oil is a very inelastic good. When the price of gasoline went from 2.30 to 2.40 did people call in to work, "I'm not coming in today, gas is too high to fill up. Yeah, I'll hope it's lower tomorrow." Do the busses shut down? No, they pony up. I believe the phrase is "got us by the short and curlies."
You might not be actually bidding at the gas pump, but to get the oil to refine oil needs to be brought in, and it's relatively fungible. Which means that if someone wants to burn oil to generate electricity in africa to keep the cement factory running and bring in some money, they have to buy it somewhere. Eventually someone can't buy it, or justify it at that price and they drop out, and that's the price of oil. Ok, that's highly simplified of course. But with a highly inelastic demand, a slight raise in demand, or dip in supply can have big effects on price.
The quote of the week from the opec president (I think) is that if there's a war with Iran, the price of crude get easily be in the 200-400 range. There's your $10 gas - are you going to work, or will you find something else to cut out of the budget? Most will go to work. Some might talk about car pooling. Hopefully a lot talk about car pooling.
To use less oil requires a decent amount of lifestyle changes. Some non-trivial. Sure, one can cut out some discretionary driving, but to use the most common example of commuting to/from work, most people can't remove that, and moving is easier for some and harder for others. It's hard for corn farmers to pass up on the fertilizer despite the prices. Short and curlies.
Sadly Saul, I don't think that we'll be seeing any wage increases. Producers are finally passing up the price increases in crude (dow raised prices 20% last month, and this month is raising again, some items up to 25%). That's going to cut into corporate profits which will mean lay offs. Which will destroy sentiment, which will mean people might actually consume less, which will further hurt the bottom line. Ultimately though, that might help destroy demand and help the price, but US demand lately has not been the cause.
posted by nobeagle at 2:49 PM on June 27, 2008
Lots of things. (Do I know what rhetorical means?) However, the consumers have been forced to rely on the opaque markets for so long it almost seems normal. Production numbers are brought about by private companies hiring people to see how low in the water a tanker is as it moves by. All guess work.
In the meantime, some of the guess work is interesting. Satellite over the desert used google maps to look at where the saudi's are drilling within the fields. One can examine how production's ups and downs match field maintenance or new fields coming on line. It's a bit better than blindly swallowing what we're told and only what we're told.
You mention that demand has only gone up slightly so why the price increase? Spend some time researching elasticity of demand (or more specifically inelasticity of demand). Oil is a very inelastic good. When the price of gasoline went from 2.30 to 2.40 did people call in to work, "I'm not coming in today, gas is too high to fill up. Yeah, I'll hope it's lower tomorrow." Do the busses shut down? No, they pony up. I believe the phrase is "got us by the short and curlies."
You might not be actually bidding at the gas pump, but to get the oil to refine oil needs to be brought in, and it's relatively fungible. Which means that if someone wants to burn oil to generate electricity in africa to keep the cement factory running and bring in some money, they have to buy it somewhere. Eventually someone can't buy it, or justify it at that price and they drop out, and that's the price of oil. Ok, that's highly simplified of course. But with a highly inelastic demand, a slight raise in demand, or dip in supply can have big effects on price.
The quote of the week from the opec president (I think) is that if there's a war with Iran, the price of crude get easily be in the 200-400 range. There's your $10 gas - are you going to work, or will you find something else to cut out of the budget? Most will go to work. Some might talk about car pooling. Hopefully a lot talk about car pooling.
To use less oil requires a decent amount of lifestyle changes. Some non-trivial. Sure, one can cut out some discretionary driving, but to use the most common example of commuting to/from work, most people can't remove that, and moving is easier for some and harder for others. It's hard for corn farmers to pass up on the fertilizer despite the prices. Short and curlies.
Sadly Saul, I don't think that we'll be seeing any wage increases. Producers are finally passing up the price increases in crude (dow raised prices 20% last month, and this month is raising again, some items up to 25%). That's going to cut into corporate profits which will mean lay offs. Which will destroy sentiment, which will mean people might actually consume less, which will further hurt the bottom line. Ultimately though, that might help destroy demand and help the price, but US demand lately has not been the cause.
posted by nobeagle at 2:49 PM on June 27, 2008
At what point will China and India be no longer able to subsidize fuel? Seems sooner than later to me.
posted by elwoodwiles at 2:55 PM on June 27, 2008
posted by elwoodwiles at 2:55 PM on June 27, 2008
I can't say for sure, saulgoodman, but it could be the lack of spare capacity. Previously, there was slack in the system. Saudi Arabia was widely considered a "swing" producer who could bring production online when necessary to make up for shortfalls elsewhere. That doesn't happen anymore.
I am also curious as to the exact mechanism for speculation driving price. How would that work?
posted by adamdschneider at 3:11 PM on June 27, 2008
I am also curious as to the exact mechanism for speculation driving price. How would that work?
posted by adamdschneider at 3:11 PM on June 27, 2008
I am also curious as to the exact mechanism for speculation driving price. How would that work?
If you predict longer-term volatility in the region where the energy is coming from and an increasingly weakened US dollar, and that seems like a prediction with high likelihood, then it is safer to take today's dollars and invest them in tomorrow's crude oil, in anticipation of a collapsed economy or state of war that will further reduce oil supply and weaken currency. Speculators are basically taking the information they have and selling the world short because of it.
posted by Blazecock Pileon at 3:24 PM on June 27, 2008
If you predict longer-term volatility in the region where the energy is coming from and an increasingly weakened US dollar, and that seems like a prediction with high likelihood, then it is safer to take today's dollars and invest them in tomorrow's crude oil, in anticipation of a collapsed economy or state of war that will further reduce oil supply and weaken currency. Speculators are basically taking the information they have and selling the world short because of it.
posted by Blazecock Pileon at 3:24 PM on June 27, 2008
Irrespective of the likely economic costs, shouldn't we be trying to burn less of this stuff anyway? I heard it was bad for the planet, or some such.
posted by imperium at 3:35 PM on June 27, 2008
posted by imperium at 3:35 PM on June 27, 2008
Speculators are basically taking the information they have and selling the world short because of it.
Well, that inspires optimism for the future.
posted by oaf at 3:39 PM on June 27, 2008
Well, that inspires optimism for the future.
posted by oaf at 3:39 PM on June 27, 2008
Mutant: We know that open interest in NYMEX oil futures has increased some %77 in the past three years to 1.35 million contracts.
Having recently looked at a chart of open interest, I can tell you that we also know that it declined from 1.55 million down to that 1.35 over the past one year or so. Interestingly, the net position of large speculative traders as categorized by the CFTC hit a high point in early March, just as oil surged beyond $100 for the first time and everyone said, "well *that* must be the top for oil." (And quite a lot of people are still saying it, check out the recent short interest on USO.) This coincides with the end of the first 52 trading days of the year during which, according to Masters' report to the US Senate which played a large part in getting all the politicians talking about this, index fund buyers flooded the market with demand for commodities futures. Since almost exactly that time, large specs have been net sellers of oil on nymex, even as prices continue to rise. They are still net long, but by the smallest amount in over a year. Another chart, straight from the CFTC, tells me that net non-commercial positions including swaps are slightly down over the last 12 months.
I'm not trying to argue that speculation *isn't* driving up the price of oil, I'm firmly in the "maybe" camp, though I'm pretty sure it's far from the whole story. It's just that I haven't seen any actual evidence of it. All the arguments seem to amount to "well, there's more speculators than there used to be, and the price is higher. Therefore the speculators made the price higher." That is certainly not any more convincing than the various evidence that world oil production spare capacity is now zero.
This is not as simple as the "dotcom bubble" or the "housing bubble" that some people like to compare it to. For one thing, we're talking about commodities, which have obviously different market dynamics just because of the way they get consumed. But also making it more complicated is the fact there's no easy way to calculate what the price of oil *should* be. With stocks, you can look at expected earnings and interest rates. With houses, you can look at comparable rents and the ratio of household income to debt service and so on.
Pastabagel: Intrinsic value of oil = f(immediate supply, immediate demand, long-term supply outlook, long term demand outlook).
Yes, that illustrates it nicely. Let's fill in those parameters...
immediate supply: rather uncertain, the best data is a few months old, you never quite know exactly how long the delay to production from a new project or how much it'll produce when it's online, and nobody knows if there's actually some spare capacity in the world right now, at least nobody who's talking and can prove it.
immediate demand: hard to guess, as even in the country with the best and most-accessible data in the world on this, we're only now starting to get some idea of the shape of price elasticity in the US. And it takes lots of difficult guess-work to get any insight into what refiners are planning, why exactly they've let thier stocks get so low, what's their effective minimum operating level of stored crude oil, etc.
long-term supply outlook: largely unknown, with various experts producing a huge range of forecasts. Obviously supply goes down in the very long-term, but who cares about five or ten years from now, certainly not the politicians who are eager to call it a speculative bubble, and probably not that many of the speculators either.
long-term demand outlook: very hard to guess, as is well known; nobody's all that good at forecasting the next recession in any one country, let alone global oil demand. Too often, lacking any better ideas, the typical forecast just takes a trend line and extrapolates it to infinity.
Obviously, speculation can move the market by noticeable amounts some times. Like last week when China announced they're lessening their subsidy. The price of oil on NYMEX was down $5 in about a minute iirc. Speculation. All anyone knew was that whatever price oil should be, it had to be a bit lower than it was a minute ago. So they sell. Someone else sees the price is going down, so he sells too. That's the kind of short-term volatility speculators can induce. Longer-term, over many contract expirations, I tend to suspect their influence is much less and may reduce volatility as some of them like to claim.
Eh, I don't know. It's just been bothering me that lately some acquaintances of mine who know next to nothing about the oil market, and random strangers at the gas pumps, seem to believe as if it's a new religion that it's entirely the speculators to blame. It ain't so easy to decide. Last year it was the greedy oil companies, or the government, or OPEC. Next year, if prices are still high, I propose we all blame the Illuminati.
posted by sfenders at 3:46 PM on June 27, 2008 [4 favorites]
Having recently looked at a chart of open interest, I can tell you that we also know that it declined from 1.55 million down to that 1.35 over the past one year or so. Interestingly, the net position of large speculative traders as categorized by the CFTC hit a high point in early March, just as oil surged beyond $100 for the first time and everyone said, "well *that* must be the top for oil." (And quite a lot of people are still saying it, check out the recent short interest on USO.) This coincides with the end of the first 52 trading days of the year during which, according to Masters' report to the US Senate which played a large part in getting all the politicians talking about this, index fund buyers flooded the market with demand for commodities futures. Since almost exactly that time, large specs have been net sellers of oil on nymex, even as prices continue to rise. They are still net long, but by the smallest amount in over a year. Another chart, straight from the CFTC, tells me that net non-commercial positions including swaps are slightly down over the last 12 months.
I'm not trying to argue that speculation *isn't* driving up the price of oil, I'm firmly in the "maybe" camp, though I'm pretty sure it's far from the whole story. It's just that I haven't seen any actual evidence of it. All the arguments seem to amount to "well, there's more speculators than there used to be, and the price is higher. Therefore the speculators made the price higher." That is certainly not any more convincing than the various evidence that world oil production spare capacity is now zero.
This is not as simple as the "dotcom bubble" or the "housing bubble" that some people like to compare it to. For one thing, we're talking about commodities, which have obviously different market dynamics just because of the way they get consumed. But also making it more complicated is the fact there's no easy way to calculate what the price of oil *should* be. With stocks, you can look at expected earnings and interest rates. With houses, you can look at comparable rents and the ratio of household income to debt service and so on.
Pastabagel: Intrinsic value of oil = f(immediate supply, immediate demand, long-term supply outlook, long term demand outlook).
Yes, that illustrates it nicely. Let's fill in those parameters...
immediate supply: rather uncertain, the best data is a few months old, you never quite know exactly how long the delay to production from a new project or how much it'll produce when it's online, and nobody knows if there's actually some spare capacity in the world right now, at least nobody who's talking and can prove it.
immediate demand: hard to guess, as even in the country with the best and most-accessible data in the world on this, we're only now starting to get some idea of the shape of price elasticity in the US. And it takes lots of difficult guess-work to get any insight into what refiners are planning, why exactly they've let thier stocks get so low, what's their effective minimum operating level of stored crude oil, etc.
long-term supply outlook: largely unknown, with various experts producing a huge range of forecasts. Obviously supply goes down in the very long-term, but who cares about five or ten years from now, certainly not the politicians who are eager to call it a speculative bubble, and probably not that many of the speculators either.
long-term demand outlook: very hard to guess, as is well known; nobody's all that good at forecasting the next recession in any one country, let alone global oil demand. Too often, lacking any better ideas, the typical forecast just takes a trend line and extrapolates it to infinity.
Obviously, speculation can move the market by noticeable amounts some times. Like last week when China announced they're lessening their subsidy. The price of oil on NYMEX was down $5 in about a minute iirc. Speculation. All anyone knew was that whatever price oil should be, it had to be a bit lower than it was a minute ago. So they sell. Someone else sees the price is going down, so he sells too. That's the kind of short-term volatility speculators can induce. Longer-term, over many contract expirations, I tend to suspect their influence is much less and may reduce volatility as some of them like to claim.
Eh, I don't know. It's just been bothering me that lately some acquaintances of mine who know next to nothing about the oil market, and random strangers at the gas pumps, seem to believe as if it's a new religion that it's entirely the speculators to blame. It ain't so easy to decide. Last year it was the greedy oil companies, or the government, or OPEC. Next year, if prices are still high, I propose we all blame the Illuminati.
posted by sfenders at 3:46 PM on June 27, 2008 [4 favorites]
yort: With 20 gallons of gas per barrel of oil, $30 implies ~$1.50 gasoline. $60 implies ~$3.00 gas. $90 implies the present $4.50 regime. $140, should it stick, will result in $7 gasoline.
Not sure that's correct. There's about 20 gallons of other oil products that are produced from one barrel of oil (total volume is 42 gallons), so they reduce the cost of the crude oil; it's not like the refiner produces 20 gallons of gasoline from the barrel of oil, and then throws away the other products.
Looking at this Department of Energy website on gasoline prices, it says that in 2007, the average retail gas price was $2.80/gallon, of which 58% ($1.62) was the cost of crude oil; and the average price of crude oil was $68/barrel. If my math is correct, that means that when the price of oil is $X/barrel, the corresponding component of the price of a gallon of gas will be about $X / 42. If the price of oil stays at $140/barrel, it'll cost $3.30/gallon just to pay for the crude oil, plus refining costs, marketing and distribution, taxes, and profits; about $5.50/gallon.
Corresponding information for Canada. With oil at $140/barrel, that translates to about 88 cents/litre just to pay for the crude oil. Say another 35 cents/litre for the refiner and the retailer. Here in Vancouver, add 30 cents/litre for provincial and federal excise taxes (which are flat), and then the new carbon tax (2.4 cents) and GST (5% on the total); I get $1.63/litre. The current price is more like $1.45/litre.
posted by russilwvong at 4:31 PM on June 27, 2008
Not sure that's correct. There's about 20 gallons of other oil products that are produced from one barrel of oil (total volume is 42 gallons), so they reduce the cost of the crude oil; it's not like the refiner produces 20 gallons of gasoline from the barrel of oil, and then throws away the other products.
Looking at this Department of Energy website on gasoline prices, it says that in 2007, the average retail gas price was $2.80/gallon, of which 58% ($1.62) was the cost of crude oil; and the average price of crude oil was $68/barrel. If my math is correct, that means that when the price of oil is $X/barrel, the corresponding component of the price of a gallon of gas will be about $X / 42. If the price of oil stays at $140/barrel, it'll cost $3.30/gallon just to pay for the crude oil, plus refining costs, marketing and distribution, taxes, and profits; about $5.50/gallon.
Corresponding information for Canada. With oil at $140/barrel, that translates to about 88 cents/litre just to pay for the crude oil. Say another 35 cents/litre for the refiner and the retailer. Here in Vancouver, add 30 cents/litre for provincial and federal excise taxes (which are flat), and then the new carbon tax (2.4 cents) and GST (5% on the total); I get $1.63/litre. The current price is more like $1.45/litre.
posted by russilwvong at 4:31 PM on June 27, 2008
yeah, well, I was assuming profit & overheads covered the rest of the barrel.
posted by yort at 4:55 PM on June 27, 2008
posted by yort at 4:55 PM on June 27, 2008
Looks to me like two points of view here:
1) Peak oil is nigh, no other explanation is realistic, prepare for the apocalypse.
2) Speculation and manipulation has meant some people have gotten extremely rich while the rest of us get raped. Peak oil is a mechanism to help us 'accept' overpriced oil.
My money is on blatant market manipulation. And, much like Enron, when the truth comes out we will be pissed.
posted by UseyurBrain at 6:11 PM on June 27, 2008 [1 favorite]
1) Peak oil is nigh, no other explanation is realistic, prepare for the apocalypse.
2) Speculation and manipulation has meant some people have gotten extremely rich while the rest of us get raped. Peak oil is a mechanism to help us 'accept' overpriced oil.
My money is on blatant market manipulation. And, much like Enron, when the truth comes out we will be pissed.
posted by UseyurBrain at 6:11 PM on June 27, 2008 [1 favorite]
yeah, well, I was assuming profit & overheads covered the rest of the barrel.
Just a thought, yort, since you've made this particular thread your debut and only real contribution to this site, try using facts and cites when throwing controversial statements out there. Might lend yourself some credibility, instead of now, where everything you've said is completely discounted by the fact that you've effectively guestimated your numbers.
Maybe it's just me, but you've just lost all cachet here.
posted by SeizeTheDay at 6:26 PM on June 27, 2008
Just a thought, yort, since you've made this particular thread your debut and only real contribution to this site, try using facts and cites when throwing controversial statements out there. Might lend yourself some credibility, instead of now, where everything you've said is completely discounted by the fact that you've effectively guestimated your numbers.
Maybe it's just me, but you've just lost all cachet here.
posted by SeizeTheDay at 6:26 PM on June 27, 2008
saulgoodman: Even if it is different this time, why is that difference having such a dramatic impact on prices in such a short period of time? Most estimates of peak oil anticipate production going into gradual decline (and even taking the signs at face value, that's what's happening). And sure, real demand is growing steadily, but there's been no recent sudden increase in demand that I know of.
China's oil consumption jumps 13% in first five months of 2008.
China's oil consumption was about 7 million barrels a day at the start of 2008. So it'll probably need another 1 million barrels a day by the end of this year, if those numbers hold up.
On a separate note, I'm curious about what is causing you financial difficulties. Is the price of gas hitting you hard, or the higher food prices, or something else? Or some combination of those?
posted by A dead Quaker at 6:49 PM on June 27, 2008
China's oil consumption jumps 13% in first five months of 2008.
China's oil consumption was about 7 million barrels a day at the start of 2008. So it'll probably need another 1 million barrels a day by the end of this year, if those numbers hold up.
On a separate note, I'm curious about what is causing you financial difficulties. Is the price of gas hitting you hard, or the higher food prices, or something else? Or some combination of those?
posted by A dead Quaker at 6:49 PM on June 27, 2008
I don't know whether speculators are a big element here, they probably play some part, but how about this thought experiment:
If we hit peak oil (half of the world's supply gone, only expensive to access oil left) what would it look like? What elements of today's situation indicate this is not the peak?
posted by bystander at 7:38 PM on June 27, 2008
If we hit peak oil (half of the world's supply gone, only expensive to access oil left) what would it look like? What elements of today's situation indicate this is not the peak?
posted by bystander at 7:38 PM on June 27, 2008
try using facts
my original:
With 20 gallons of gas per barrel of oil, $30 implies ~$1.50 gasoline. $60 implies ~$3.00 gas. $90 implies the present $4.50 regime.
Note the ~, which means 'approximately'.
HTH
posted by yort at 7:47 PM on June 27, 2008
my original:
With 20 gallons of gas per barrel of oil, $30 implies ~$1.50 gasoline. $60 implies ~$3.00 gas. $90 implies the present $4.50 regime.
Note the ~, which means 'approximately'.
HTH
posted by yort at 7:47 PM on June 27, 2008
but when we hit peak (now) on a global level, there's nowhere else to go. except maybe the giant oil lakes on the moon.
posted by Hat Maui
Of Saturn.
posted by Balisong at 7:26 AM on June 28, 2008
posted by Hat Maui
Of Saturn.
posted by Balisong at 7:26 AM on June 28, 2008
I don't believe (again, personal opinion as this isn't my market) that the oil companies have properly invested in discovering new reserves.
Why would you have any reason to think that?
posted by afu at 1:33 PM on June 28, 2008
Why would you have any reason to think that?
posted by afu at 1:33 PM on June 28, 2008
While it is true that some big oil companies have cut back on exploration in the past, there's a massive industry of oil exploration juniors whose ONLY function is to prospect for oil. The idea that oil is out there but no-one's looking for it is laughable. Many oil juniors are sitting on discoveries and waiting for the price of oil to rise enough for them to become economic to exploit.
posted by unSane at 5:34 PM on June 28, 2008
posted by unSane at 5:34 PM on June 28, 2008
Right, so I finally realized exactly what is missing from Masters' comments on speculation, aside from some consideration of the differences between physical demand and futures demand in how the move the market as all his critics have pointed out, and how easy it would be to correct this deficiency. He has this data on the positions of index speculators, he wants to show that its increase has driven up the price of commodities... so what he needs to start with is a proper statistical analysis of the relationship between the two. Somebody should go do that.
I can't do that, but I can do a basic "sanity check" by looking at a few numbers. If it's index buyers that are primary movers of the market lately, odds are pretty good that a quick look at changes in their position will somehow correlate with price movements. I picked wheat just because it's first in the reports. Index speculators net position Mar.18 (around which date that other COT said "large specs" started selling oil -- if that includes and is dominated by the index speculators, then they'd presumably be selling wheat too, also part of the index. If not, as it turns out, then in the same way the numbers for wheat should indicate what oil trades the indexers were making.)
date, index traders' positions, and price, approximately 'cause I'm lazy:
2008-03-18 188k 1200
2008-05-27 192k 750
2008-06-24 179k 880
Your index speculators were buying a little when the price was falling steadily in april and may, and selling a fair bit in june while the price reversed and started rising steadily. Of course crude oil was just straight up the whole time. Does not look good for this "blame the speculators" fad, but I invite someone to do a real study of it.
posted by sfenders at 5:36 PM on June 28, 2008
I can't do that, but I can do a basic "sanity check" by looking at a few numbers. If it's index buyers that are primary movers of the market lately, odds are pretty good that a quick look at changes in their position will somehow correlate with price movements. I picked wheat just because it's first in the reports. Index speculators net position Mar.18 (around which date that other COT said "large specs" started selling oil -- if that includes and is dominated by the index speculators, then they'd presumably be selling wheat too, also part of the index. If not, as it turns out, then in the same way the numbers for wheat should indicate what oil trades the indexers were making.)
date, index traders' positions, and price, approximately 'cause I'm lazy:
2008-03-18 188k 1200
2008-05-27 192k 750
2008-06-24 179k 880
Your index speculators were buying a little when the price was falling steadily in april and may, and selling a fair bit in june while the price reversed and started rising steadily. Of course crude oil was just straight up the whole time. Does not look good for this "blame the speculators" fad, but I invite someone to do a real study of it.
posted by sfenders at 5:36 PM on June 28, 2008
On a separate note, I'm curious about what is causing you financial difficulties.
Hard to say, but most of our discretionary spending is down substantially over recent years past. My wife and I have a young son now, so we don't go out drinking every weekend anymore, nor do we go out to movies or concerts, or eat out very often (and when we do, we dine from the budget menu now). Obviously, there are some costs associated with rearing a child, but at our son's age, those costs are still negligible--I doubt they're enough to exceed the decrease in our entertainment budget. My best guess is it's a combination of three things: 1) Increases in basic grocery costs; 2) Increases in fuel costs; 3) Increases in my health care contribution for family coverage (also my company's health plan has seen major across the board increases over the last couple of years).
It's likely the health care piece of it is a bigger factor than inflation, but if it weren't for the inflation, I think we'd still be treading water a little more comfortably. Until very recently (the last year or so), we still consistently managed to get through the month in the black.
Oh, right, heh--I just remembered another pretty big contributing factor. Before my wife became pregnant with our son, she worked full-time. We lost a major source of income when he was born. But even so, we were managing pretty well paycheck to paycheck until the recent spike in fuel prices.
Does not look good for this "blame the speculators" fad, but I invite someone to do a real study of it.
I don't really understand commodities markets well enough to have an opinion (but as I understand it, speculators are at the mercy of going market prices for whatever contracts they're left holding, so its difficult to see them directly influencing price if that's correct), but I thought the questions being raised about the role of speculative markets were slightly more subtle ones about oil producers possibly manipulating prices/understating supply in collusion with institutional or other investors who are engaged in speculation? But as I said, I don't know enough to have any idea if that's got even the slightest trace of plausibility to it (hell, I'm not even sure if what I just said is anything more than gibberish).
posted by saulgoodman at 7:47 PM on June 29, 2008
Hard to say, but most of our discretionary spending is down substantially over recent years past. My wife and I have a young son now, so we don't go out drinking every weekend anymore, nor do we go out to movies or concerts, or eat out very often (and when we do, we dine from the budget menu now). Obviously, there are some costs associated with rearing a child, but at our son's age, those costs are still negligible--I doubt they're enough to exceed the decrease in our entertainment budget. My best guess is it's a combination of three things: 1) Increases in basic grocery costs; 2) Increases in fuel costs; 3) Increases in my health care contribution for family coverage (also my company's health plan has seen major across the board increases over the last couple of years).
It's likely the health care piece of it is a bigger factor than inflation, but if it weren't for the inflation, I think we'd still be treading water a little more comfortably. Until very recently (the last year or so), we still consistently managed to get through the month in the black.
Oh, right, heh--I just remembered another pretty big contributing factor. Before my wife became pregnant with our son, she worked full-time. We lost a major source of income when he was born. But even so, we were managing pretty well paycheck to paycheck until the recent spike in fuel prices.
Does not look good for this "blame the speculators" fad, but I invite someone to do a real study of it.
I don't really understand commodities markets well enough to have an opinion (but as I understand it, speculators are at the mercy of going market prices for whatever contracts they're left holding, so its difficult to see them directly influencing price if that's correct), but I thought the questions being raised about the role of speculative markets were slightly more subtle ones about oil producers possibly manipulating prices/understating supply in collusion with institutional or other investors who are engaged in speculation? But as I said, I don't know enough to have any idea if that's got even the slightest trace of plausibility to it (hell, I'm not even sure if what I just said is anything more than gibberish).
posted by saulgoodman at 7:47 PM on June 29, 2008
sfenders -- "Having recently looked at a chart of open interest, I can tell you that we also know that it declined from 1.55 million down to that 1.35 over the past one year or so."
Well, your data is newer than mine but even so that documents a reduction of roughly 13%, still leaving a lot more speculators in the market than earlier.
But I do agree with you that the overall issue is far more complex than only speculators. Or growth in the money supply. Crap if I didn't have to trade my own money to support myself and Mrs Mutant these days I'd really enjoy taking a more detailed look into this market just to see how sensitive spot price is to the various factors. That would be really interesting.
Many folks are (correctly) raising the issue of physical delivery. Well, for a couple of years now I've heard rumors about some banks doing just that. I also know that Morgan has several large warehouses in Amsterdam that are being used for storage - they started this practice back in 2005 when oil was pushing past $50 a barrel.
Some of those same banks are now apparently taking long positions directly, not even messing about with the futures markets in the first instance.
As I keep saying I don't really know this market, but the EIA data seems to indicate it is very sensitive to supply. How many million barrels would have to be removed from the daily supply to cause prices to spike X%? That's the kind of question I'd like to see answered.
Of course Oil is over $143 a barrel this AM so who the hell knows what next? Everyone and their uncle seems to be talking it up, so I don't think we'll see any significant drop until it breaks $150, if then.
posted by Mutant at 7:01 AM on June 30, 2008
Well, your data is newer than mine but even so that documents a reduction of roughly 13%, still leaving a lot more speculators in the market than earlier.
But I do agree with you that the overall issue is far more complex than only speculators. Or growth in the money supply. Crap if I didn't have to trade my own money to support myself and Mrs Mutant these days I'd really enjoy taking a more detailed look into this market just to see how sensitive spot price is to the various factors. That would be really interesting.
Many folks are (correctly) raising the issue of physical delivery. Well, for a couple of years now I've heard rumors about some banks doing just that. I also know that Morgan has several large warehouses in Amsterdam that are being used for storage - they started this practice back in 2005 when oil was pushing past $50 a barrel.
Some of those same banks are now apparently taking long positions directly, not even messing about with the futures markets in the first instance.
As I keep saying I don't really know this market, but the EIA data seems to indicate it is very sensitive to supply. How many million barrels would have to be removed from the daily supply to cause prices to spike X%? That's the kind of question I'd like to see answered.
Of course Oil is over $143 a barrel this AM so who the hell knows what next? Everyone and their uncle seems to be talking it up, so I don't think we'll see any significant drop until it breaks $150, if then.
posted by Mutant at 7:01 AM on June 30, 2008
there are a total of 2.35 million tonnes of floating storages offshore Singapore and Malaysia
So the entire total of floating storage in that area is a small fraction of the amount by which OECD stocks declined year-over-year. Total commercial storage capacity in Singapore is probably about equal to the reported one-year OECD decline. Lots of good reasons why storage in Asia has been rising, most obviously the rapid growth in the size of the market there. It'd be interesting to know exactly how much physical oil the investment banks are holding, and it'd be interesting to know just how much oil Saudi Arabia is holding in its tank farms too. Lots of places an inventory build could hide. Still, more competition in East-West arbitrage sounds like a good thing to me. Morgan Stanley is not leasing that VLCC just to have a place to put all its oil for a year or two.
Anyway, I know next to nothing about how the oil market works in Singapore or China. I guess it's not quite completely impossible that Tapis is somehow priced wrong for the local market due to insufficient arbitrage and the price influence of WTI or something like that, and therefore Asia is sucking some of the oil stocks out of the rest of the world.
Morgan has several large warehouses in Amsterdam that are being used for storage
Seems a bit unlikely that these banks are increasing their storage for speculation while speculators and "investors" are generally selling their futures (another data point confirming this, via TOD.) No doubt they helped bring the price up at some point, but if they're selling now and the price is still rising, then that makes them the *good* kind of speculators, who smooth out the long-term volatility and get the market to where it needs to be, and the high price gets "ratified" (as James Hamilton put it) as correct (or still too low?) for the time being.
How many million barrels would have to be removed from the daily supply to cause prices to spike X%? That's the kind of question I'd like to see answered.
Yeah, me too. It could easily work out to something that matches the recent price action fairly well. If world GDP growth is a roughly equal to oil demand growth, and supply is capacity constrained and hasn't changed much over the past three years, and the price has doubled, then we get something reasonable for price elasticity of demand, around -0.25 maybe, which is in line with most estimates I think. But I'm hedging my bets pretty hard right now.
posted by sfenders at 5:17 PM on June 30, 2008
So the entire total of floating storage in that area is a small fraction of the amount by which OECD stocks declined year-over-year. Total commercial storage capacity in Singapore is probably about equal to the reported one-year OECD decline. Lots of good reasons why storage in Asia has been rising, most obviously the rapid growth in the size of the market there. It'd be interesting to know exactly how much physical oil the investment banks are holding, and it'd be interesting to know just how much oil Saudi Arabia is holding in its tank farms too. Lots of places an inventory build could hide. Still, more competition in East-West arbitrage sounds like a good thing to me. Morgan Stanley is not leasing that VLCC just to have a place to put all its oil for a year or two.
Anyway, I know next to nothing about how the oil market works in Singapore or China. I guess it's not quite completely impossible that Tapis is somehow priced wrong for the local market due to insufficient arbitrage and the price influence of WTI or something like that, and therefore Asia is sucking some of the oil stocks out of the rest of the world.
Morgan has several large warehouses in Amsterdam that are being used for storage
Seems a bit unlikely that these banks are increasing their storage for speculation while speculators and "investors" are generally selling their futures (another data point confirming this, via TOD.) No doubt they helped bring the price up at some point, but if they're selling now and the price is still rising, then that makes them the *good* kind of speculators, who smooth out the long-term volatility and get the market to where it needs to be, and the high price gets "ratified" (as James Hamilton put it) as correct (or still too low?) for the time being.
How many million barrels would have to be removed from the daily supply to cause prices to spike X%? That's the kind of question I'd like to see answered.
Yeah, me too. It could easily work out to something that matches the recent price action fairly well. If world GDP growth is a roughly equal to oil demand growth, and supply is capacity constrained and hasn't changed much over the past three years, and the price has doubled, then we get something reasonable for price elasticity of demand, around -0.25 maybe, which is in line with most estimates I think. But I'm hedging my bets pretty hard right now.
posted by sfenders at 5:17 PM on June 30, 2008
If world GDP growth is a roughly equal to oil demand growth
...which is obviously not the best way to look at it. But if you take the growth rate in oil consumption 2002-2005, coincident with a rapid increase in demand in China, and consider that prices were rising during that period too, it might not be all that far off.
posted by sfenders at 6:56 PM on June 30, 2008
...which is obviously not the best way to look at it. But if you take the growth rate in oil consumption 2002-2005, coincident with a rapid increase in demand in China, and consider that prices were rising during that period too, it might not be all that far off.
posted by sfenders at 6:56 PM on June 30, 2008
After sleeping on it a bit, the answer came to me in a dream (so you know it must be true): It's price/supply manipulation this time around, same as it was during the fabricated California energy crisis, and largely by the same players exploiting the same weaknesses in regulatory mechanisms (although Enron's symbolically out of the picture now).
And the real motivation isn't short-term gain through speculation or anything crass like that. The latest artificial energy crisis is part of the broader strategic agenda being pursued by the American energy sector, and it serves two closely-related purposes:
1) Increase popular domestic support for off-shore oil-drilling. Some signs seem to suggest it's working, despite the fact that energy analysts uniformly agree there's no chance whatsoever that off-shore drilling will exert any immediate short-term downward pressure on energy prices.
2) Blunt public outcry over the imposition of exploitative and non-competitive oil contracts explicitly designed to benefit American interests in violation of Iraq's own national sovereignty and slowly begin nudging the American public toward accepting the brutal fact that the Iraq war really was a glorified grab for oil.
And the bastards almost got away with it, if it weren't for those pesky kids and their blog...
Oh, wait. Even on the remote chance I'm right, they almost certainly will get away with it. So never mind, then.
/tinfoilhat filter
posted by saulgoodman at 11:04 AM on July 3, 2008
And the real motivation isn't short-term gain through speculation or anything crass like that. The latest artificial energy crisis is part of the broader strategic agenda being pursued by the American energy sector, and it serves two closely-related purposes:
1) Increase popular domestic support for off-shore oil-drilling. Some signs seem to suggest it's working, despite the fact that energy analysts uniformly agree there's no chance whatsoever that off-shore drilling will exert any immediate short-term downward pressure on energy prices.
2) Blunt public outcry over the imposition of exploitative and non-competitive oil contracts explicitly designed to benefit American interests in violation of Iraq's own national sovereignty and slowly begin nudging the American public toward accepting the brutal fact that the Iraq war really was a glorified grab for oil.
And the bastards almost got away with it, if it weren't for those pesky kids and their blog...
Oh, wait. Even on the remote chance I'm right, they almost certainly will get away with it. So never mind, then.
/tinfoilhat filter
posted by saulgoodman at 11:04 AM on July 3, 2008
Yeah, so don't ask me why I felt compelled to make my own oil price forecast when so many others have tried, but such is the nature of my madness. Having mentioned it here, I should explain further. Both the world oil demand elasticity and price-adjusted demand growth are difficult to guess, but as a thought experiment, values of up to 6% for the consumption growth there would've been at a constant price and 0.1 for elasticity of demand seem possible. That's higher demand growth than most would guess, but sometimes markets really do grow that fast, as for example the number of cars on the road in China growing at more than twice that rate. I'd have guessed world average price elasticity to be higher, but it's been measured in the US as lower, and with retail prices held constant by the government in some places it could be possible for the world average to be that low.
If you take both those extreme values it doesn't work very well of course, but if you put one or the other a bit closer to what might ordinarily be estimated, you can indeed get a predicted price chart that matches fairly well with observed prices, with a rapid increase in the rate of price rises from 2006 that corresponds well with that observed. Now I am using annual production data for this quick experiment, so it makes no attempt to account for things like the somewhat prolonged 2006 price decline, which may have been noise or something else. Still, you can pick constant values for demand growth and elasticity that do approximately match observed prices.
Based on this, if the recent trend is indeed based on demand growth and constrained supply (as the IEA also says it is, based on their rather different methods of estimation), and if it continues another year, then the price of oil for end of 2008, taking a guess at production for the rest of the year, ought to be somewhere between $125 and $165. Not exactly a precise forecast, but all I was really trying to show is that the present price can be explained as a direct continuation of the past trend.
Now of course the demand curve isn't a straight line, and now that the world's biggest consumer country is getting into the part of the curve where the United States reduces consumption a bit, and economic growth is slowing down, things may change. There may be a bit of extra oil production coming on this year and next. Even so, if my simplistic model is anything close to reality, it says the equilibrium price is not going below $100 in the foreseeable future. In the most bearish forecast I can come up with by this method, it goes to the $120 range over the next year or two; that is with an optimistic estimate of potential supply growth, along with rapidly slowing but still positive demand growth.
posted by sfenders at 6:36 AM on July 4, 2008
If you take both those extreme values it doesn't work very well of course, but if you put one or the other a bit closer to what might ordinarily be estimated, you can indeed get a predicted price chart that matches fairly well with observed prices, with a rapid increase in the rate of price rises from 2006 that corresponds well with that observed. Now I am using annual production data for this quick experiment, so it makes no attempt to account for things like the somewhat prolonged 2006 price decline, which may have been noise or something else. Still, you can pick constant values for demand growth and elasticity that do approximately match observed prices.
Based on this, if the recent trend is indeed based on demand growth and constrained supply (as the IEA also says it is, based on their rather different methods of estimation), and if it continues another year, then the price of oil for end of 2008, taking a guess at production for the rest of the year, ought to be somewhere between $125 and $165. Not exactly a precise forecast, but all I was really trying to show is that the present price can be explained as a direct continuation of the past trend.
Now of course the demand curve isn't a straight line, and now that the world's biggest consumer country is getting into the part of the curve where the United States reduces consumption a bit, and economic growth is slowing down, things may change. There may be a bit of extra oil production coming on this year and next. Even so, if my simplistic model is anything close to reality, it says the equilibrium price is not going below $100 in the foreseeable future. In the most bearish forecast I can come up with by this method, it goes to the $120 range over the next year or two; that is with an optimistic estimate of potential supply growth, along with rapidly slowing but still positive demand growth.
posted by sfenders at 6:36 AM on July 4, 2008
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posted by anthill at 8:57 AM on June 27, 2008