Sic Semper Tyrannis

US oil/gas independence soon.

"The IEA said it saw a continued fall in U.S. oil imports with North America becoming a net oil exporter by around 2030 and the United States becoming almost self-sufficient in energy by 2035. "The United States, which currently imports around 20 percent of its total energy needs, becomes all but self-sufficient in net terms - a dramatic reversal of the trend seen in most other energy importing countries," it said. IEA Chief Economist Fatih Birol told a news conference in London he believed the United States would overtake Russia as the biggest gas producer by a significant margin by 2015. By 2017, it would become the world's largest oil producer, he said. The United States will rely more on natural gas than either oil or coal by 2035 as cheap domestic supply boosts demand among industry and power generators, the IEA said. "  Reuters

-------------------------------------

This will make a big difference in the US economy and with regard to the long standing relationship to the Saudis.  pl  

http://news.yahoo.com/u-overtake-saudi-top-oil-producer-iea-132331660.html

Oil prices - 2012

"A year ago SST had a piece on oil prices at the height of the Libyan revolt. There were all kinds of theories expounded on why oil prices should escalate beyond reason. It is time to look back and see what really happened during the last year. Using WTI one month futures at Cushing, OK as a base, the price was $94/bbl a year ago. It is $87 today. The highest price during the year was about $110 (caused by the usual geopolitical crap in the Middle East) and the lowest $78 (caused by a temporary glut of oil on the US Gulf Coast due to a refinery startup failure)."  R. Whitman 

Download OIL PRICES 2012

Huge Mediiterranean oil and gas deposits

"The discovery in late 2010 of the huge natural gas bonanza off Israel’s Mediterranean shores triggered other neighboring countries to look more closely at their own waters. The results revealed that the entire eastern Mediterranean is swimming in huge untapped oil and gas reserves. That discovery is having enormous political, geopolitical as well as economic consequences. It well may have potential military consequences too. Preliminary exploration has confirmed similarly impressive reserves of gas and oil in the waters off Greece, Turkey, Cyprus and potentially, Syria."  Thethe

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What was that you said about "peak oil?"  pl

 http://www.thethe.com/news/tag/oil/

 

Gasoline will go a lot lower.

"The price of gasoline has dropped to a five-month low, giving drivers some relief ahead of the July 4 holiday.

The national average fell to around $3.40 per gallon on Tuesday. South Carolina, at $2.987, has the distinction of being the first state with an average below $3 since February 2011. Even in states that impose high gas taxes, such as New York and California, pump prices are averaging less that $4.

Americans are now spending roughly $200 million per day less on gas than in early April, when gas peaked at $3.94 per gallon. And analysts are expecting further declines. One economist on Tuesday forecast the national average will soon fall to $3.10 per gallon."  Yahoo News

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I think it will go lower.  Gasoline prices are not determined by world wide supply and demand.  There is no short term shortage of crude oil. Forces internal to the markets are largely responsible for price movements.  These forces are the result of attempts by traaders to outguess each other in forecasting price movements.

I may have mentioned that a couple of weeks ago gasoline bought from major oil companies in the Harrisonburg, Virginia area was selling for 70 cents per gallon cheaper than the same product in the Washington, DC area.  Why is that?.  Gasoline is not produced in the Shenandoah Valley.  It must be trandported there in tanker trucks.  This, obviously adds to the cost.  I conclude from this phenomenon that the oil companies are pricing products at what they think the ttraffic will bear.

Look for a big drop in prices before the November election.  That might do it for BHO.  pl

http://news.yahoo.com/us-gasoline-prices-cheapest-since-january-151415588--finance.html

 

Guest Post from oilprice.com: The Most Immediate Threats to Global Energy Security - Jellyfish Interview

Earlier today COL Lang, hopefully enjoying his summer vacation, emailed to ask if I'd make sure the following interview, which was conducted by oilprice.com's Jen Alic was reposted in full.  Oilprice's publisher, Mr. James Stafford, contacted COL Lang to offer him and the SST community a full reprint of this very interesting interview.  You all will find it reprinted in its entirety below:

The Most Immediate Threats to Global Energy Security - Jellyfish Interview

By Jen Alic | Tue, 19 June 2012 14:32

As global energy supplies come under increasing attack by non-state actors and private energy holdings become key targets of political maneuverings and criminal activities, Oilprice.com discusses the nature of the growing threat and how to reverse the risk with “smart power.” 

To help us look at these issues we got together with Corporate intelligence specialists Jellyfish Operations and security expert Jennifer Giroux.

Michael Bagley is the president of Jellyfish, a global boutique intelligence firm that combines on-the-ground intelligence collection and analytics with an unprecedented country-to-country economic diplomacy program that helps governments, corporations, institutions and private individuals forge secure partnerships, discover new opportunities and mitigate operational risks. 

Jennifer Giroux is a global security expert who specializes in emerging threats to energy infrastructure in conflict-affected regions.

In the Interview Michael & Jennifer talk about the following:

• Why the risk to global energy supplies is increasing
• Violent entrepreneurialism: Why piracy is on the rise
• The most immediate threats to global energy security
• Which countries are most likely to see attacks in the future
• Why Saudi Arabia could be the next country to have its energy infrastructure come under attack
• Why energy companies assets are becoming key targets.
• How energy companies can create opportunities in Conflict-Affected Regions
• Why companies need more than just intelligence to operate in hostile environments

Oilprice.com: Energy supplies have always been at risk, particularly due to geopolitical maneuverings, transit through countries in conflict and those suffering from ongoing political instability, as well as piracy on the high seas. You have both mentioned that the risk to global energy supplies is increasing. How do you support that claim?

Gasoline price fall coming?

IMO this is likely.  As you all must know by now there is no shortage of crude oil at present.  No amount of fear mongering and "peak oil" advocacy can disguise that fact.

The rise in filling station prices is all market action.  Investors and suppliers bid against  estimated price rises in the markets.  This is basically a casino operation.

A fall in gasoline prices combined with slowly falling unemployment levels will doom "Kolob" Mitt's hopes. 

I don't intend to vote for either of them.  pl 

http://www.bizjournals.com/boston/news/2012/04/11/gas-prices-growing-evidence-theyve.html

54% think the Pres, can set gas prices.

I am always surprised by the peope who think the president of the US is an analog of the CEO of a corporation.  They think he has relatively unlimited power over the economy of the country.  The Democrats are now reluctantly admitting that this is not true in the matter of gasoline prices.

How about it?  What power does the president have over this?

I am tempted to think that market play could be regulated to force prices down, but would that just drive the action overseas?  pl 

"Crude Oil Falls in New York, Approaching a Bear Market as 2011 Gain Erased" - Bloomberg

 
"Oil fell to the lowest level in four months in New York, bringing its loss from this year’s peak to more than 20 percent, on speculation Greece’s debt crisis and a weakening global economy will curb fuel consumption.

Futures slid as much as 2 percent, erasing this year’s gains, as Europe failed to agree on releasing a loan payout to spare Greece from default and Japan’s exports fell. Oil traded for a second day below its 200-day moving average, a major technical-support level. Today’s low signaled a bear market."  Bloomberg

---------------------------

Well, boys and girls, how low will it go?  "Peak Oil," anyone?  pl

http://www.bloomberg.com/news/2011-06-20/crude-oil-falls-in-new-york-approaching-a-bear-market-as-2011-gain-erased.html

Gasoline prices and investors.

 
What role Wall Street investors play in the high cost of oil is a hotly debated topic in "Washington. Despite weak demand, the price of a barrel of crude oil surged more than 25 percent in the past year, reaching a peak of $113 May 2 before falling back to a range of $95 to $100 a barrel.

The Obama administration, the Bush administration before it and Congress have been slow to take steps to rein in speculators. On Tuesday, the Commodity Futures Trading Commission, a U.S. regulatory agency, charged a group of financial firms with manipulating the price of oil in 2008. But the commission hasn't enacted a proposal to limit the percentage of oil contracts a financial company can hold, while Congress remains focused primarily on big oil companies, threatening in hearings last week to eliminate their tax breaks because of the $38 billion in first-quarter profits the top six U.S. companies earned."  KC Star

------------------------------

Jump ball! 

- There is no oil shortage presently driving high prices.

- We are being screwed by traders, hedge fund managers, etc.

-  The Saudis do not love us.  They will probably join in the "screwing" soon, if not already.

Go for it.  pl

Read more: http://www.kansascity.com/2011/05/25/2903397/saudis-often-warned-us-about-oil.html#ixzz1NlU59pvo

 

"...Oil Price Should Be $60 To $70 A Barrel." - Forbes

 
"Rex Tillerson, the boss of ExxonMobil admitted last week that the price of oil–based purely on supply and demand- should be in the $60 to $70 a barrel range. Forbes

----------------------------

Well, here we have the truth from the "horse's mouth."  You don't have to believe ignorant old me.  "$60 to $70 a barrel range."  Lenzner continues by stating that, broadly speaking, the rest of the price is created by the "market forces" that I keep talking about.

I find it difficult to believe that the casino-like process of playing with the possiblity of extracting profits from the maniplulation of futures contributes to the production of petroleum.

This "game" contributes to the bank accounts of the players, but what does it do to the rest of us? 

If the answer is nothing, then the "crap shoot" in New York and other places should be dealt with, probable through international treaties of regulation.  pl

http://blogs.forbes.com/robertlenzner/2011/05/14/exxon-mobil-ceo-says-oil-price-should-be-60-70-a-barrel/

#Oil crude futures prices falling.

 
"Commodities fell broadly Wednesday and early on Thursday"  WSJ

------------------------------

At the risk of being boring, this is yet another demonstration that all this exagerated pricing in oil is market action of one kind or another.  Day traders, fund managers, dogs and cats, etc.

Long term shortages? probably.  Short term? No.

http://online.wsj.com/article/SB10001424052748703864204576319000023930160.html?mod=googlenews_wsj

#Gasoline prices now are just market action

 
"Oil dropped to the lowest level this month on Tuesday as energy forecasters said the world's supply of oil will remain ample, and a prominent investment bank said prices are too high."  Boston Globe

------------------------------------

We haven't had a good oil price fight here for a while.  I am curious if you "peak oil" types think the high prices now are the product of long or short term shortages.

IMO, 30% of this is just speculative action in the markets operating at the margins of the spot market.

I am not a great admirer of Donald Trump but I heard him say the other day that there is a lot of crude afloat in tankers that can't be sold or placed ashore.  True?  pl

http://www.boston.com/business/articles/2011/04/12/oil_price_tumbles_on_supplies_and_goldman_pullback/

#Media silliness

 
On "Morning Joe" today the Washington Post columnist Eugene Robinson said some remarkable things.  His Pulitzer has gone to his head.  Complete with self-satisfied smirk, he held forth on the motivations of American foreign policy in the MENA region.  "Its all about OIL" he said, "Iraq, Libya, Bahrain, Saudi Arabi."  Its all about OIL. 

Its a pity that this does not make sense.  Qathafi always sold oil into the world market at market prices.  He did not threaten to cut off the flow of oil.  Bahrain has litttle oil.  Saudi Arabia has mega oil and we are doing everything that we can to iritate them about the wave of unrest.  We never benefited at all from Iraqi oil.  Look at our national debt! 

Work on this conundrum.  Are their motivations in foreign policy other than economic ones?  pl

#Some Thoughts on Libyan Intervention

Adam L. Silverman, PhD*

After following all the recent SST posts and comments pertaining to Libya, as well as some of the reporting and commentary in other places, I think the issues pertaining to American intervention in Libya come down to the broad categories of why and how.  While I think that The Twisted Genius and COL Lang certainly have laid out and proposed the best variant of how US intervention should take place, after observing both the politics surrounding the uses of American military force for the past decade, as well as the actual way the US ultimately uses force, I'm not feeling too optimistic that what they are delineating, based on year's of hard learned experience, will actually be done.  In fact I'm pretty sure we will see something of the usual suspects version of the use of force: a no fly zone that doesn't do much to remove Qathafi (which is now, if I understood the President's remarks correctly, the overall stated US objective: that he has to go), followed by pressure from both our allies (France, Britain) and from the internal foreign and defense policy mavens that we must do more, America is looking weak, we're not living up to our standards - the usual arguments for boots on the ground intervention, which will result in said intervention.  Then we will start hearing the arguments that we have to expand operations so as not to discredit those who have already risked so much and because we can not allow Libya to descend into an ungoverned state of chaos, destabilize the region, and become a haven for al Qaeda, other extremists, and/or international criminals.  This will then become the basis for the need for the US to build a modern Libyan nation-state.  Since only time will tell how what we do plays out, let me move on to a brief discussion regarding whether we should or should not intervene.

#Oil, Energy and the Markets

 
It has been pointed out to me that we (I) have been neglectful of the economic aspects of presently developing history.  Such issues as crude oil prices, "peak oil," and nuclear power alternatives are, or should be, in the forefront of our committee's considerations.

Therefore, I call upon you all in my capacity as chairman, to begin a renewed emphasis on energy issues in our discussions.

I propose an initial string on the subject of the mechanisms that control oil spot prices.  pl

 

Oil Disaster Open Thread

I am increasingly seeing materials that suggest an "End of Days" scenario as an outcome for the Gulf/BP catastrophe.  Let us review the "bidding" on this.  pl  

What's the pressure in the hole?

 "Some experts are beginning to worry about whether BP, or any company, has enough strength to pay the eventual price for one of the worst environmental disasters in U.S. history — a tab that may continue to run for two or three decades.

"One of the problems is that we don't even know if $20 billion will be enough. This is all on an unprecedented scale," said Joe Hahn, a professor at Pepperdine University's Graziadio School of Business and Management who formerly worked as an engineer in the oil industry.

Hahn said the company might face the additional problem of severe fines from its decisions before and after the oil rig exploded.

"Initially, I thought they would be able to survive this, but they are in serious financial trouble. Their future is very questionable right now," Hahn said."  LA Times

------------------------------------------------------------------

This article mentions 20 billion in  BP assets that have been "set aside" as a "kind of collateral" for payment of the "trenches"of the $20 billion dollar fund. What assets are these?  How well are they secured from the possibility of a Chapter 11 bankruptcy or dissolution of the BP Group elements within the reach of US law?  

Hayward's performance yesterday made me think that he was "buying time" for BP, buying time for them to come to grips with whatever they decide is the best course of action for their stockholders.

Dylan Ratigan yesterday interviewed one Matthew Simmons on the subject of the actual condition of the hole that BP is trying to plug.  Simmons, evidently a leader of the "Peak Oil" people, insists that the down hole pressure is not 11,000 PSI as Hayward said to Congress.  Simmons maintains that the pressure is really more like 60,000 PSI.  If that is the case then it would seem that both the present leak and the relief wells may be ineffective.  What do you all know of this?

Simmons also says that USGS scientists in the Gulf have determined that there is no casing (metal pipe) left in the bore hole.  He says that the pipe has been blown out by the extreme pressure.

His solution?  A small yield nuclear explosive in the bore hole.  Opinions?  pl

http://www.latimes.com/business/la-fi-oil-spill-bp-20100617,0,2351140.story

Can Obama seize BP assets?

 "Barack Obama will order BP to hand over control of damage claims arising from the oil spill in the Gulf of Mexico, his spokesman said today as the company was granted permission to try a new method of containing oil from the spill.

The US president is to give a televised address to the country tonight, his first from the Oval Office during his presidency, to reassure Americans that the government is in control of the crisis.

Obama's spokesman, Robert Gibbs, said the president was poised to seize the handling of damage claims from BP, if necessary. He would also use the speech to identify a person to lead the recovery effort and discuss reducing the US's reliance on fossil fuels and imported oil."  Guardian

----------------------------------------------------------------------------------

I want to see BP pay for it - all of it.  that would be an enormous sum.  There are direct costs of the clean up and then there are costs to individuals and businesses in lost income.  Those costs will continue for years.  Then there are costs to the state governments concerned in lost tax revenue from businesses damaged and tourists that wil have disappeared from the Gulf coast area.

Mr. Gibbs says that the US has the legal power to force BP to disgorge all that money.  Is that true?The US has a long standing tradition of resistance to ex post facto legislation.  Would some form of impoundment of BP's assets stand up in federal courts?  BP is an international company with a European base.  Why do we not think that BP would transform itself in some way to limit liability ans salvage assets for the benefit of stockholders?  They said they will pay for everything?  Don't be amusing.  These are businessmen about whom we are talking, not "grunts" on a ridgetop in Afghanistan.  Business is not about sacrifice, honor and service.  It is about making money.  It looks as though BPs liabilities in the Gulf region are virtually unlimited.  They will try to escape from that.  pl 

http://www.guardian.co.uk/environment/2010/jun/15/obama-bp-oil-spill-claims

"Study: Oil speculators dominate open interest in oil futures" Ruth

"Using data from the Commodity Futures Trading Commission (CFTC), the authors state that the previous claims by the commission that speculation wasn't influencing oil futures markets were based on inappropriate analysis. The authors present new evidence that speculative trading is playing an increasingly important role in the oil market.

They note that while the question of what has produced sharp swings in oil prices since 2005 is a complex one that requires further and deeper study, there are "inescapable facts" that need to be part of the debate about regulating the activities of institutions betting on movements in oil price purely for financial gain. Specifically, speculators, which the CFTC designates as any reportable trader who is not using futures contracts to hedge, have increased their footprint in the marketplace dramatically since the late 1990s.

Hedgers are typically producers and consumers of the physical commodity who use futures markets to offset price risk. By contrast, speculators seek profits by taking market positions to gain from changes in the commodity price, but are not involved in the physical receipt/delivery of the commodity.

"To protect the U.S. economy and American consumers, there needs to be greater market oversight," Medlock said. "The tremendous increase in the market presence of speculators by fifteenfold speaks for itself."" Ruth

-----------------------------------------------------------------------------

Need I say more?  pl

Crude prices are driven by investors.

"The 15 percent drop in oil prices since the end of June was the longest and steepest decline so far in 2009. Prices had been rising since February, more than doubling from lows hit near $33,as traders started to price in an eventual recovery.

But many analysts cautioned prices had risen ahead of the real economy, with unemployment still climbing and global oil inventories mounting up.

The fragile state of the global economy dominated the annual G8 summit, with the United States, Japan, Germany, France, Britain, Italy, Canada and Russia acknowledging there were still significant risks to financial stability.

OPEC's 2009 World Oil Outlook has added to the gloom as it said world demand for oil may take years to recover from the slump in 2009 because of economic weakness and demand destruction." Reuters

------------------------------------------------------------------------

Does anyone here still think that crude oil prices are governed in today's markets by eventual world shortages?

I reckon that the time has come to provide an opportunity here for further debate on this question if there still is a question.  pl

 

"Judicious investment" in oil

"Downgrading the forecast, IEA said the oil demand would rise 0.6% or 540,000 barrels per day on average during 2008-2014. In its latest Medium-Term Oil Market Report, the Paris based agency said the oil demand would rise to 89 million barrels per day in 2014."

-------------------------------------------------------------------

OK.  Crude prices declined to around 32 dollars per barrel and now are back up around 70 dollars.

Why?

There is no short term shortage of crude.  Oil producers and traders are impounding the stuff all over the world, holding it in waiting for the steadily rising price to come to the level they want.  Speculation?  The "S" word?  OK.  Let's call it "judicious investment."

Demand is down just about everywhere at the moment, so more and more oil has to be withheld from the markets to keep the price going up.  This is very "judicious investment."

How high will the price of crude go this summer?  That depends on the skill of the producers and investors.  pl

 

Oil Prices, OPEC and the Financial Markets

"It's a warm spring day in Vienna, and OPEC delegates meeting in the former imperial capital seem more relaxed than they have been in months. There is less behind-the-scenes skullduggery than usual. Instead, it's an opportunity to hold leisurely dinners with colleagues, or even take time out to watch Barcelona beat Manchester United in the European Champions' League soccer match on TV. And why not? The oil market, deathly ill just three months ago, has recovered faster than just about anyone—including OPEC—expected, with prices now above $63.50 per barrel. "They are jubilant," says Kamel Al-Harami, a Kuwaiti oil analyst.

It came as no surprise that with prices moving up OPEC saw no reason to change production levels at its May 28 parley. "Stay the course," the Saudi Oil Minister Ali Naimi shouted cheerfully as he left OPEC's glassy blue and white building to take in the sunshine. OPEC's medicine for weak markets announced late last year—a series of cuts amounting to 4.2 million barrels per day—seems to be working, even though demand remains limp and inventories are near record highs. "We worry less when prices are improving," says the Algerian Energy Minister Chekib Khelil. He added that he thought rising prices were sustainable if the European economies follow what OPEC sees as signs of improvement in the U.S."  Business Week

---------------------------------------------------------------------------

Time to start up the oil wars again on SST.

If Business Week is to be believed, OPEC restraints on production (their right), market action and investor belief in future higher prices are raising price per barrel in spite of low demand and massive inventories. 

OK.  Now let's hear from the "Peak Oil" people as to whether or not these rising prices reflect the undeniable long term shortages of hydrocarbons.

My Escalade is still purring along nicely on Regular gas.  pl

Oil, Commodities, Instability?

Is the price of oil settling on a long term price of $40 a barrel? Some hard evidence is showing up. The Iranian government is setting its 2009-10 budgets on a price of $37.50. This week’s price started below $40 but March futures are in the $43/$44 range. The world recession is tracking to have an equal impact on the price of commodities.

Not being an economist, I would have assumed that consumption was in sharp decline and thus the supply and demand cycle kicked in. It appears this has been aided by the action of hedge funds as well. From Steve Austen’s blog: http://www.oil-price.net/#20080105#20080105

But when the banking industry collapsed, hedge funds had to raise cash by "deleveraging", liquidating their leveraged energy ETF positions sending the price of oil tumbling. Anecdotally shorting of banking ETFs was suspended by the US Securities Commission during that time but not shorting of energy prices, and the leverage mania soon found an escape route in utrashort oil ETFs, compounding the speed of this downward spiral. By December 2008 the oil price had collapsed 75% and frankly, who would complain about cheap gas these days?

Cheap gasoline will mean big cars.

El presidente has decided to give GM and Chrysler money from the TARP.  They have until March to re-structure enough to survive as distinct business entities.  If they can't do that they have to re-pay the money.  Oh?  With what?  Ford does not want any money just yet, maybe later.

Who thinks that the Big Three will solve their problems by March, or maybe July, or maybe October? I do not think that their financial situations will allow them to continue for much longer in their present form.  Merger or liquidation awaits them.

As I said before, I have two excellent vehicles, one from GM, and the other from Ford.  I am completely happy with them.  Before these I had two Ford products.  Both were without any problems.  People like to say that the Big Three did not make good vehicles.  I have never experienced that.  People also say that the Big Three should not have made full sized cars, pick-up trucks, or SUVs.  Well, capitalism implies obedience to market forces.  Most Americans like big vehicles. The Big Three responded to that preference.  If you prefer a command economy of the sort that we might approach in the USA, then you might have the opportunity to see if you like automotive products that environmental activists design.  The products of the former Soviet automotive industry come to mind.  Those who were lucky got "Lada."  The nomenklatura rode around in "Zil."  Do people think that the American nomenklatura are going to ride around in tiny electric or hybrid cars?  Get real.

Gasoline will be below a dollar a gallon soon.  How long the price will stay at that price level is not immediately apparent.  Will most Americans want little cars when gasoline is at prices of that sort?  I doubt it.

Do the environmental faithful believe that Obama would ask Congress to legislate against big vehicles if polling (triangulation) says that most people are opposed to that.  Do people think that he will ask for high gasoline taxes?  Come now!  Look at his cabinet choices.  This man is a politician, and a skilled one.  2012 is coming...

Someone suggested that I keep the Escalade as a museum exhibit.  Who laughs last, laughs best.

Does "peak oil" have any effective meaning?  pl

I bet that OPEC can't...

"Crude-oil futures soared above $49 a barrel Thursday, propelled by sharp weakness in the dollar and expectations that the Organization of Petroleum Exporting Countries will deliver a significant production cut next week.

Crude for January delivery rose $4.46, or 10.2%, to end at $47.98 a barrel on the New York Mercantile Exchange.

Earlier, the contract hit an intraday high of $49.12 a barrel in electronic trading on Globex.

Other energy futures also rallied. January reformulated gasoline rose 11 cents, or 11%, to end at $1.08 a gallon and January heating oil gained 11 cents to finish at $1.51 a gallon."  Marketwatch

--------------------------------------------------------

Can OPEC decide on production cuts?  Sure.  Can the OPEC countries endure pain from loss of revenues brought on by demand destruction and lower prices?  Probably not.  Will the members cheat on their quotas trying to "make up" the lost revenue?  Probably.  Can OPEC discipline its members to ensure that they will not cheat on their production quotas?  Certainly not.

Translation - Crude prices will appear to stabilize and then begin to fall again,  pl 

http://www.marketwatch.com/news/story/crude-futures-soar-12-trade/story.aspx?guid=%7BC2D4E75E-3C68-4112-ACA7-08AFA18CA3FF%7D

Is the price of oil a tolling bell?

The price per barrel is now approaching $42.  We should consider the implications.  If the price of crude continues to fall, then at some point there will be widespread shut-downs of production and exploration.

OPEC will meet soon to seek a solution to the decline in their resource basis that is inherent in the massive price decline.  There has been so much destruction of demand in the course of the world economic crisis that it may not be possible for OPEC to enforce restraint on the financial "hunger" of its members for the funds that come from high levels of production.  In other words, this decline in price may be beyond the power of OPEC to reverse. The decline in the oil market has become emblematic of the larger economic decline.   Is the world headed for another Great Depression and is the oil industry leading the way down into "the pit?" 

Comments?  pl

How low will oil go?

By now, those of you who are interested have noted that the price of crude dipped balow $50/barrel today.

You may also have noticed that I have thought for some time that much of the price range that was achieved this last summer was the product of human herd behavior in treating this commodity as a "poker chip" in large scale and ever more complex Ponzi schemes.

We have probably not reached the bottom in the process of what is now quaintly called "de-leveraging" of those prices. 

Down underneath the hot air and fluff there are prices for crude oil that are supportable on the basis of cost of production and transport plus a profit margin sufficient to cause producers to accept the risk involved in the "ahl bidness" as they say in the Permian Basin.

What is that price? pl

PS -  Yes, you can throw in "Peak Oil" in your comment if that is soothing.

http://www.msnbc.msn.com/id/12400801/

Will OPEC production cuts work?

"Even the Saudis, who argued for keeping the markets well supplied at the last OPEC meeting, seemed to have been struck by the speed of the price drop.

When prices spiked this summer, the cartel’s leaders attributed the jump to speculation, and Saudi Arabia, the world’s biggest oil producer and OPEC’s most powerful member, opened the taps and increased production to a record of 10 million barrels a day. The Saudis have since pared their output to around 9.5 million barrels a day, according to analysts.

As the lowest-cost producer, Saudi Arabia can afford to let prices fall for a while without hurting its budget. Most analysts estimate that the Saudis could live with oil at $55 to $65 a barrel. But other producers need higher prices. Nigeria’s oil minister said his country would be more comfortable with $80, Qatar has set a range of $70 to $90, and Iran’s representative said that prices below $90 a barrel would hurt.

For Iran and Venezuela, the drop in prices is particularly painful,"  NY Times

---------------------------------------------------------------------

OPEC agreements on production cuts are not going to halt the fall in the world price of crude.  The fantastic prices that prevailed in the Summer of 2008 were the outcome of trading in oil as financial investments rather than as commodities.  Deregulation led to this as it led to speculative excess in many other commodities (real estate derivatives being the most famous example).  A valuation of crude by the financial markets resulted that had little to do with short term demand and everything to do with the boundless "greed" espoused by Gordon Gecko.

The collapse of the stock and credit markets that has occurred has started an unwinding of the fantasy of the false short term valuation of crude oil.  At the same time the actual economic slowdowns that are happening around the world are reducing real short term demand for oil to even lower levels.  This produces a downward spiral that has a certain built in momentum.

The oil producing countries need the revenues that they were earning at the inflated prices of oil that prevailed last Summer.  In many countries the governments themselves are the principal owners of the oil producing companies.  A loss of revenue by the oil companies is a direct "hit" on the governments' budgets.  Political stability in these countries is to some extent dependent on budgets.  Cutting production is a gamble that many of these governments will hesitate to adopt.  Cheating on OPEC established quotas for production is an old feature of the oil supply situation.  In addition, there will be countries who will simply not "play ball" with OPEC in this.

Conclusion:  Production reduction efforts on the part of OPEC will not be fully effective.  Demand will continue to fall for some unforeseeable period of time. Therefore, crude oil prices wil continue to decline.  To what level will prices decline and for how long?  That is not knowable at this time, but It is likely that price will decline to below 50 dollars a barrel.  pl

http://www.nytimes.com/2008/10/25/business/worldbusiness/25oil.html?_r=1&pagewanted=2&bl&ei=5087&en=e931bc5317323329&ex=1225080000&oref=slogin

Oil - Down, Down, Down.

No comment needed, but....  Seems like this is a predicted Black Swan.  Musta been dumb luck on the "Casenova the Turkey" model. pl

Fabius Maximus teaches us. Thank You, Fabius.

Our brother Fabius, who evidently writes about oil was courteous enough to inform me that he has posted the following in his blog.  I thank him for his help in explaining this complex phenomenon.  So many have sought to help in similar ways.  I am especially grateful to the army of social scientists who "lent a hand" in so many ways.  pl

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"Colonel Lang shows us why the 21st century might prove difficult - even painful - for America"

As the evidence grows that global oil production will peak in the next decade, many Americans grow increasingly frantic to deny this possibility.  Hence the campaign against speculators (an historically common response to changed conditions).  We see this even by intelligent and experienced people, showing how deeply rooted is our desire not to make the necessary (and probably painful) adaptations necessary.

"How to burn the speculators" - Galbraith

"On these matters, there is a quick fix. Under pressure, the cftc is closing the London loophole. Early in the next administration, Congress must slam shut the Enron and swaps loopholes. Index speculation should be curtailed by making such strategies illegal for regulated pension funds and by imposing limits for all traders on how much they can buy or sell. Investment banks using credit default swaps to enter the commodities markets should be regulated to the standards that apply to speculators, not as if they were heating-oil vendors hedging against a warm winter. Investigations now under way at the Federal Trade Commission, the Federal Energy Regulatory Commission, and the Department of Justice should be intensified, and criminal manipulation of the markets, if detected, should be punished.

Finally, the federal government should burn the oil speculators by selling up to 4 million barrels a day from the Strategic Petroleum Reserve. And as economist Tom Palley has pointed out, consumers can help too. An awful lot of gas is stored in cars. If people stop topping off and make do with half a tank, they'll back up supply and lower demand. It's a brilliant suggestion and definitely worth a try.

And while this is being done, and especially if all this smoke leads to fire, someone should ask, "What did Henry Paulson know, and when did he know it?""  Galbraith

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Am I beating this horse to death?

Yes.

Why?

...Because the horse isn't dead yet.

pl

http://www.motherjones.com/news/feature/2008/09/exit-strategy-how-to-burn-the-speculators.html

The price per barrel - down, down, down.

The TV business channel 24/7 crowd have more or less lapsed into sullen quietude over the continuing fall in the price of the oil commodity.  Why?  They can't explain it in terms that they are willing to accept.

Some of the anchors are restive and asking embarrassing questions that are "slapped down" as quickly as they arise.

The rise of the dollar, the destruction of US demand, the unexpected decline of Asian demand, etc., etc., ad nauseam.  These are the "herd" answers.

In fact, there was never really a short term shortage of petroleum.  The talking heads and the mindless anchors on TV business shows hyped and hyped the long term shortages until the unthinking came to believe in oil shortages as every day fact.  Talib, in "The Black Swan" describes this phenomenon.  Once something like the phony oil shortage became "fact" then the oil commodity was a good candidate for the "play" of traders of the wild eyed variety.  Now, they are getting out.  This reveals the lack of "fundamentals" underneath todays prices.

A woman "talking head" on CNBC said today that oil is seeking an "equilibrium price" based on the real supply and demand situation.   She was correct.

She was hooted down.

pl

Kudlow - "Drill, drill, drill, so that the futures traders will flee."

Larry Kudlow, the financial whiz, was on the Joe Scarborough show on MSNBC today.  He repeated his unending mantra of "drill, drill, drill," as a way out of the current wilderness of high priced crude.

His insistence on this simplistic solution to the short term price situation has never made a lot of sense to me.  Kudlow is a smart man.  He gets around enough in the right circles to know that short term traders in oil futures are the fire behind the crude prices we see now.

When pressed by one of the hosts on the show to explain how favorable congressional action on drilling both on and off shore would affect the price in less than several years, he "came clean."

"Ah," he said (roughly).  "Approval of drilling will frighten the futures traders out of the market and the price will go a long way down."  "They are already leaving the oil futures market" he went on.  "This will push them out even faster."

Need I say more?  pl

http://en.wikipedia.org/wiki/Larry_Kudlow

The oil "head game" is collapsing - for now

"Oil prices continued to decline Wednesday, after a government report showed stronger-than-expected inventories and a Federal Reserve report showed a weakening economy.

Light, sweet crude for September delivery fell $3.98 to settle at $124.44 a barrel on the New York Mercantile Exchange.

Oil has tumbled nearly $23 since setting a record of $147.27 just eight trading days ago on July 11. Prices have not been this low since June 4.

The September futures contract became the so-called front-month contract as the August contract, which fell $3.09 to settle at $127.95 a barrel in the previous session, expired Tuesday. Oil settled down $3.51 from Tuesday's front-month settle. Oil futures contracts typically expire with seven trading days left in the month."  CNN Money

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What happened to all the babble on the 24/7 news about the end of western civilization as we knew it?  What happened to the images of Ali Velshi (aka - "the bald headed prophet of doom") trudging across the Alberta tar sands,  gloating over the pain? 

Now, the financial news babes on CNBC, Fox Business, Bloomberg, etc.  are looking cautious and pensive as they try to re-adjust their "pitch" to falling prices.  Actually, they look pretty good compared to the collection of group thinkers who pass for experts on these shows.  People ask how it is possible to listen to the chatter from these shows all day long.  That is easy to answer.  They are intensely amusing as further evidence of the herd mentality of humans and the instinct for individual survival manifested in rationalizations after the fact.

Perhaps we should look into hedge fund operations.  Unfortunately, so many of them are now run by the mediocre and unimaginative that there will not be as many to study soon.

Oh, yes, the oil head game.  Don't fret, those of you who loved it.  It will be back after the price gets down to some rational level.

Think for yourselves!  PL

http://money.cnn.com/2008/07/23/news/economy/oil/?postversion=2008072314

http://tacticalinvestor.com/masspsychology.html

http://en.wikipedia.org/wiki/Crowd_psychology

More oil leaking from the barrel.

"The drop offered further evidence that investors who only a week and a half ago drove prices to a new high above $147 a barrel are now quickly pulling money out of the market. It was also a reminder that, with traders for the moment turning bearish, the absence of major news can push the market down — just as incremental supply concerns previously drove prices sharply higher.

"This is more of the long exit from the market by the hedge funds," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates. "A lot of these investors who have been supporting prices are hitting the road."

In Washington, the Senate voted 94-0 to move ahead with a plan that would require the Commodity Futures Trading Commission to set limits on trading in oil markets by certain large investors.

A number of Democratic lawmakers and other critics have blamed the historic rise in prices on speculators that they suggest are manipulating prices."  Yahoo news

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"A lot of these investors who have been supporting prices are hitting the road."

"And may the road rise up to meet yah!"  (Leprechaun Talk  )

My hat's off to all of you who can continue to believe that fundamentals and trivial news can explain the oil futures markets' action in the last couple of weeks.  it takes real discipline to maintain that kind of position in the face of reality.  The ability to do that reminds me of the way the Bush Administration insisted that various nonsense descriptions of the war in Iraq were true.  The Jacobins are still clinging to these ideological positions.  Bravo!  Hang in there!  Don't let reality push you around!

The last month or so I have been watching the various TV financial market networks.  Marvelous!  These "analysts" by and large have no idea at all as to what really moves the various markets.  They just mouth the received wisdom and describe what happened as a forecast of what will happen.

They are not a bit different than the sports figures you see interviewed on the tube.  "And how is it that you won today?"  Well, we ran well.  We passed good (sic). We threw a lot, and we won."  "Well, thank you."  pl

http://news.yahoo.com/s/ap/oil_prices

The oil bubble is leaking

I told you so!  Ah, that's not very mature.  Yes, but it feels sooo good.

Down how much last week?  What's that again?  I couldn't hear you...

It is true that there is a severe supply and demand problem in crude oil supply, but it is a long term problem.  As is often the case, the time-scape of this problem is one of the most important parts of it.  There clearly is not enough oil in the ground for humanity to continue using it in the ways that we have been doing.  Growing demand in newly industrialized places like China and India exacerbates that problem.  The solution to the supply problem in energy lies in new reliance on different ways to produce electricity.  Cheap electricity would enable short distance drivers to use electric cars and could eliminate the absurd reliance on fuel oil to heat buildings in the deep north.  That would produce a very different situation.  Al Gore is calling for windmills, etc., but the real solution (as he says) is nuclear power.  The Greenies will have to "suck it up" and accept the idea.  Hey, the French get most of their electricity from nuclear power.  The Francophobe crowd should take that as a challenge.

The short term problem is not the same.  This is and has been a bubble generated in the ways that have been discussed in previous articles.  Short term investment in the futures and spot markets have driven prices to levels unrelated to present supply and demand.  The markets have recently been a fantasy world without real limits for movement on the up side.

The bells are now tolling for that fantasy.  The smart people who stand to lose from this festival of childish greed have been kicking the psychological props out from under the process of finding bigger and bigger fools.

You don't think so?  Good.  It will be amusing to see how much money is lost in your disillusionment.

Sometime in the next few months the price per barrel will fall below 100/barrel.  It will be interesting to see how far it falls below that level...  pl

http://en.wikipedia.org/wiki/Gordon_Gecko

10 pounds in a 1 pound bag

I was in New York City for a few days on business and took the opportunity to talk to a friend who knows his way around the financial world.  Inevitably the talk turned to the current crude price crisis. 

This is a potentially catastrophic situation.  If the price of crude continues to drive upward, we are all looking at the prospect of a radically altered world in which our daily lives will be very different and much more limited and in which the international scene will shrink in importance as countries turn inward in the search for stability and resources.

My friend is going to assemble the opinions of his knowledgeable contacts for a post on this subject but for the moment I would offe the following opinion.

The oil spot and futures markets are limited in size, limited by the actual amount of crude available within the timescape of the contracts.  Investor money from institutions, pension funds, hedge and index funds , etc. is pouring into those markets as it flees from other investments that are not appealing at the moment.

An old army saying held that it is not possible to put 10 pounds of stuff in a 1 pound bag.  Nevertheless, that is what all that investor money is trying to fit into at present.  Is it really a surprise that prices are steadily rising?

A solution to this problem is not apparent.  Since this is a process detached from short term supply, it would seem that there is no upside limit to how high the price per barrel may go. 

Someone had better do something soon.  pl

"Speculators accused of dictating oil prices"

"Just how much oil prices are being driven by speculation became clearer yesterday as regulators revealed that Wall Street dealers, hedge funds, pension funds and other speculators hold 70 percent of the leading oil futures contracts traded in New York.

The price on those contracts continued to defy gravity yesterday, with premium crude closing near $134 a barrel despite trends that in the past would have weighed down prices, including falling demand for oil in the United States and a strengthening U.S. dollar. Oil's seemingly relentless rise in the face of these trends has prompted charges that speculators have taken control of the market.

The latest estimate of how large the investor involvement in the market has become was provided by the Commodity Futures Trading Commission this week to the Senate Energy and Natural Resources Committee.

The commission previously said speculators constituted only 37 percent of the market, but at the committee's behest, the new estimate includes for the first time the 40 percent of oil futures contracts held by Wall Street dealers who have taken advantage of a regulatory loophole for "swap dealers" provided by the commission.

"Even 70 percent may represent a low-ball figure," as it includes only trading in the most popular crude-oil contract on the New York Mercantile Exchange - the benchmark premium crude West Texas Intermediate, said Bill Wicker, spokesman for committee Democrats. "  Washtimes

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I offer the opinion that the "fundamentals" of supply, demand and all the other undergraduate economics concepts that we all remember from long ago do not adequately explain the pricing process that now prevails in the oil and financial markets.

Investment in oil futures is not criminal.  It is not conspiratorial.  It is merely another aspect of the oh, so clever greed game played in the markets of New York and London.  Having operated on the fringes of that society of global "crap shooters" for a couple of decades, it seems very clear to me that all the expensively dressed and self assured youngish men who inhabit the hedge funds, etc. view the oil futures markets as just another sandbox to play in on the road to "making it big."

Yes.  There are long term supply problems in energy that must be solved soon.  No.  This years craziness in the price of oil is not a clear reflection of that problem.  pl

http://www.washtimes.com/news/2008/jun/18/speculators-accused-of-dictating-oil-prices/

"Bubble, bubble, toil and trouble..."

OK, folks. let's start a pool on where the price is going.  Remember, the argument is not about long term supply and demand.  The argument is about this year.  pl

http://finance.yahoo.com/tech-ticker/article/28315/Get-Used-to-Oil-Volatility----the-Bubble-May-Last-Longer-Than-Expected?tickers=STO,USO,OIL,DUG,XOM,COP,CVX