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17 May 2008

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Clifford Kiracofe

I happened to be out in Saudi in June 2002. I met with Mr. Al-Naimi, who is an excellent man, and several of his fine staff at the ministry. At that time, he indicated the preferred price band per barrel was $22-28, as I recall. Several years later at a conference in Washington, DC I sat next to a top executive of a non-US major international oil company at lunch. When I queried about the then price of $60 a barrel he said that his company calculated that fundamentals accounted for about $45 and hedge fund and other speculation for $15.

Today, OPEC and the Saudis have pointed to just such international speculation with respect to the price of oil as well as to the relative decline of the dollar. With respect to fundamentals placing an upward pressure on oil, obviously China and India have an impact. Perhaps the Decider should tell them to halt their economic growth so they don't consume so much oil so we can have it at a lower price?

Refined product? Gasolene for example? Has anyone noticed what the greenie-enviros have done over the last three decades to curtail the ONSHORE refining industry in the US??? Just why do we not have ONE NATIONAL standard for refined petroleum products? What about our substantial undeveloped, even unexplored, natural gas reserves? What about our vast coal reserves?

Responding to GLOBAL demand, significant refinery capacity is being built now in other parts of the world. Also, the world fleet of modern double-hull product tankers is being expanded to accomodate increased global movement of refined prodect. There are a lot of such ships being built in yards these days in Korea, China, and Japan and a lot on the order books for 2010-2012, etc.

On my 2002 visit to Saudi I also met, with several colleagues, the then Crown Prince and now King. My impression of him was of a serious and forward looking international leader. When I raised the Iraq issue with various contacts there, the answer came back "Iraq is contained and weaker than it was before the Gulf War(1990-91)." I am quite confident that today those on our country team in Riyadh reponsible for bi-lateral security cooperation would would speak highly of the very close, positive, and effective ongoing cooperation we have between the two countries.

It is understandable that the Saudis, and others in the region, are shocked by Bush's aberrant behavior and policies. Many Americans are shocked and ALL Americans, and their children, will be paying the price over the next several decades for a $5 trillion fiasco in Iraq not to mention elsewhere.

As Col. Lang indicates, the regional powers are certainly capable of working out (in their own ways and with their own means) reasonable understandings leading to stability and progress. But the US is PREVENTING this. Why?

meletius

Let's not forget that the "people" voted for Gore in 2000, cloned poster, including the people of FL.

So the shame of Bush likely belongs somewhere else. The ridiculous electoral college is the chief culprit, the 90,000 FL Naderites another, and 5 radical right-wing "judges" on the Supreme Court another...

Cieran

Not very often I find myself in disagreement with Dr. Kiracofe, but this one needs some clarification:

Has anyone noticed what the greenie-enviros have done over the last three decades to curtail the ONSHORE refining industry in the US???

Environmentalists have certainly opposed addition of new refining capacity in the U.S., but their effect has been minimal compared to that of the big refiners.

In fact, the only truly "green" interests served by the fact that the U.S. hasn't seen a new refining plant built in over three decades has to do the color of money, not the color of trees. Refining capacity in this country has steadily increased during that period by adding capacity in places like Houston, which aren't exactly Sierra Club outposts.

Refiners don't want much additional capacity for two important reasons, namely (1) they are profiting wildly from tight gasoline supplies (e.g., Valero's profits recently went up as its production went down!)), and (2) concern in the refining community that prices could go down if drivers shift away from gas guzzlers, which could hurt ROI for new refining capacity.

So the big refiners are both fat and happy with current supply constraints.

The most important exception to this situation for the on-shore case is the West Coast, where oil companies have a long history of shorting supplies to drive up the price of gas (BP Amoco got in trouble in the 1990's by shipping Alaskan crude to Asia at a loss in order to drive up prices for their refined products in California, and they netted plenty on the bait-and-switch deal), so even this exception has a rich history of supply manipulation by the major oil companies.

Thus the problem is correctly identified, but the primary cause is not. And let's face it, environmental interests are not exactly in the driver's seat in the Bush administration... if the refining industry wanted to build entirely new facilities since the GOP took over the White House, they could easily have done so.

Finally, I'm really looking forward to Dr. Kiracofe's new book. It looks like it will be a great help to those of us trying to make sense out of Bush and company...

Clifford Kiracofe

Cieran,

Thanks for your insights and clarifications per the onshore the US refinery sector. Just paid over $4 a gallon for premium this weekend in the Outer Banks at Hatteras. I get about 31 miles per gallon on average and am resigned to the fundamentals affecting global oil prices. (I prefer a clean and healthy environment myself.)

High (for the US) gasolene prices may well impact to reduce gas guzzlers on the road. Perhaps, as happened after the oil shocks of the 1970s, more fuel efficient cars, like those Japanese imports back then, will become more popular.

What federal policy initiative(s) would it take in the US to deal with inflated-manipulated gasolene prices you indicate? Would this make much difference given the inexorably rising global oil (crude) prices? Perhaps rising gasolene prices are ok as they will cause increased efficiencies? (inflation effect though?)

Babak Makkinejad

parvati roma:

We shall see.

Curious

I am surprised nobody has made comment about oil price keeps climbing. (The reason why Bush went to Riyadh and bend over.)

Incidentally, we are entering unknown territory, the dollar is not sustainable at such high oil price. The trade deficit can't be financed if it collapses.

http://www.washingtonpost.com/wp-dyn/content/linkset/2006/06/01/LI2006060100693.html?hpid=moreheadlines

The Dow Jones industrials fell more than 200 points.

Crude jumped after OPEC's president was quoted as saying his organization won't raise its output before its next meeting in September. That sent a barrel of light, sweet crude to a trading high of $129.58 on the New York Mercantile Exchange.

Meanwhile, the Labor Department's producer price report, which indicated higher energy and food prices might be seeping into other parts of the economy, compounded the concerns raised by higher oil. The department said wholesale inflation edged up by 0.2 percent in April following a 1.1 percent jump in March, but outside of food and energy, prices rose by a faster 0.4 percent _ double what analysts expected.

Cieran

Clifford:

Good questions all. And knowing the answers would certainly go a long way towards solving one of the bigger problems the U.S. faces.

The main problem in both crude and gasoline supplies is that the elasticity of demand is so low that it's easy to short the market to produce wildly inflated prices (and profits, since when the market is tight, oil still costs the same to pump out of the ground, and gasoline doesn't cost any more to refine at low prices than it does at high prices).

So a slight decrease in supply (or increase in demand) in a tight market produces a large increase in pump prices, oil-company revenues, and profits. This is what California's so-called Energy Crisis was about a few years ago, as Enron and other corporate miscreants found novel ways to restrict supplies of electricity and natural gas to drive up prices.

What we can do to help lower costs (individually and collectively) is to find alternatives (e.g., fuel-cell research funded by DOE) or to shift our individual consumption patterns (e.g., towards your 31-mpg car and away from Hummers), or to disrupt the transportation energy market via choices like living within walking distance of work, or riding bikes for trips less than a few miles.

With all these alternatives in place, demand can decrease in the face of more-or-less constant supply, and then that inelastic demand works for the citizenry, in that small decreases in demand can create large decreases in price, which effectively reverses the wild price hikes we've seen of late.

(tho in real-world practice, prices almost always go up faster than they decrease, so that we say that prices are "sticky on the downside", but the reversibility of the price behavior is eventually reached if demand is lowered sufficiently and consistently).

So the bottom line is that almost anything helps, be it more efficient cars or driving less or (best of all) creating alternatives to gasoline for transportation purposes. But when you have oil-men in the White House, you don't expect policies that will break the stranglehold that oil interests have on our economy. Such change will have to wait until the next administration, at least...

And finally, I've been doing my homework in preparation for reading your upcoming book, by tracing the origins of dispensationalist thought in the U.S. (I grew up near Holland, Michigan, so I saw this stuff up-close-and-personal). What an interesting topic! I'm really looking forward to seeing what you've learned and written.

john in the boro

President Bush gave us a “tax rebate” during his first year in office and a “stimulus payment” during his last year in office--both borrowed. For me that pretty much sums up his political ideology and his legacy.

Babak Makkinejad

john in the boro:

But in both cases at least the money was going in the right direction (no pun intended) - back to oneself.

I think his main domestic agenda was dismantling the US Social Security under the guise of privatization - which was dropped after the 9/11/2001 attacks against US.

Curious

War with Iran is on the making. August.

Oil is going to hit $160-$200.

http://www.atimes.com/atimes/Middle_East/JE28Ak01.html

air strike against the Iranian Revolutionary Guards Corps (IRGC). The air strike would target the headquarters of the IRGC's elite Quds force. With an estimated strength of up to 90,000 fighters, the Quds' stated mission is to spread Iran's revolution of 1979 throughout the region.

Targets could include IRGC garrisons in southern and southwestern Iran, near the border with Iraq. US officials have repeatedly claimed Iran is aiding Iraqi insurgents. In January 2007, US forces raided the Iranian consulate general in Erbil, Iraq, arresting five staff members, including two Iranian diplomats it held until November. Last September, the US Senate approved a resolution by a vote of 76-22 urging President George W Bush to declare the IRGC a terrorist organization. Following this non-binding "sense of the senate" resolution, the White House declared sanctions against the Quds Force as a terrorist group in October. The Bush administration has also accused Iran of pursuing a nuclear weapons program, though most intelligence analysts say the program has been abandoned.

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