King Abdullah and the speculators

"Saudi Arabia, Opec's largest oil producer, moved to take some of the heat out of rising fuel prices yesterday with plans to increase production next month.

The Saudi move followed a weekend of talks between the UN secretary general, Ban Ki-moon; the Saudi ruler, King Abdullah, and the country's oil minister Ali al-Naimi.

The news is expected to help depress the crude oil price, which hit a record high of $139 a barrel last week, ahead of an unprecedented meeting of oil producers and importers to be held in the Red Sea port of Jeddah on Sunday."  Guardian

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

Sooo, the Saudi king is going to increase production at the margin on crude oil going into the spot market and this is expected to lower the market price on deliveries of crude to refiners.  That, in turn, is expected to cause a failure in confidence in the whole nasty complex of capitalist hedge fund managers, index fund managers, bankers, advisers to same, and individual mega-investors.  It is hoped/believed that this failure in confidence will cause the players to lose faith in their ability to pass the risk along to the greater fools waiting somewhere in speculator limbo.  After that set of developments the price per barrel is supposed to fall, a lot.  I believe this to be true.  We will assemble here afterwords to gloat, or not. 

A couple of things... 

- This declaration by the Saudis means that the Saudi gremlins (something like the gnomes of Zurich but more colorful and with bigger boats at Nice) believe that they can affect the price by doing this.  It is intuitively obvious that they thought that all through the time that they assured the cretins in the Bush Administration that they could not possibly increase oil production since they were already at the top of their production limit.  I seem to remember that some of you believed that.

- Believing that, they still did not choose to increase production enough to take the steam out of the commodity/financial market upward spiral in price.  That spiral gained speed as marginal scarcity fed the greed and confidence of the players.

- Now they are going to boost production because the accelerating rate of destruction of the world economy threatens everyone, including them.   Even 300 foot yachts can be threatened by instability.

-  Why did they play this game?  The Saudis are angry with us and have been for some time.  They are tired of being treated like poor relatives at the family reunion.  They are tired of being ignored in the matter of policy with regard to Shia triumphalism, Iran and the Palestinian question.  The Saudis don't care about that last one?  Only a neocon or a State Department hack toadying his way towards promotion would even try to believe it to be true that the Saudis do not care about Palestine or Jerusalem.  Ask the Saudis.

Foreign policy doesn't matter to the "little people?"  Ask yourself if that is true next time you fill up mama's Explorer. pl

http://www.guardian.co.uk/business/2008/jun/16/oil.saudiarabia

Comments

[Grimgrin]

As one of the people who thought Saudi Arabia was at or near it's production peak, I'm more than willing to say I was wrong. At the time though, I remember the Saudis were telling Bush that speculators were responsible, rather than that they didn't have the ability to increase production period. Most of the reading I had done on the subject at the time had been focused on the supply and demand part of the equation, and I didn't honestly think the Saudis were angry enough to allow an oil shock if they could avoid it. I was obviously wrong on both counts.

Since then I've read more about what's happened in the commodity markets.

http://www.spiegel.de/international/world/0,1518,559550,00.html

This article in Der Speigel is probably the best thing I've read about the speculative bubble, now inflating in the commodities market.

I do question whether a 3.2% increase in Saudi production be enough to pop or deflate the commodities bubble, however. I hope it is. And the Saudis certainly know the markets better than I do. I suppose it all depends on exactly how irrational the exuberance in the market place is.

I also question how insane we have to be to allow a speculative bubble to form in vital commodities. The famous tulip bubble looks almost rational if you compare it to a market that has been allowed to bid up the price of the sine qua non of the modern world to unprecedented levels.

[gacetillero]

Traders in the markets say that the Saudis can produce as much as they want, there's not a lot of demand for it. Saudi oil is harder to process, and so the discount that they have to offer to more attractive crudes has got steadily wider and wider. Make of that what you will.
Perhaps this will help slake Asian demand and reduce pressure elsewhere in the system, but perhaps it's purely for sure. Perhaps there'll just be a lot of cheaper Saudi oil sloshing around in the market while the prices of WTI and Brent keep rising.

[walrus]

Statutes against speculation have been a feature of European history since medieval times.

"Forestalling" was the crime of buying food from farmers before it was put to sale in a market stall (ie: Fore' stall)and then the goods were marked up and resold without the current open market price ever being determined.

"Engrossing" was the crime of buying more than you could personally use, purely for speculative purposes - again to try and "corner" the market.

The first crime denied the market accurate information. The second was a misuse of financial power against less well off individuals

The reason these were regarded as offences was due to questions of equity; in a tight medieval seasonal market for food, committing them meant that somewhere, someone was going to go hungry so that the offenders could profit.

Speculation is fine according to theory today because it adds liquidity, I mean, how boring it would be if people only bought what they needed today?

However in a tight oil market, like a tight food market, speculators can really amplify the damage their activities cause.

Perhaps we could apply a little medieval economic law here......and perhaps the appropriate medieval penalties as well?

[arbogast]

Saudi Arabia is run by liars for liars. They don't have the reserves they claim to have and they ain't bailing out anything.

http://www.theoildrum.com/node/4153>Saudi Propaganda

[eaken]

perhaps this to lower prices and reduce effect of military confrontation with Iran?

not into conspiracy theories, but oil gets to $139, falls dramtically, and then spikes back to current levels upon Iran strike. We've already been to $139, so it won't be that big of a deal will it?

[eaken]

and on a somewhat unrelated note, i find it very peculiar that there is once again the talk of resolving the Lebanon, Israel, Palestine, Syria issues. Talk of returning Shebaa farms, Golan Heights, stop building in East Jerusalem.

This was the same BS that was being fed to us right around the start of the Iraq war.

It seems as though we're living some algorithmic life inside a Matrix.

[Clifford Kiracofe]

For some data on this issue:

1. data with Saudi perspectives see the Saudi-US Relations Information Service (SUSRIS)at:
http://www.saudi-us-relations.org/articles/2008/special-reports/080609-oil-crisis.html

2. statistical data by US Department of Energy,Energy Information Administration at:
http://www.eia.doe.gov/

3. British Petroleum Statistical Review of World Eneregy June 2008 at
their website www.bp.com under catergory "Reports and Publications."

"The Review shows that the world's fossil fuel resource base remains sufficient to support growing levels of production but the continued weakness in oil supply and increasing demand outside the OECD also highlight the challenges that industry faces in maintaining secure energy supplies.
"Declining oil production in the OECD highlights the fact that, while resources are not a constraint globally, the resources within reach of private investment by companies like BP are limited. Political factors, barriers to entry, and high taxes all play a role here. In other words, when it comes to producing more oil, the problems are above ground, not below it. They are not geological, but political," added Hayward."

In 2002, when I was In Saudi Arabia, the Minister of Energy indicated to me and several colleagues that the desired price band goal at that time was US$ 22-28 per barrel. Even allowing for inflation and the decline of the dollar, the current price level does appear to be suffering from advanced tulipmania.

Anent tulipmania: http://en.wikipedia.org/wiki/Tulip_mania

[Duncan Kinder]

An interesting question here is whether MEND and other Nigerian rebels can reverse the effect of the Saudi decision by stepping up attacks on oil production in the Niger Delta.

In other words, is worldwide oil production so tight that any such increase in Saudi output can be reversed by effecting some decrease elsewhere.

The Saudis currently are functioning as a sort of petro-FED. Much as the Federal Reserve Board regulates the money supply by increasing or decreasing interest rates, the Saudis have regulated the oil supply by increasing or decreasing production.

However, if oil supplies are sufficiently tight, then MEND and similar outfits could challenge the Saudis' Fed type status by imposing their own policies on worldwide world output.

Everything I have read suggests they have both the motive and the means to do just that.

Accordingly, I predict an increase in attacks in the Niger Delta.

[JohnH]

It doesn't much matter whether the Saudis increase production or not. Since they do not release their production figures, nobody will ever know. But maybe their saying these soothing words will help reduce prices...or maybe not. But they won't look like the villains. And maybe they've extracted something concessions from the Bush administration, though they must know that the Bush administration's promises are about as reliable as the Saudi's announcements of increased oil production.

[Lysander]

I really don't buy the "speculators are screwing us" argument. If the markets knew Saudi could dump oil on their heads with the flick of a switch, they would never bid up the prices so high.They'd never know when a Bush phone call to Abdullah would would leave them holding a very heavy bag. The markets must have a lot of confidence that Saudi wouldn't do that.

No. The problem is with an ever weakening dollar and the markets suspicion that it will keep falling. Not to mention a risk premium with the Iraq war and every idiot and his brother threatening to attack Iran.

500 k BPD aint much against all that.

[Dana Jones]

I don't see how a 500k increase will affect anything. The SA's supposedly claim to be able to put out 1Mbbl/day more, but they aren't or can't do it. From what I've read on other forums, they have peaked on light, sweet crude, and now the excess output is made up of heavy, sour crude, which our refineries can't handle. Didn't the SA's claim not too long ago to be able to put out 12Mbbl/day by now? So where is it?
So I don't see the 500k/day making much difference, maybe the price will drop to $130/bbl at most.

[Kieran]

Disclaimer: I am no oil expert.

However, I notice that oil has hit a new record of $140 after the announcement.

Speculation may fuel present high prices, but if the basic concern is that Gulf production is at its 'peak' an increase of 200,000 bpd above that already announced is unlikely to change minds. I understand that it is generally possible to increase production temporarily at a cost to the long-term 'health' of the field in question.

If the speculation is driven by forecasts of conflict in the Gulf such a production increase would be similarly meaningless.

[ISL]

theoildrum.com is a good source for highly technical discussions on reserves, including Saudi, and the general consensus is that barring short term efforts (i.e., a few million bpd for a few days or week), the Saudi's cannot sustain an increase. However, a new field has been "coming online" for a couple of years now, and seems to be ready, finally.

I think the reason the markets are ignoring this announcement is that the new field has been factored into the supply/demand equation for several years now.

[Marcus]

It is not so much that Middle Eastern oil is at peak but that Mexico, US, and North Sea are past peak.

I'm no expert on oil either so that is why I read the experts (at: oildrum.com for one) and make an informed opinion from there. Look at the world production rates since 2005 (flat) and the demand increases from China (+/- 6 %/year) and this gives you the reason for high oil prices.

If there is a precipitous drop in the price of oil that will probably not be the big news. The big news will be a severe drop in economic activity.

[William R. Cumming,]

"Ilia iactus sunt!" The oil Rubicon has been crossed and now the PEAK will become heavily documented whatever the result of the Saudi efforts. As long as daily world-wide demand increases and exceeds production the new world order has arrived in full force.

[John Howley]

It is critical to understand "peak oil" even if in the end you decide to disagree. Why? Because if Matt Simmons is correct, then many geopolitical calculations need to be changed.

Here's what clinched it for me: Look in ExxonMobil's 10-K. You will see that in recent years they have spent more buying back their own stock than capital expenditures for oil exploration and development.

In other words, the company with the most experience, best technology and ready funds has decided that propping up their own stock is a better investment than crude oil extraction.

Some respond that ExxonMobil is trapped by "above-ground" political factors that cut off their access to reserves. This overlooks the fact that all the super giant oil fields have been discovered decades ago and are now in decline. There is more oil to be found but not enough to offset the depletion of the best fields.

Final argument: We have had very high prices for several years now and still no supply response -- crude oil production has been roughly flat since 2005. (Don't be distracted by tar sands and the other junk, focus on the OIL).

And, by the way, Saudi Arabia is no longer Number One. That distinction belong to Russia. Check the BP stats.

Good luck to all!

[Dan Bradburd]

The laws Walrus mentions in his comment presume a 'moral economy' and regulation based on social values. A market economy is not a 'moral economy.'

[Jimmy]

Sir,

In a speculative bubble, the demand has to decrease (relative to supply) before the price crashes. In the current market, supply is fairly fixed. So we need to wait for the other shoe to drop before calling an end to the bubble.

The news that Taiwan and other countries are dropping their gasoline subsidies is a signal that the global demand will start changing soon.

At the same time, the commodity market has already bought up most of the near-future delivery contracts. The futures instrument is now contributing to near-term price inflexibility. Interesting how an instrument meant to promote liquidity is now hindering price discovery.

[Cieran]

Colonel:

As always, thanks for fostering discourse on important topics...

The Saudi move, if they can even pull it off, is tactical in nature. I would guess that they are jawboning for some reason, perhaps to deflect blame away from Gulf States for western economic disarray (since said blame might be part of an information operations campaign to drum up support for a US attack on Iran, for but one example).

The strategic picture is more bleak, as others here have pointed out. The best attempt by DOE to estimate the long-term nature of the oil supply threat resulted in the Hirsch Report, which can be found via the links here:

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

Hirsch published a good summary in ACUS, and it's required reading for anyone interested in fossil fuel eschatology. And Hirsch's viewpoint is strategic, concerned with the decades-long time frames required to plan for transitioning from oil to whatever might replace it. He's done the math, unlike all too many energy pundits.

Replacing humanity's reliance on fossil fuels is not going to be easy. We seem to believe that technological solutions are just out there ripe for the picking, but that's not the case here. This is a hard technological problem, perhaps one of the most difficult humanity has ever faced. We may not like what it takes to get out of this one alive.

Finally, it's important to note that the concept of "oil reserves" is actually not an estimate of remaining oil stocks, but is instead an estimate of fossil fuel capacity that can be extracted at a given price.

Thus proven reserves tend to go up with price, and vice versa. With high enough prices, reserves begin to include otherwise-less-than-cost-effective supplies, e.g., marginal oil shales and tar sands, which often generate economic externalities, e.g., diversion of water resources that affect food production, etc. This relationship of reserves with oil prices is a big part of why such wildly differing oil supply statistics can be found, and especially when the price is all over the map.

[Arun]

Look at the world production rates since 2005 (flat) and the demand increases from China (+/- 6 %/year) and this gives you the reason for high oil prices.

The US consumes 24% of the world's oil, China still only 8% - one-third as much. That means a 2% increase in US demand requires as much increased production as a 6% increase in consumption in China.

China is merely making the problem apparent a few years earlier.

[Arun]

@John Howley:
Look in ExxonMobil's 10-K. You will see that in recent years they have spent more buying back their own stock than capital expenditures for oil exploration and development.

In other words, the company with the most experience, best technology and ready funds has decided that propping up their own stock is a better investment than crude oil extraction.

That is easily explained - according to World Watch 80% of the world's proven reserves are government-owned.

I know Col. Lang won't like this but the writing was on the wall for Exxon etc., even in 2000; one of the reasons for the Iraq war was precisely to get private Western oil companies into the state-owned Iraqi reserves, and get that 80% figure moved downwards.

[Arun]

Perhaps it was on this web-sit e where it was said that you don't want a business MBA running your war. The correct thing to do may be to go in with overwhelming force; the MBA, counting $$ will allocate only enough force to do the job.

Similarly you don't want oilmen running your country's foreign policy. They're fighting last century's wars, where wealth comes from sitting on top of natural resources. A Silicon Valley type might have made a better President or VP at this point - they understand better the source of wealth.

Today Honda unveiled its first entirely-hydrogen car. Yes, it is a long way from practicality. But a trillion dollars sunk into Iraq would have bought a hell of a lot of research and development.

One should notice the record of large American corporations too - whether it be the auto makers, the electronics guys, they have spent more effort in a futile attempts to guard what they have and thus have fallen behind. Kodak perhaps is a poster child - it almost missed the digital photography revolution. The music recording industry would be another example - trying its best to avoid the implications of the Internet.

It is the same thing with oil. The world can survive with $10/gallon gasoline; and at that price a lot of alternatives become practical. What shape or form it will take if I knew, I'd not be writing here, but rather investing. BTW, the New York Subway gets the equivalent of 540 miles/gallon.

Will American innovation lead the way? Not if so much American energy and resources are wasted in trying to maintain its empire.

[Jose]

I know nothing about oil but didn't the Saudis also raise production in the last election?

"Even 300 foot yachts can be threatened by instability."

After Iraq? Iran? Perhaps a Shiite uprising in the Eastern Province?

Maybe the Saudis know something we Americans don't have a clue about.

"Only a neocon or a State Department hack toadying his way towards promotion would even try to believe it to be true that the Saudis do not care about Palestine or Jerusalem. Ask the Saudis."

Why do American Jews care about Israeli or Iranian Jews or Catholics about Rome?

Colonel, are you trying to tell us that even after the WOT, Iraq, the Levant and perhaps Iran the "Dumbyas" still haven't figured out that the true nature of the problem is?

Maybe the Saudis know something we Americans don't have a clue about.

Interesting posts, just my two cents on the subject.

[Curious]

wait,

are they really going to war with Iran in August?

1. Saudi July cheap oil (preparing military build up)

2. One month ultimatum given to Iran.

http://www.atimes.com/atimes/Middle_East/JF17Ak02.html

Iran will have a month or so to give an official response to the package and in the event it is negative (ie, with respect to the key demand that Iran suspend its uranium-enrichment activities), then Tehran will likely be confronted with a fourth round of UN sanctions, as well as new unilateral sanctions by the EU, targeting Iran's banking system.

----

Wow, somebody is going to make boatload of money speculating oil price. The insider information alone is worth a couple of $Billions.

With major banking all desperate for cash. This is the best time to be Iranian diplomats. .. "pssst, wanna hot tip?" nuke deal is happening/not happening ...next monday. spread the words.

Bonk...$6-$10 price movement.

We are screwed ladies and gentlemen.

[David Habakkuk]

Cieran, Arun,

One of the worst possible scenarios would be if resource shortages led to highly militarised competition.

That really risks being a non-zero sum game where all -- or most -- players lose. And vast military power would not guarantee that the United States was a winning player.

American capacities for innovation should mean it has a vast amount to contribute, in a non-zero sum game where most players gain.

But, as Arun says -- not if so much American energy and resources are wasted in trying to maintain its empire.