Editore"s Note
Tilting at Windmills

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June 19, 2008
By: Kevin Drum

THINKING OUT LOUD ABOUT OIL....Is oil in a speculative bubble? There are a couple of memes making the rounds on this score: First, that the "real" fair market price of oil ought to be around $70/barrel or so, and second, that the speculative bubble sending the price up to $130/barrel has been fueled by the "Enron loophole," a measure passed in 2000 that exempted online energy commodity trading from federal regulation.

On the first issue, I'm confused: I have no idea how you'd figure out the "real" price of oil even in theory. I suppose you could make historical arguments about oil prices, or perhaps compare the prices of different forward contracts and look for inconsistencies, but those strike me as the kinds of strategies that can be used to prove whatever you set out to prove. So count me as skeptical that they can tell us very much. At the very least, claiming that $70 is the right price because that's how much it costs to pump a marginal barrel of oil is silly. If demand increases but nobody has any more oil to pump, then the price will get bid up regardless of the cost of production.

Now, that doesn't mean there isn't a bubble. Maybe the global savings glut, which powered the housing bubble, is now being redirected to oil. But unlike housing, where there are analytical tools and historical trends you can use to get at least a sense of whether prices are way above their fundamentals, oil bobs up and down all the time. And since there's no truly reliable data on how much production capacity the world has (hell, there's not even any truly reliable data on how much oil is actually produced on a monthly basis), there's no way of setting any kind of baseline. So who knows?

On the second issue, I'm also confused, though a little less so. But here's the thing: the Enron loophole has been closed. I can't quite figure out if it got closed last month or last week (there was a technical glitch with the farm bill it was attached to), but in any case, it's been closed. It will be several months before the CFTC can actually implement regulation and oversight of online trading, but if this is really a factor in driving up oil prices then even the prospect of near-term regulation ought to have a dramatic effect on speculative buying. But in fact, nothing much has happened lately. Oil prices are down today based on news out of China, but for the most part prices have just jumped around sort of randomly in the $130-140 range over the past couple of weeks. There's been nothing dramatic at all. So my initial feeling is that the Enron loophole theory doesn't hold water.

In any case, this is mostly a long-winded way of shrugging my shoulders and saying, "eh." I just felt like noodling over this stuff in public. Based on my general knowledge of the oil industry and its constraints, I've long believed that the steady rise in oil prices since 2003 has been basically driven by supply and demand. But I have to admit that the huge increase over the past five months has had a bit of a bubbly feel to it. Aside from a few interesting tidbits, though, I haven't really come across much solid evidence to back that up. But I'll keep looking into it.

Kevin Drum 7:34 PM Permalink | Trackbacks | Comments (61)

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All those words and you dont bother to give peak oil a mention?

BOOO!

Posted by: sampo on June 19, 2008 at 7:45 PM | PERMALINK

Kevin,

I used to work in public affairs for a mid-sized oil company in the 80s, so my knowledge is rather dated. However, based on what I knew then:

1. It is a real hard question! There is certainly no "real" fair price for oil. What the memos are probably saying is that based on a current and mid-long term projection for oil consumption based on current and mid-long term projected available supply, the current prices seem to be unjustified.

2. Oil companies think far out in the future. Oil is one of the most capital intensive businesses. hundreds of millions or billions of dollars are necessary for exploration and development of future supplies. When they strike out they get zero. When they hit they reap enormous profits.

In any case, you can't criticize oil companies based on their financial performance at any given point. It only makes sense to look at their performance over 5-10+ time frame. If they are consistently reaping windfall profits over the entire span then something is wrong.

3. It is a bubble, but...

There is no doubt that there is a huge bubble component in the current oil prices (for the reasons given in [1] above). However, it is also arguably not a bubble because:

1. Oil is a dwindling resource
2. Long-term demand from rapidly developing countries like China and India is rising. The $130/barrel prices are too high now, but they will almost certainly be 'fair' by any standard at some point in the near future.

If you can find a copy, read the "7 Sisters", which traces the history of the big oil companies in the early 20th Century. The problem that the oil companies have if that their scale is too big and their economic impact on other sectors of the economy too large. Rather like Wal-Mart, a retailer that became so big it transcended the level of merchant and became a social force.

How's that for rambling...?

Posted by: James M on June 19, 2008 at 7:53 PM | PERMALINK

From The Guardian yesterday:

Of course, there is one other possibility, but if that possibility turned out to be right than it would cast doubt on the legitimacy of the entire financial system. In fact, it would prove that the system is being rigged from the top-down by our friends at the Banking Politburo, the Federal Reserve. Here goes:

What if the investment banks are trading their worthless MBS and CDOs at the Fed’s auction facilities and using the money ($400 billion) to drive up the price of raw materials like rice, corn, wheat, and oil?

Posted by: mats on June 19, 2008 at 8:06 PM | PERMALINK

Kevin Drum: In any case, this is mostly a long-winded way of shrugging my shoulders and saying, "eh." ... I've long believed that the steady rise in oil prices since 2003 has been basically driven by supply and demand. But I have to admit that the huge increase over the past five months has had a bit of a bubbly feel to it.

Dead on. Everybody is guessing about the split, but you're honest enough to admit it's a guess.

Posted by: alex on June 19, 2008 at 8:13 PM | PERMALINK

It only makes sense to look at their performance over 5-10+ time frame. If they are consistently reaping windfall profits over the entire span then something is wrong.

Maybe back in the day, but if supply is constrained by real world limitations those who control the resource will reap windfall profits from hereon. Of course that refers to OPEC more than it does Chevron.

I'm not sure what other resource you can compare it to. It's becoming rare, everyone uses it and needs it, and there's no ready replacement. I was thinking anthracite in the early 20th century, but maybe it's more like a slab of bacon on Donner Pass in the winter of 1846.

Posted by: B on June 19, 2008 at 8:18 PM | PERMALINK

See if you can outdo that for hyperbole!

Posted by: B on June 19, 2008 at 8:20 PM | PERMALINK

B: maybe it's more like a slab of bacon on Donner Pass in the winter of 1846

I'm not sure it would have been worth all that much, after all they did have plenty of "long pig".

Posted by: alex on June 19, 2008 at 8:22 PM | PERMALINK

Funny - I havent seen any coverage that closing the enron loophole was part of the farm bill.

I wonder if it was part of the 34 pages left out of the copy the president vetoed?

Lets hope it stays in the farm bill during the ReDo.

Posted by: yep on June 19, 2008 at 8:28 PM | PERMALINK

In his May 12th column in the Times, Paul Krugman made the claim that a speculation-driven oil bubble can't happen in the absence of hoarding, and also insists that oil inventories haven't risen very much lately.

I'm not sure if this makes sense, though. If production is so non-transparent as to be practically impossible to judge accurately, then why is it easier to judge inventories?

Posted by: Eric on June 19, 2008 at 8:33 PM | PERMALINK

Eric, I suppose there are a few different places people could be hoarding, 1) refineries, 2) strategic petroleum reserves (India and China recently created these), and 3) in the ground. I think stocks in 1) and 2) are relatively transparent. 3) is the outstanding question. But that's not a speculation bubble. It's a continuing OPEC monopoly.

Posted by: B on June 19, 2008 at 8:47 PM | PERMALINK

It's fishy. I firmly believe that our current Administration is actually reaping untold profits from the recent spike in oil.

I can't prove it...but I don't trust 'em.

They enacted obscene tax-cuts for the rich so it makes sense that oil profits before November are part of the plan.

Just think about it.

Posted by: Tom Nicholson on June 19, 2008 at 8:57 PM | PERMALINK

I don’t really think it is a bubble, but it could be a spike.

Previously, OPEC and other countries would have spare capacity that they could bring on line if prices rose. Now, there is not that much spare capacity out there.

Oil demand is fairly price inelastic in the short term. Driving can fall, but people still have to drive to work. Even with the huge swing in gas prices, miles driven has only fallen a little, as seen in the post above this one.

So, a good with very little spare capacity that is fairly price inelastic can have pretty huge price swings. If an oil rig goes out in that case, supply falls because there isn’t anywhere else it can come from. To get the volume of oil demanded down to meet the decrease in supply of a fairly price inelastic quantity requires a pretty big swing in price.

Oil prices will probably be much more volatile going forward than they have been in the past.

Posted by: JSmith on June 19, 2008 at 9:02 PM | PERMALINK

Kevin,

There are some folks (like the fuel oil dealers in New England) who think that the price of oil should be about one half of what it is based on current supplies and demand for current use. What's driving up the price is the futures market, where energy users, producers and speculators are projecting much higher prices due to, I would guess, growth in demand from China and India, possible constriction of supply do to war in the Mideast, and who knows what else.

If this analysis is true, then telling the market that billions of barrels of oil will be coming on the market in a few years would have an effect today on futures prices, which would drive down spot prices. Thus, opening up federal lands and the continental shelf to oil production probably would have a current impact on oil prices even if no oil were produced for several years.

Alternatively, we could draw-and-quarter oil speculators and nationalize all the oil companies. That worked so well in the old Soviet Union.

Posted by: DBL on June 19, 2008 at 9:14 PM | PERMALINK

ExxonMobile testified earlier this month in congress that speculators had doubled the price of oil from what it 'should' be.

The devaluation of the dollar surely hasnt helped costs.

The loophole is the London Loophole where speculators can designate themselves commercial traders instead of speculative traders. Technically [splitting hairs] its the [hold two finger up each hand] its the "commercial traders" behind the rising prices.

SAN FRANCISCO [June 17 08] (MarketWatch) -- The Commodities Futures Trading Commission moved Tuesday to make London traders of the benchmark U.S. oil contract meet the same position requirements as their U.S. counterparts, one of a series of actions the futures watchdog says it's taking to stamp out "excessive speculation" in the oil markets.

Ralph Nader [Counterpunch Article] asks why big business has started fighting back against high fuel costs?

Well,some are [YaY!] The airlines' main lobbying group backed the Durbin bill Tuesday, saying airlines will spend more than $61 billion on fuel this year.

Posted by: Jet on June 19, 2008 at 9:35 PM | PERMALINK

The "real price" of whatever is perhaps not hard and fast, but not a chimera either. You can make some estimate of what if would be if bought only by users and "ordinary" intermediaries rather than speculators (perhaps by definition, people who buy specifically because they think it will be pricier in the future, not to make a distributor's cut at the current price. These people may also realize the self-fulfilling nature of what they do, yet another complication.)

However well or not we can define how much costlier X is due to such activity, it strains credulity that such activity would not influence the price upwards. Speculators themselves and enabling hacks like Samuelson blow it off. Please don't fall for their dishonesty or dopiness.

tyrannogenius

Posted by: Neil B. on June 19, 2008 at 9:36 PM | PERMALINK

erratum has should be *hasn't above.

Sue me.

Posted by: Jet on June 19, 2008 at 9:38 PM | PERMALINK

Kevin,

The title of the farm bill left out by mistake in the original go-round was the trade title. Title XIII, which reauthorizes the Commodity Futures Trading Commission and closes the Enron loophole, was included in the bill enacted over the President's veto on May 22nd.

Posted by: sam3am on June 19, 2008 at 9:40 PM | PERMALINK

Well, Im like Kevin, With everyone pointing fingers and none taking responsibility its difficult to say why the prices are climbing. Its ironic that all these people in the oil market dont know?? EH?

Lukken [CFTC chairman] said Tuesday the regulator plans to give Congress a report by Sept. 15 detailing its findings on index trading. Critics say the CFTC's designation of index trading, or trades entered into by pension funds and others that are linked to a commodity index, understates the funds' presence. That's because these funds can increase their positions through swaps contracts with large investment banks like Goldman Sachs Group, Inc.

So three groups I dont trust. Big Oil, Speculators and Goldman Sachs [bankers]

"Eh" certainly describes it.

Posted by: Jet on June 19, 2008 at 9:47 PM | PERMALINK

Yo Kev,

You think our little excursion in Iraq may have had something to do with oil prices in 2003?

Naaaah, it is all demand.

Nevermind that today there is never an oil SHORTAGE, remember 1973? Sure looks to me like supply isn't the problem.

They call it a cartel for a reason. It has something to do with giving Adam Smith's hand the finger.

Posted by: says you on June 19, 2008 at 9:51 PM | PERMALINK

So I guess 'Peak Oil' is now the new 400lb gorilla in the room?

Whether the oil price is driven by speculation or not is really beyond the point, isn't it? The billions of dollars flowing into the coffers of Saudi Arabia, Venezuela, the Gulf States and Russia are not speculative. Those profits are real.

You guys are haemorrhaging wealth. The question is - how long can you keep it up?

Posted by: floopmeister on June 19, 2008 at 10:01 PM | PERMALINK

One other question - why would people invest in oil futures if they didn't think the price of oil was going to be rising?

People speculate because they think the fundamentals are showing that their future hedges will pay off.

Also, why would oil companies increase refinery capacity if they thought supply was going to continue to fall? Maybe there's fundamental reason why these companies are cutting back on investment in this industry?

Posted by: floopmeister on June 19, 2008 at 10:08 PM | PERMALINK

anent Peke Oil:

http://www.eia.doe.gov/ipm/t11d.xls

This site gets updated with oil production data. As you can see, world production has been hovering @ around 73.5-74.5 million barrels per day since the Fall of 2005. It's like sitting up with a patient in a 19th century melodrama about TB. Is it now? No? Is it now? I suspect that they're capable of pumping more but that stocks are declining faster than they're being replaced.

Posted by: Jeffrey Davis on June 19, 2008 at 10:18 PM | PERMALINK

floopmeister: You guys are haemorrhaging wealth. The question is - how long can you keep it up?

What do you meam "you guys"? From

http://news.smh.com.au/business/current-account-deficit-hits-195b-20080603-2l7q.html

"Australia's current account deficit has blown out to a record $19.5 billion as the resources boom fails to boost the nation's struggling export performance."

That's about 7%/GDP, which makes Australia about the only developed country with a current account deficit that's worse than the US.

People speculate because they think the fundamentals are showing that their future hedges will pay off.

Or because they believe they can sell before a speculative bubble bursts. Oil isn't tulip bulbs, but that doesn't mean that there isn't a certain amount of speculation driving up the price.

Posted by: alex on June 19, 2008 at 10:42 PM | PERMALINK

Oil is worth a lot more than $100/barrel, when we consider the very high amount of energy it contains. It reportedly contains as much energy as is expended by 12 men doing hard labor on a farm, for a whole year.

Posted by: JoAnn C. on June 19, 2008 at 10:55 PM | PERMALINK

Supply and demand, with some modification based upon future estimation of supply and demand. We should note that today, China announced a reduction in their subsidies, and the price dropped by several dollars. So we have a concrete example of how we can change the expectations for supply/demand -reduce a significant subsidy, and the price should drop. Conversely add a subsidy -by say giving into striking truckers -or whomever, and the price should increase. On the other side, a credible threat to add/subtract supply should also have an effect.

But, the reality of politics is that voters are scared and angry. We gotta find someone to blame/punish. The most productive sort of blame would be to blame the most profligate users. But, most of these (at least the domestic ones), are either voters -or struggling industries, who consider themselves to be victims. Our current political culture would consider it elitist to blame such folks.

Posted by: bigTom on June 19, 2008 at 10:58 PM | PERMALINK

I think now that the three largest factors in terms of their impact are:

1) Asian hoarding-especially China-that's where the extra oil demanded is being stored rather than consumed.
2) Cheap dollar and getting cheaper.
3) Fear of supply disruption sending the future's markets into "backwardation". The "spot price" usually is lower then the future price, now the spot price is higher than the future price-the main driver for that is short-term supply disrupution fears.

Possible Israeli attack on Iran causing refiners to "top up" supplies in the short term? There has been a lot of hoarding behavior and psychology of late. Geez, it is just like the '70s mantra of "buy what you can before it goes up again".

Posted by: Doc at the Radar Station on June 19, 2008 at 10:59 PM | PERMALINK

I suggest a political angle as a cause of recent changes in oil prices, which admittedly doesn't take into account rising secular world demand or the declining value of the American peso.

But it accounts for some. My thesis makes the following assumptions, which I think are valid: 90% of American oil companies are controlled by Republicans, and most traders on the NYMEX skew Republican.

Republicans thus exert the preponderance of control over US oil pricing and bidding, and, since the US consumers 1/4 of the world's oil, they exert some significant control over world oil prices.

Republicans in the US oil biz have two interests right now:

1. Rack up as much money as possible while their boy Bush is still in office, and before a more Democratic Congress and President start exercising some oversight of oil trading in the US and perhaps imposes new taxes on oil companies.

2. Rack up money now that can be used politically in the fall campaigns.

I have little evidence to support this theory, except the behavior of oil prices between August 2006 and January 2007.

During that period there was a 33% decline in the price of crude oil, even as world demand continued a slow rise. Lower crude prices could be seen as helping the Republicans in the November elections (it wasn't enough, as it turned out) and a further lowering of prices to January helped take the political heat off the oil interests as the new Democratic Congress was about to take office making noises about a windfall profits tax and repeal of subsidies. Shortly before the new Congress was sworn in in January, oil prices bottomed. And then slowly rose as it became evident no windfall profit taxes were actually going to get passed.

Take it for what you will, but here's a prediction: Oil prices will fall between the Republican convention and the election. And if the Democrats win in November, oil prices will continue a downward trend to January.

Also, Republican PACs and 527s will be flush with cash when the time comes to swiftboat Obama in the fall.

Posted by: W. B. Richardson on June 19, 2008 at 11:01 PM | PERMALINK

Doc at the Radar Station: Asian hoarding-especially China-that's where the extra oil demanded is being stored rather than consumed.

How do you know that China is hoarding oil. Seriously, no snark. Any links?

Posted by: alex on June 19, 2008 at 11:09 PM | PERMALINK

James M at 7:53 PM,

I thing you are talking about "7 Sisters" by Anthony Sampson. An excellent book, but a bit dated. http://www.washingtonmonthly.com/archives/individual/2008_06/013945.php#1284250

Posted by: Rick B on June 19, 2008 at 11:18 PM | PERMALINK

How do you know that China is hoarding oil. Seriously, no snark. Any links?

China, despite being such a moneymaker for our investments is still a rather opaque place information-wise. No links. Strong suspicion based on me being in China's shoes. If I was them I would be snatching up all the oil I could and stashing it. We are the world's 3rd largest oil producer despite the fact that our production is in decline. China is nowhere near that. I'm just looking at the fundamentals, motivations, and the resources and going with what makes the most sense to me. China doesn't HAVE to publish and disclose their energy production/consumption patterns to the rest of the world.

Posted by: Doc at the Radar Station on June 19, 2008 at 11:20 PM | PERMALINK

alex: fair point! It's an abysmal performance...

However, I guess one difference between the two countries would be this:

Australia has abundant reserves of Natural Gas. Recoverable reserves as at January 2001 were 157 343 petajoules (PJ) — equal to 125 years’ supply at 2002 consumption level. Total Australian Natural Gas production amounted to approximately 1250 PJ in 2002...

...In 2002, Australia exported over 7.6 megatonnes of LNG to Japan and other markets around the world.
http://www.esv.vic.gov.au/ForConsumers/OverviewofgasindustryinAustralia/NaturalGasinAustralia/tabid/296/Default.aspx

Australia is a net exporter of energy (coal and natural gas) and a net importer of oil
http://www.austrade.gov.au/Oil-Gas-overview/default.aspx

We could stop exporting our natural gas and instead run our transport fleet on it. In terms of a Peak Oil (Energy) situation, I guess what matters is not balance of Trade. We do have enough energy to keep our small population going without needing to purchase it on the world market.

In the end, I guess that's what matters...

Posted by: floopmeister on June 19, 2008 at 11:20 PM | PERMALINK

Every great lie has a little bit of truth to it.

I'm a long term oil bull, just as I'm a long term internet bull. But does that mean that oil should have doubled in the last year+, any more than pets.com should have been worth more than Delta airlines?

Goldman and Morgan are most definitely using their toxic MBS and CDO exchanges for treasuries/cash to help kite the oil market through the futures market. By issuing their forecasts of $150+ oil they get others to eventually drink the coolaid. Then they slowly switch their positions to short and let the suckers lose their shirts while they recapitalize their balance sheets.

This is going to end badly.

Posted by: kis on June 19, 2008 at 11:39 PM | PERMALINK

Eric at 8:53 PM,

I mentioned that Krugman article on my blog and Ian Welsh from FireDogLke left this comment: "There are two ways to speculate in oil. One is the physical method Krugman talks about. The other is futures/options. And while in theory in a futures contract you could wind up with a load of oil, in practice you close out before that happens if you're a speculator."

Welsh is right. If the speculation is in the futures markets, there is no need to hoard oil. But the prices in the futures markets will drive up the prices in the commodity markets. No physical hoarding of the oil itself is required because the fungibility of the money driving up the futures prices will cause the commodity prices to also go up.

It's not clear to me what the mechanics of the arbitrage opportunities between the commodity markets and the futures markets are, but that's just because I haven't studied the issue. They are there. The dealers know them well.

Posted by: Rick B on June 19, 2008 at 11:43 PM | PERMALINK

Oil is worth a lot more than $100/barrel, when we consider the very high amount of energy it contains. It reportedly contains as much energy as is expended by 12 men doing hard labor on a farm, for a whole year.

Perversely, as the cost of oil increases we may find that the cost of those men's labors will decrease substantially. Once upon a time, mechanical energy was expensive and human labor was cheap.

Posted by: AK Liberal on June 19, 2008 at 11:44 PM | PERMALINK

1) Long-term price trend trend is up.

2) U.S. energy use is so massively inefficient that a significant drop in demand can be rapidly achieved once a certain price pain threshold is reached.

3) Prices are currently inflated and will drop or, in declining dollars, level off in the short term, absent another financial crisis.

4) The dollar has as much or more to do with this as supply/demand.

Posted by: Jon on June 19, 2008 at 11:50 PM | PERMALINK

Jet

"Sue me."

Where do I deliver the papers?

Posted by: Rick B on June 19, 2008 at 11:50 PM | PERMALINK

God, your site posts slowly. What are you doing, hand-editing it before posting?

Posted by: Jon on June 19, 2008 at 11:51 PM | PERMALINK

The oil thing is very complicated, there are multiple factors at work. But when it comes to speculation, wait six months and we'll all see that natural gas is the new oil. And in a few years, water will be the new oil. Enjoy the ride.

Posted by: Dave Brown on June 20, 2008 at 12:51 AM | PERMALINK

Ask yourself: what should happen to the price of an inelastic commodity as soon as demand for it outstrips supply?

Demand for oil is growing as rapidly as the economies in India and China, and new supplies are not coming online. Indeed, no significant oil fields have been discovered in recent years, and the major oil companies are not actively looking for them. Saudi Arabia's fields have probably already peaked and will deplete within the next 2 decades (just like Texas's did).

What we have here is a classic illustration of growing demand meeting dwindling supply. Don't get used to these high oil prices though, because they're soon going to be much much higher.

See http://en.wikipedia.org/wiki/Hubbert_peak_theory

Posted by: Cello on June 20, 2008 at 1:24 AM | PERMALINK

Yes - a barrel of oil is worth approximately 26.000 hours of effective manual labor.
But we've priced it below what we pay for a similar volume of Coca-Cola.

The spike before the last one was caused by traders getting out of short positions, "at any cost", that doesn't seem to compute with the speculation driven bubble theory. Either those traders were dumb as dodos (there were some big names among them) or else the speculators are just speculating -- in all directions.

Oil is a vanishing resource, with an extreme energy coefficient relative to volume, and with a plethora of other, essential derivatives. Our grandchildren will curse us for having been so profligate with this resource.
Now compute the price.

Posted by: SteinL on June 20, 2008 at 1:26 AM | PERMALINK

Kevin,

You know a lot about politics but you obviously know zilch about petroleum.

The left blames speculators and big oil, the right blames environmentalists and regulations.

Few people, particularly inside the Beltway, want to talk about peak oil and geology.

For several decades the world has been burning several barrels of oil for every barrel discovered. In the last 120 years or so, we have managed to burn through over a trillion barrels of light sweet crude. The age of easy oil is coming to an end. The largest oil field ever discovered, Ghawar in Saudi Arabia, is watering out and in decline. Each additional barrel of oil we produce is now harder and more expensive to get; we are like the Red Queen, running faster and faster just to stay where we are. We are beginning to be flow rate constrained, with inelastic demand (due to a large established infrastructure dependent on liquid fuels) pushing against geologically constrained supply. No wonder prices are spiking - it's Econ 101.

It is true that reliable data on reserves outside the USA is often hard to come by (OPEC members, for instance, have an incentive to lie about their reserves, it increases their quotas) but the statement that "hell, there's not even any truly reliable data on how much oil is actually produced on a monthly basis" is the single most ignorant thing I've ever read on this blog.

Get thee to the Energy Information Administration (http://www.eia.doe.gov/) and to TheOilDrum (http://www.theoildrum.com/).

We have good data on oil production. Crude plus Condensate has plateaued at about 75mbd (millions of barrels per day) and All Liquids has plateaued at about 86mbd.

It's not that we weren't warned. Back in July of 1979 a certain peanut farmer tried to tell us; we fired him. Further back, in the mid 1950's, Admiral Rickover (Google for his speech) and M. King Hubbert (who correctly predicted that US oil production would peak around 1970) warned us that we would be in trouble in the early 21st century. We choose to ignore them. And here we are, in trouble.

I like living in an industrial civilization. I like having the lights come on whenever I flick the switch. I like working in an air conditioned building. But we are starting to run out of time to sustain this industrial civilization, especially when our political elites (and I count Mr. Drum as among the political elites) refuse to recognize the problem is geology, that infinite growth cannot be based on a finite resource base.

We need to stop pouring crude oil into useless wars (DOD uses 3.5mbd) and immediately start on efficiency, innovation, alternatives and nuclear.

But we're ruled by idiots.

Posted by: Enon Zey on June 20, 2008 at 1:27 AM | PERMALINK

"How do you know that China is hoarding oil. Seriously, no snark. Any links?"

Maybe they're storing it underground off the cuban coast :)

I know I've read something recently in the news, but wikipedia isn't a bad start for various strategic petroleum reserves.

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

Posted by: asdf on June 20, 2008 at 2:34 AM | PERMALINK

One would expect a shortage of fuel when supply limits are causing prices to increase. So where is the shortage? When there is a smooth and abundant flow at the historically unprecidented prices, the only market force in control is price fixing.

Posted by: YY on June 20, 2008 at 2:36 AM | PERMALINK

I can't believe that people pay you to say nothing at all. I might have well watched a Seinfeld episode, because at least I would have been entertained.

Oil consumption has been trending down just as supply has been trending up, while prices are accelarating at rates never before seen, and you say "eh". It's an easy call. Not even a neutral one. Either there is a bubble. Or there's a massive global shortage, that mysteriously involves more than adequate supply everywhere in the world. It's much like the mystery of the unsustainable housing market, which wasn't a mystery to anyone at all. Why don't you get off your duff do some investigative journalism and get some answers?

I hope the washington monthly has picked up that old PBS Exxon Mobile sponsorship, so it at least you are getting a cut on one of the most naked and brazen thefts of our time.

Once like John McCain, you looked hungry to challenge power. You went after Bush draft dodging. And now what are you? I don't even know why I come by to read anymore.

You have become just as sorry an excuse as any other pundit. What do you do when salt has lost its flavor?

Kevin Drum - "eh."

Posted by: patience on June 20, 2008 at 3:13 AM | PERMALINK

"It will be several months before the CFTC can actually implement regulation and oversight of online trading, but if this is really a factor in driving up oil prices then even the prospect of near-term regulation ought to have a dramatic effect on speculative buying. But in fact, nothing much has happened lately. "

Unless I misread the reports, the Enron Loophole closes in June of 2009 -- that seems far enough away to not affect short-term speculation.

Like you, I've been skeptical of the speculator/bogeyman theory of rising prices, but my skepticism is weakening the more I learn.

Posted by: on June 20, 2008 at 3:50 AM | PERMALINK


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

Perhaps 60% of todays oil price is pure speculation

by F. William Engdahl


Global Research, May 2, 2008

The price of crude oil today is not made according to any traditional
relation of supply to
demand. Its controlled by an elaborate financial market system as well
as by the four major
Anglo-American oil companies. As much as 60% of todays crude oil price
is pure speculation driven
by large trader banks and hedge funds. It has nothing to do with the
convenient myths of Peak Oil.
It has to do with control of oil and its price. How?
First, the crucial role of the international oil exchanges in London
and New York is crucial to
the game. Nymex in New York and the ICE Futures in London today control
global benchmark oil
prices which in turn set most of the freely traded oil cargo. They do
so via oil futures contracts
on two grades of crude oilWest Texas Intermediate and North Sea Brent.

A third rather new oil exchange, the Dubai Mercantile Exchange (DME),
trading Dubai crude, is more
or less a daughter of Nymex, with Nymex President, James Newsome,
sitting on the board of DME and
most key personnel British or American citizens.

Brent is used in spot and long-term contracts to value as much of crude
oil produced in global oil
markets each day. The Brent price is published by a private oil
industry publication, Platts.
Major oil producers including Russia and Nigeria use Brent as a
benchmark for pricing the crude
they produce. Brent is a key crude blend for the European market and,
to some extent, for Asia.

WTI has historically been more of a US crude oil basket. Not only is it
used as the basis for
US-traded oil futures, but it's also a key benchmark for US production.

The tail that wags the dog

All this is well and official. But how todays oil prices are really
determined is done by a
process so opaque only a handful of major oil trading banks such as
Goldman Sachs or Morgan
Stanley have any idea who is buying and who selling oil futures or
derivative contracts that set
physical oil prices in this strange new world of paper oil.

With the development of unregulated international derivatives trading
in oil futures over the past
decade or more, the way has opened for the present speculative bubble
in oil prices.

Since the advent of oil futures trading and the two major London and
New York oil futures
contracts, control of oil prices has left OPEC and gone to Wall Street.
It is a classic case of
the tail that wags the dog.

A June 2006 US Senate Permanent Subcommittee on Investigations report
on The Role of Market
Speculation in rising oil and gas prices, noted, there is
substantial evidence supporting the
conclusion that the large amount of speculation in the current market
has significantly increased
prices.

What the Senate committee staff documented in the report was a gaping
loophole in US Government
regulation of oil derivatives trading so huge a herd of elephants could
walk through it. That
seems precisely what they have been doing in ramping oil prices through
the roof in recent months.


The Senate report was ignored in the media and in the Congress.

The report pointed out that the Commodity Futures Trading Trading
Commission, a financial futures
regulator, had been mandated by Congress to ensure that prices on the
futures market reflect the
laws of supply and demand rather than manipulative practices or
excessive speculation. The US
Commodity Exchange Act (CEA) states, Excessive speculation in any
commodity under contracts of
sale of such commodity for future delivery . . . causing sudden or
unreasonable fluctuations or
unwarranted changes in the price of such commodity, is an undue and
unnecessary burden on
interstate commerce in such commodity.

Further, the CEA directs the CFTC to establish such trading limits as
the Commission finds are
necessary to diminish, eliminate, or prevent such burden. Where is the
CFTC now that we need such
limits?

They seem to have deliberately walked away from their mandated
oversight responsibilities in the
worlds most important traded commodity, oil.


Posted by: Tommy Randalll on June 20, 2008 at 7:33 AM | PERMALINK

Hilarious. Researcher types are in paradise for this one. So many figures, so little time....

Posted by: Bob M on June 20, 2008 at 8:08 AM | PERMALINK

YY, I don't know what planet you're living on (except the typically American one) but shortages are happening. They are in poorer countries that are being outbid in the global oil market by richer countries. Poor people who used to burn kerosene are reverting to burning peat, wood and dung.

Tommy Randall, just asserting something is a "myth" doesn't make it so. Engdahl says nothing that demonstrates Hubbert was wrong. The fields that brought us increased supplies in the 1970's (in Russia, Alaska and the North Sea) are all in decline. There's nothing on the horizon to replace those flows.

Posted by: Enon Zey on June 20, 2008 at 8:51 AM | PERMALINK

'The principal influence behind the huge rise in oil prices has been speculation, whether by the international oil companies, by hedge funds deprived of easy pickings in the housing and equities markets, or by the oil suppliers themselves, drunk with the glory of their new-found wealth.' - Martin Hutchinson
http://www.prudentbear.com/index.php/BearsLairHome

Posted by: MsNThrope on June 20, 2008 at 9:57 AM | PERMALINK

Patience,

Take it easy. Kevin knows all about Peak Oil. I first read about it here.

Are speculators driving up the price of oil? Yes. Is the falling dollar driving up the price of oil? Yes. And guess what. At $200/bbl, even at $300/bbl, oil is still a bargain. It's an amazing amount of energy delivered in a compact and easy to use package. And we'll be seeing those prices soon.

Anyone remember this post?
http://www.washingtonmonthly.com/archives/individual/2005_08/006970.php

I looked at buying 2010 options that day, or around then. ~$5k would buy you a late 2010 option at $100/bbl, if I remember correctly. Damn.

Posted by: Doosh on June 20, 2008 at 10:36 AM | PERMALINK

Says You ... there was an oil embargo in 1973, that's why there were lines at gas stations, etc.

There was not a worldwide shortage of oil stock at the time, you simply had producers that were not selling. The situation that we currently face is not the same. Worldwide demand is a lot higher than it was three decades ago given the industrialization of China, India, etc.

Posted by: Texas Yankee on June 20, 2008 at 11:50 AM | PERMALINK

The price of oil should be high. Although many think the price of oil should have been increased through taxation twenty - thirty years ago, with the public finances used to stimulate technological advances for energy alternatives to oil, at least the markets have finally done what the politics could not. Unfortunately, the surplus earned from the increases for the cost of oil are not going to technological research for alternatives, but at least the higher prices are starting to reduce consumption and stimulate private searches for alternatives.

Posted by: Brojo on June 20, 2008 at 12:14 PM | PERMALINK

If it is a simple, incorrect speculative bubble, then, eventually, the market will correct and overcorrect to the downside. If the speculation in the futures market is correct, then the futures markets is accurately predicting the future spot prices.

Actual hoarding of oil can raise today's spot price- this is well known and understood, but such hoarding can be a losing proposition if the rise in spot prices causes supply to rise more in the future than does the demand. In addition, one must pay the cost of storage.

Supply and demand determine today's price and will determine the future price in the future. If someone ends up with a lot of oil to take for delivery in 2012, for example, and he has overpaid for his futures contract in 2008, then he will lose money- the spot market at that time will not care one bit about his predicament.

Posted by: Yancey Ward on June 20, 2008 at 2:55 PM | PERMALINK

First the Housing Market and now the Oil Market are suffering from a locust-like plague of speculative dollars. It really started after the tech-stock bubble crash in 1999-2000. Newfound wealth and a brand new investor class thanks to the Internet, Pension Funds and 401ks have all sorts of new capital flowing through the financial system looking for the next investor gold-rush ala a bubble trend.

The big problem though is that unlike in the stock market where the individual stock traders are the ones who pay the price of bad bets, the oil and housing markets force everyone to bear the suffering and repercussions of the greed of others in an immediate sense. Its bad business and it screws up the rest of the economy while its happening and in the end we all pay for it.

We are having to learn this lesson again. This is what happens when you foster a culture of greed.

Posted by: Condor on June 21, 2008 at 12:43 PM | PERMALINK

So we won't see any gas price relief until after June of next year (per Anon at 6/20/08 3:50 p.m. comment) when the closure of the "Enron loophole" takes effect.

And if anyone doubts the impact of the "Enron loophole" on increased energy costs for households, businesses and municipalities, just ask utility rate payers out in California and on the West Coast how the "Enron loophole" adversely impacted them financially back in 2001 as Enron's energy market speculators were unleashed on them and their energy markets, gaming the utility grids out West, causing rolling black-outs and doubled/tripled monthly utility bills.

Now we're seeing the same thing happen at the gas pump, and based on recent reports, we are all going to soon see increased monthly utility bills as utilities nationwide pass on the artificially-induced speculator-driven high cost of a barrel of oil on world markets...essentially putting all of us in the same boat, a financially sinking boat, as California/West Coast rate payers back in 2001.

But it is nice to hear that someone finally decided to close this foul loophole in the recently passed Farm Bill.

But, we will have to wait to see what the CFTC does, based on how this "closing the loophole" provision was worded, and depending on whether or not George W. Bush issues one of his infamous and unconstitutional "signing statements" reversing the closure of this loophole.

Unfortunately, any delay in reining in the oil futures/energy market speculators will only end up causing additional financial harm to U.S. citizens and their children, driving even more into poverty and further weakening our economy.

Posted by: The Oracle on June 21, 2008 at 2:30 PM | PERMALINK

What was the real cost of electricity while Enron criminals were gaming and fixing the system? Understand that the good taxpayers of CA are still paying off billions on that.

Of course it's a bubble and scam. And I don't think that OPEC is behind it though they are reaping the benefits. Oil and food futures is where the big money went after real estate collapsed. Too much money chasing too few goods. Though that may be about to change with the coming of the 2nd Great Depression.

Posted by: el pollo on June 22, 2008 at 10:44 PM | PERMALINK

What was the real cost of electricity while Enron criminals were gaming and fixing the system? Understand that the good taxpayers of CA are still paying off billions on that.

Of course it's a bubble and scam. And I don't think that OPEC is behind it though they are reaping the benefits. Oil and food futures is where the big money went after real estate collapsed. Too much money chasing too few goods. Though that may be about to change with the coming of the 2nd Great Depression.

Posted by: elpollo on June 22, 2008 at 10:46 PM | PERMALINK

What was the real cost of electricity while Enron criminals were gaming and fixing the system? Understand that the good taxpayers of CA are still paying off billions on that.

Of course it's a bubble and scam. And I don't think that OPEC is behind it though they are reaping the benefits. Oil and food futures is where the big money went after real estate collapsed. Too much money chasing too few goods. Though that may be about to change with the coming of the 2nd Great Depression.

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