Why oil costs so much
Wednesday May 28, 2008
Categories: Peak oil
Reader Peterk sends this excellent link to a lengthy post on The Oil Drum, explaining in great detail -- charts, graphs, the whole megillah -- why the cost of oil is so high, and why it's only going to get...
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About Crunchy Con
Rod Dreher is an editorial columnist for the Dallas Morning News, and author of "Crunchy Cons" (Crown Forum), a nonfiction book about conservatives, most of them religious, whose faith and political convictions sometimes put them at odds with mainstream conservatives. The views expressed in this blog are his own.
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No different than Social Security, Medicare, the deficit, educational standards...if you wait for/let Washington to solve it, you're courting disaster.
"Energy efficiency should be the guiding beacon of all policy decisions and this must apply equally to energy production and energy consumption"
What! and give up my Hummer/McMansion? Stinkin' commies..
/snark.
I'm agnostic on the whole peak oil theory (hey, do I look like a petroleum engineer?), but my bulls*** alarm goes off when anyone starts talking about "adjusting" tax structures to achieve a policy goal or tsk-tsking over mythical "windfall profits." The only thing adjusting tax structures will accomplish is to make a purportedly bad situation worse.
Well, this is usually my cue to insist that this explanation may be wrong.
My argument have been made in various places in the comboxes. Let me summarize briefly: The current surge in oil prices _may_ signal the advent of peak oil, but other economic explanations must be explored and eliminated before we settle on this. I believe a financial explanation for the surge in oil prices can be offered that is robust and has actual data to back it up.
I mentioned the Senate testimony of Michael Masters in an earlier combox posting. Happily, I found a neat summary of this testimony earlier this morning and have been itching for Rod to say something about oil so that I can post it.
Please read it, especially from "Krugman Misses the Boat" onward.
Quantifying Commodities Speculation
tinyurl.com/4fc5nt
Let me add that I do think Peak Oil will be a real concern in the coming years, so Rod's musings on this subject are not wrong.
Clarification 1: Well, this is usually my cue to insist that this explanation [for the current surge in oil prices] may be wrong.
Clarification 2: Let me add that I do think Peak Oil will be a real concern in the coming years, so Rod's musings on this subject are not wrong [in the long term].
*****
Here's some more background from a week ago.
tinyurl.com/3m4g65
Since this article appeared, George Soros has made a lot of headlines by insisting that speculators are behing the rise in oil.
Clarification 1: Well, this is usually my cue to insist that this explanation [for the current surge in oil prices] may be wrong.
Clarification 2: Let me add that I do think Peak Oil will be a real concern in the coming years, so Rod's musings on this subject are not wrong [in the long term].
*****
Here's some more background from a week ago.
tinyurl.com/3m4g65
Since this article appeared, George Soros has made a lot of headlines by insisting that speculators are behing the rise in oil.
Key quote from Article 1:
"Index Speculators have now stockpiled, via the futures market, the equivalent of 1.1 billion barrels of petroleum, effectively adding eight times as much oil to their own stockpile as the United States has added to the Strategic Petroleum Reserve over the last five years."
Key quote from Article 2:
"Now consider the situation today in oil markets: the Gulf ... is crammed with supertankers chartered by oil-producing governments to hold the inventories of oil they are pumping but cannot sell. [This] suggests ... that there are few buyers for physical oil cargoes at today's prices, but there are plenty of buyers for pieces of paper linked to the price of oil next month and next year. This situation is exactly analogous to the bubble in credit markets a year ago, where nobody wanted to buy sub-prime mortgage bonds, but there was plenty of demand for 'financial derivatives' that allowed investors to bet on the future value of these bonds."
I buy the peak oil argument but I think our current price escalation is due to the manipulation of the markets by profiteers.
We are an oil dependent country. Everything we do has an oil component to it. Drastic change is needed immediately. Perhaps this will force us to return to local products and local markets.
We will never return to the "good old days" Time for new ideas and perhaps making Wendell Berry required reading.
The current surge in oil prices _may_ signal the advent of peak oil, but other economic explanations must be explored and eliminated before we settle on this.
Bingo. This is exactly equivalent to very hot regional summers in the late 90s/early 00s being taken as proof positive of global warming by uninformed laypersons--and that man-in-the-street perception being stoked by activists and politicians. Not that global warming doesn't exist, just that a 2 degree rise in average planetary temperatures over the course of a hundred years has little or nothing to do with a given heat wave in Dallas in May of 2008.
Human beings being what they are, though, still believe that they (and their local surroundings) are still the Center of the Universe.
Enough with "Peak Oil" - you are going to lose readers if you keep harping on it.
Odd...I have friends in Alaska who swear that the Oil Companies are only operating on 50% capacity because they like all the cash flow in the market.
Ralph Nader's take: http://www.counterpunch.org/nader05282008.html
Michael Shedlock: http://globaleconomicanalysis.blogspot.com/2008/05/commodities-speculation-symptom-of.html
pb:
That Nader article is a great find. He's getting good economic advice.
"[S]ome industry experts, who profit greatly from the high price of crude, and have stated openly that the worldwide economic price of crude, absent speculators, would be around $50 to $60 per barrel."
This has been my hunch, too. I've been using the same figure.
"Supplies of crude are so plentiful, according to the Wall Street Journal, 'traders of physical crude oil say their market is suffering from too much supply, not too little.'"
If this -- coupled with my oil tanker quote above -- is true, then we've reached an inflection point. Oil prices may start tumbling very soon. (This has already happened in other commodities.)
Speculation is clearly the major cause in the abrupt rise in food prices worldwide.
There were lots of people who learned from the California 2001 electricity market cornering- at the very latest- that diminishing supply is the easiest way to raise prices and profits. Thankfully, we've learned from that and the price runups in places like Texas, and our state and federal government is cracking down on cartels and monopolies.
Oh, wait....
Nice post, Rod. I must say I agree with most of the Drum's points, except for what to do about it.
Look, pyrrho, I agree that we see "speculation". But a good reason we do is because everyone is projecting ahead and scared ****less.
The big part of the reason we have at first three of the four "secondary" causes for the rise in oil prices...
Speculation
Political unrest in producing countries
The depreciation of the $US
Prime exploration acreage that is off limits to OECD corporations
...is that we are running out of the stuff! And even if we opened up exploration to the moon, this would only buy us a little time. So it's hardly "speculation" to wonder how governments are going to respond to hungry, angry, and fearful citizens when dealing with energy disruptions at peak. Think war. We've waited too long to prepare for peak oil, and are now swinging in the wind no matter what we do. Just imagine the price of crude if or when things start getting dicey.
Look, you know the markets don't like uncertainty. We have no idea what the #1 producer Saudi has left in the ground (they won't tell us, natch), or how Russia (#2 producer) will decide to play this peak-oil geopolitical game. Not nice folk. I'm actually shocked oil hasn't crossed $200 by now. This ain't some sort of Soros speculation. This is raw, common-sense, watch-your-backside fear. Oil is what makes the wolf's legs go. He's just a little hungry now. Iraq was the warm up.
Anna, I can promise you that Alaska is not operating on 50% capacity. We peaked a long time ago. Plus, there is no single "Alaska" deciding what to pump, but rather a bunch of companies. They're private. They want money. They pump as much as they can and still keep the field healthy. Besides, it's moot to the peak oil topic. Even if you held back all AK production, it wouldn't make a drop in the bucket for worldwide crude production, or even American consumption.
I can't believe I agree with George Soros but futures speculation is a pretty big part of the price run-up we've seen in the last couple of years. Soros is saying that current petroleum futures contracts are pretty far out of whack with supply/demand. If he is right then any measurable demand drop will cause the oil market to crater. We'll know soon enough.
But I can't for the life of me figure out why nobody mentions another huge factor - inflation. Pick 7-8 commodities at random and run their price charts over the last five years. Now compare the oil chart. Notice anything?
Skyrocketing food prices get blamed on ethanol production. Oil prices are "peak oil". Higher materials prices are blamed on Chinese/Indian construction booms, and so on. Maybe, just maybe, it might be prudent instead to dump this mess in Ben Bernanke's lap.
...or how Russia (#2 producer) will decide to play this peak-oil geopolitical game.
Remember Ukraine?
Remember Ukraine?
To quote Mr. Moon of O' Greg's fame...
I'm just gonna have to pretend I didn't hear that, Aaron.
I want my money for nothing and my gas for free!
I want my,
I want my,
I want my S.U.V...
Take that, Scott Lahti!
Gerry:Enough with "Peak Oil" - you are going to lose readers if you keep harping on it.
pyrrho:If this -- coupled with my oil tanker quote above -- is true, then we've reached an inflection point. Oil prices may start tumbling very soon. (This has already happened in other commodities.)
And when the bubble du jour pops, don't expect Rod to admit he leapt aboard a silly bandwagon. Peak Oil is a little bit like Global Warming, when you look at them as secular proxies for religious cosmology--Judgment Day when the world truly dissolves into chaos is always safely a few decades away, or at least after the pundit/politician retires--even though the Signs Are All Around Us.
What frightens me, for Rod and his family, is not so much the fear that repeated jeremiads about Peak Oil will alienate his readers, but that he has been posting a lot lately in tandem about how it may be time to take Julie and the kids to that self-sufficient homestead out in the country, where they can have the last laugh after the rest of us are forced to sell our children into prostitution to pay the fuel bills.
Because it reminds me of another gifted small-o orthodox writer/cultural observer, who was at heart a city boy, but who listened too credulously to dire warnings about Y2K (not coincidentally, Kunstler's penultimate episode of crying wolf) and concluded that it was time to up and move the family to the sticks and 'be self-sufficient'.
Lets assume for arguements sake that charts and such stuff are credible secondary data measuring some primary resource that may of may not be a fungible that we can speculate with. Now, assume on top of that, that those with the most "fungibles" will want to be the winners of the "future" not the "losers" right? so far so good its all quite logical assuming a third unproven data point, that the scale we use to measure the arguements is a fixed given.
But here's the rub - the dollar's been devalued over the past decade as our Government diluted it by creating more monetary units ex nihilo, rewarding the speculators who bet on the currency devaluing and price of commodities accruing in the deavalued units of currency. Little Jack Horner Soros has a finger in this pie, anyone who wants to help him and his sort go ahead and buy his cherries, but don't cry when he squirts their jiuce all over your napkin as he eats them leaving you hungry!
See http://www.lewrockwell.com/blog/lewrw/archives/021240.html
for the real deal on inflation and money supply.
Clare:
You hit the nail on the head. This is all about the reckless expansion of money supply.
K:
Rice and wheat prices have dropped 20-30% since last month's Malthusian worries about China eating us out of house and home.
mdavid:
I expect oil to decline in the coming months as the speculative bubble unwinds and the global economy continues to slow, but I also wouldn't be surprised to see unmistakable peak oil signs (not mixed with speculative noise) in the subsequent global recovery.
K, And when the bubble du jour pops, don't expect Rod to admit he leapt aboard a silly bandwagon. Peak Oil is a little bit like Global Warming
1) I have no doubt oil prices will go down. Just because they do doesn't mean squat regarding discoveries and lack of supply. Peak oil is very real, regardless of price.
2) Why don't you put some numbers down here? Give me a number, how low oil will get, and how long it will stay there. Dare ya.
3) I say it may well drop over the next few years. But I also think it will still go up, way up, over the next decade. $200-$300. I thought this many years ago, back when it was $15.
4) For the hundreth time, peak oil is NOTHING (yes, I'm shouting) like MMGW. Nothing. MMGW is complete and utter scientific nonsense - I say this as a neutral observer who's looked at the data.
Peak oil, otoh, is simple reality and obvious to all but the most ideological, obtuse, or ignorant. I'm assuming you are the latter. Most of the world's free nations have already peaked in production, and this hasn't changed no matter what the price does. The sweet crude oil is simply about halfway gone. Peak oil theory has predicted accurately the US Lower 48 production over 50 years ago and has been proven to be dead on over and over when you have the data to work with. We don't know Saudi's data so we can't nail down a worldwide peak date down, but we do know for a fact we aren't replacing discoveries since the '80s and are thus fairly close. This is not hand-waving global warming bunk. You claiming that it is silly. You really should read the Drum article, it's fairly good.
...it may be time to take Julie and the kids to that self-sufficient homestead out in the country, where they can have the last laugh
You can rest assured that Bush, Cheney, et al have their own "self-sufficient homesteads out in the country." Cheney understands peak oil better than anyone else. Peak oil is precisely the reason Cheney invoked executive privilege about his Energy Task Force meetings and peak oil is the reason we're in Iraq today. The Saudis are now our number two supplier of oil, and Big Oil knows exactly what would happen if the Persian Gulf were to fall into Iranian or other hostile hands.
I can only speculate (har, har), but many analysts believe the price of a barrel of oil should be somewhere around $60 today based on current demand.
Nobody in their right mind engages in the price forecasting business without deep reservations (other than to point out an obvious bubble). This is the main reason the Fed and other central banks should stop trying to set short-term interest rates.
many analysts believe the price of a barrel of oil should be somewhere around $60 today based on current demand.
Then you should buy all the $60 oil they will sell you. Speculation, among other things, is one of the essential features of capitalism. If the Fed didn't constantly tinker with the money supply we might indeed have $60 oil, or even $20 oil. But that's not the system we have. You can't print fiat money and expect rational behavior, particularly when the Fed won't even release M3 data anymore. The way I look at it, we're lucky we have $120 oil.
Speculators are not to blame because speculators take both positions, some buy oil and some short oil. In fact, much of speculation is on the short side, especially in the stock market, because most people are long. What's happening in oil is that average joes now have the same ability to invest in commodities as hedge fund managers, university endowments, etc. There probably is a bubble, but the better question is why are they all buying commodities? Why did they all buy real estate? Why did they all buy Internet stocks? Part of it is mania, part of it is cheap money. The mania will die and prices will crash, thanks to speculators on the short side and oil companies upping supplies. (Don't hold your breath waiting for Congressional hearings thanking oil companies and speculators for low prices.) But the cheap money will remain and there will be a new bubble.
Other Jim:
Whether professional speculators are net long or net short depends on the situation. They often ride and even amplify waves generated by amateur enthusiasm. That being said, I wouldn't be surprised if many are net short right now.
BTW, I went to school with many of the so-called "best and brightest" on Wall Street and consider most of them to be fools. Just look at the incredible damage they have done at investment banks with their structured finance instruments. The reckoning is still in its early stages. Most of the investment banks are still hiding their massive losses and are on an IV drip from the Fed (Term Auction Facility, etc.) to raise the capital they need to meet day-to-day operating requirements.
That's why half the Fed governors have quietly resigned. The rest are probably wearing Depends.
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