What can be done?

In my blog I offered several ideas:

"So, from the lack of real action for 3+ years now, e.g. no additions of refinery capacity for the heavier types of oil, or expanding the types of futures contracts traded, or adding risk to holding speculative longs by randomly selling e.g. 30Mb from SPR (instead of letting momentum funds front-run mindless price-insensitive buying for filling of US SPR during 2002-2005), or even suggesting that we go back to nation-to-nation contracts, I can only conclude there is some hidden agenda behind accepting the broken price discovery mechanism in oil market today"

There's tons of explanations of why the price is so high and won't come down. Listening to the radio, or reading the paper, I gather that the 'glut' of storage oil on the market has now affected OPEC so badly that they're storing oil in old tankers (and running out of them!). They're looking (begging) for people on the open (spot) market to buy oil.

Indeed, there is a glut of real "wet barrel" oil, yet price remains stratospheric at $72.2 a bit down from all-time-highs of $75. Basically IMHO it's a broken pricing mechanism, which leads to the paradox where oil keeps going up in price (supposedly on surging demand) and yet producers can't find buyers for REAL "wet barrels".

Inflation, inflation everywhere!

Inflation is evident everywhere but the governments' statistics and wages.

Pretty soon, the producers are going to have to start ramping back, correct? And when that happens, the price IS gonna be pretty much set in stone, correct?

The producers ARE cutting back, as they have nowhere to store it (why pump it up?). Wrt price, not really, it all depends on how long this broken system will persist.

Most of the charts and articles you've referenced here reflect the month of April, and they mostly talk about the Western world (specifically the US). What's going on in China? And to a lesser extent, India? Things haven't changed much in three months. It's such a fast changing world, too.

Charts are same-day as posts. Articles, I gather over the Web and may be weeks/months old. Doesn't change much, the real market picture is the same for the past 1.5yr

I'm not an economist, but I would say those "orange" people have something to do with whats going on, too! Maybe these 'speculators' ain't so happy that the world is going flat without them?

I'm afraid I don't understand what you mean "orange people"?

Another interesting thing is that the European price for fuel has always been a lot higher than the US. I remember paying something like 4.50 a liter in Italy 10 years ago. Is that right?

The difference in EU is due to taxes. I'm talking about CRUDE OIL in my articles, not the refined products (gasoline etc).

So, my question is what mechanism could you use to artificially inflate the price of light sweet crude and sustain it, in order to develop new technology that will in the end, defeat it? And to further aggravate the question, who would be developing the new technology? Hate to be an outsider holding on to a bunch of light sweet crude when that happens, but either way, someone is always living behind a dumpster at a 7-Eleven.

Well, one COULD use today's method, i.e. take advantage of the broken price discovery mechanism in crude oil to artificially inflate its price.

But it's like shooting oneself in the foot.

If governments want to reduce our exposure to foreign oil and/or go "greener" (more environment friendly), they can simply TAX the product. e.g. put a $3/gallon tax on gasoline to drive it to $6/gallon. It would force consumers to use less and opt for more efficient vehicles etc etc.

Instead nowadays it's ruining our trade balance. Because 500-600bn/yr goes to oil exporters.

It really makes no sense to me why this situation persists so long and why sheeple haven't revolted yet.

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Last week, Iran leased 2 more VLCCs (Very Large Crude Carriers, oil super-tanker ships)for oil storage, claiming lack of demand for heavy, sour crude. With now 9 vlccs, have storage capacity for 18.3 million barrels. (As per latest issue of OGJ.)

So, there is a GLUT of heavier crude oils, a GLUT of nat.gas (they couldn't find where to store it anymore and plunged in price -65% since Dec-05)

And the only "demand" is for light sweet crude oil via "paper barrels" of the futures markets (derivatives). As "traditionally" all crude oils are priced off those futures "paper barrels" benchmark, it causes the entire price chain to spike yet, despite the world being awsh in "wet barrels" of oil.

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To me building more storage is rather illogical. .... why pump something out of storage, so you can store it again, unless maybe you're going to refine it on the way? (on very large floating platforms no less, as if making and buying SUV's wasn't the epitomy of the supposed concensus on environmental issues) But then again, you can just 'drive' the refinery out of the path of a hurricane, eh?

About the 'orange' people. I've been reading a book called "The World is Flat" by Thomas Friedman. A little scary from an average, or below-average joe point of view. If Mexico can't compete with the Chinese, and we can't compete with the Indians, what do you think is going to happen to the standard of living in the US and other 'developed' countries? So, pick something that everyone is going to need and put your money in it, because a job is something you may not have next week, next month, or next year. Oil, oranges, and to some degree, brains. My vision of globalization and 'triple convergence' had a little something different in mind, but I guess it has to start somewhere.

What I'd like to see a litle more of is 'stewardship, spiritual wisdom, and leadership'. Pretty boring stuff, especially if it doesn't make money or better MY standard of living in some manner? It's why I like Rosetta.... My only wish (prayer) is that we were creating answers instead of possibilities. Why try to save lives in a life eat life world? Maybe that's why it doesn't fly in the face of some people's reality.

About increasing taxes to pay for new development. Governments increase taxes to support themselves. New technology development comes when those governments have some crisis on their hands and start losing points in the polls, then they hire private industry to 'fix it' for them. Creative people find creative ways to defeat those mechanisms too.

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I'm copying over some discussions from SETI forums:

Um, I don't understand what you mean by the people should "revolt". Do you mean demonstrations at the refineries? Protests in the streets?

I'm not talking about refineries or BigOil. Ofcourse they're profiteering off a broken pricing mechanism and pretend all is well and are shedding crocodile tears about how sorry they are.

I mean to change the BROKEN mechanism used to set the price of oil, off the price of derivatives whereas there is no real link between derivatives and physical. Isn't it obvious?

When you have even the #1 exporter of oil in the world tell you BLUNTLY that oil should be selling for no more than $50 (see yesterday's Reuters story) and now it's 50% higher, just what more do people need?

If we were talking about the market for apples instead of oil barrels, and you saw the price go up and up and at the same time the producers tell you can't sell their apples, wouldn't you think the market is "broken"? Why don't people do the same for oil?

Apparently people have the misconception that international "open markets" set the price for oil, but due to technical aspects -explained earlier- the oil derivatives markets are neither free nor fair. They're cornered, but unlike a similar situation that might happen in a piece of paper i.e. stock, oil is a basic commodity which everyone HAS to buy and it's getting awfully expensive!

Um, I'm not disagreeing with you at all, Dmitri. <kindly said>

I'm just asking about the "How" of it all. What would you like people do to get this changed?

Best regards.


Edit: P.S. I'm seeing the price disconnect at the supermarket every day, on apples and other products. There's a complete disconnect there too. Prices are based solely on demand monitored in real time by the retailers' computers. Only a drop in demand succeeds in lowering prices. These new price disconnects we're seeing are a feature of new computer-enabled business savvy in many fields, I think.

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To answer Beethoven's question, What I would like people to do to get this chaged:

Write to your regulators / legislators / representatives. Surely there must still be a few honest men among them, who care for people's interests. They can't all of them have sold you out, can they?

Take the "investors" who are pouring $$$ in oil "paper barrels" out of the picture. Demand that anyone dealing in oil for over a certain threshold, must be involved in the physical market.

The price mechanism for oil is broken and the market is cornered. One way to immediately solve this crisis, is to abolish the current pricing system and go back to nation-to-nation contracts. If Saudis say they see no reason why oil should be trading over $50 (see statement 2 days ago), use that price as a start.

There are other options, I get more technical in the links:
http://dhatz.blogspot.com/2006/06/oil-to-38657-per-barrel.html
http://dhatz.blogspot.com/2006/06/oil-price-marginal-barrel.html

This IMHO is NOT a problem which can be solved by reducing demand/consumption or increasing supply (drive less, drill ANWAR) for PHYSICAL, real "wet barrels" of oil (unless we're talking adding 10Mbpd in spare capacity for LSC which can't happen overnight). There is ALREADY a enough real oil to meet demand, the producers can't find buyers for it (not just now, but for some time, S.A. cut -400Kbpd, Iran is leasing VLCCs to store it while looking for buyers). Producers are pumping LESS than what they did 1-2 years ago as they have no buyers, you read about it everyday and yet price is driven up at the "paper barrel" financial trading level.

Remember that the biggest part of US' trade deficit is due to oil imports. And you're paying for it by selling out your country's "silverware", i.e. selling toll-roads, ports, companies etc.

If it were a REAL supply/demand crisis situation, where countries were outbidding eachother for the last few drops of oil, it might have been a "necessary evil" to sell out your country's silverware to pay for it. But always remember that THERE ARE NO REAL BUYERS FOR PHYSICAL OIL IN THE REAL WORLD and this situation exists so that very few people can make even more obscene profits!


PS: As I'm writing this, oil is back near all time highs, over $74/barrel!

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Just a quick note that crude oil is back at all-time highs of $75+/bar, rising +1.75% sofar today (session isn't over). Sofar, I don't see real outrage.

Meanwhile today, natural gas (which is substitutable for oil in many application) is at 2yr lows, down -4.5% today, down -65% from Dec-2005 and nat.gas trades right now at a price which would correspond to crude-oil $35/bar (instead of $75/bar).

The past weekend, Saudi Oil Minister gave an interview to a French newspaper, here's some extracts from Reuters story:

Naimi said Saudi Arabia had always worked on market stability "in the interest of consumer countries, producer states and in the interest of the world economy in general".

"There is no doubt that the initiatives taken by my country and by other oil producers, within or without OPEC, will sooner or later return stability to the market," Naimi said.

Naimi said since the beginning of his career in the oil sector, he had never seen as many disagreements and agitation, noting this could partially be explained by a short-term rise in oil prices and "rumours about an assumed exhaustion, limits in excess production capacities and effects on the environment".

"It is preferable to us, government officials, business men and intellectuals, to be realistic, to avoid resorting to intimidation or exaggeration despite what this might accomplish in terms of attention and short-term political advantages."

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Studer SL, you raised some interesting points, but I wanted to stay on the topic of oil in this thread. I'll be happy to discuss general economic matters and my outlook. (I'll only send URLs to sites with info I think is right)

I'll send a couple of charts here, but if people want to discuss economic matters, we'd better create a new thread for general economic/political issues (perhaps "vote" withthe +/- signs?)

Late credit card payments in USA, as proxy for "distress in the system":


Spending on essentials as % of disposable income:



Basically, watching the trends, it's easy to tell that US is rapidly destroying its middle class and ladders of upwards mobility. IMHO it's being done on purpose, but then I'm heavily biased aginst the current regime, so I may not be totally objective and you should look at the facts and make up your own mind.

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Just in case anybody missed it, today crude oil made new all-time highs (intraday) to $75.4/bar, up 1.8%

On the other hand, natural gas is down -6% today and down -65% since Dec-2005 just made fresh 1.5 YEAR LOWS. Nat.Gas also belongs to the energy complex and its price is historically correlated with crude oil (correspondingly to their respective energy content; a barrel of oil has about six times the energy content of a thousand cubic feet of natural gas). Although they're not perfect substitutes, they're used interchangeably esp. in industry.

In both cases of nat.gas and crude oil, the storage facilities are almost FULL and supply comfortably covers demand. In the case of nat.gas it pressures price downward, whereas oil -having IMO a BROKEN pricing system, as I've explained in detail earlier- price keeps going up and up due to financial inflows for "paper barrels", but producers like Saudi Arabia and Iran can't find buyers for their real "wet barrels" of oil.

And crude oil producers resort to actually cutting production e.g. Saudi Arabia cut production by -400,000 barrels/day (from the 9.5Mbpd level of the past 2yr downto 9.1Mbpd) in Apr-06 citing lack of buyers and Iran leased 2 more VLCC supertankers a few weeks ago, for a total of 9, to use them to store 18 million barrels while looking for buyers. (explained in detail and citing sources in prior posts)

Nat.Gas is now trading at a price equivalent to oil at $35/bar (instead of $75/bar it's right now)

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Feet1st, mentioning oil, you've struck a nerve.

I'll never understand people, why they don't REVOLT against this kind of abuse. After bleeding financially for years and years. How can they possibly believe people who are lying to them in the most blatant and obvious way?

You're expectng logical behaviour there. Which is NOT going to happen in a society that is told by adverisers that the cool vehicle they have to own burns about 80% of a pint of gas each mile it goes.

Hummer Fuel Stats

Look at the 2004 H2 SUV and weep.

Also, (to quote John Lennon) "You say you want a revolution ..." How exactly are we supposed to revolt?

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Feet1st, mentioning oil, you've struck a nerve.

I'll never understand people, why they don't REVOLT against this kind of abuse. After bleeding financially for years and years. How can they possibly believe people who are lying to them in the most blatant and obvious way?

You're expectng logical behaviour there. Which is NOT going to happen in a society that is told by adverisers that the cool vehicle they have to own burns about 80% of a pint of gas each mile it goes.

Hummer Fuel Stats

Look at the 2004 H2 SUV and weep.

Also, (to quote John Lennon) "You say you want a revolution ..." How exactly are we supposed to revolt?

dgnuff, I understand what you mean about the Hummers and it's a sign of our times.

But what really bugs me is that this whole runup in oil price (which incidentally just made new all-time highs today to $75.775/barrel as I'm writing this) is basically a financial game which is now out-of-control.

I will stop here, because oil is not the subject of this thread.

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been poking around at the web on this subject some more. found a pretty interesting report from the EIA (energy information administration) about the price of gasoline. http://tonto.eia.doe.gov/oog/info/twip/twip.asp

Seems as though one of the real problems is refining.... US demand is so high, that European and other global refiners are now supplying either finished gasoline or blend stocks to the US at ever increasing levels. How can you have nation to nation contacts when the oil is being refined globally? Refiners buy and ship to their refineries to process into various products, and that depends on the bottom line and the availability of refineries. The excess in crude is probably also due to the decrease in import demand from China. Either the 'boom' years in China are coming to a close, or they've been able to increase their own capabilities enough to wean themselves from the global market somewhat.

I remember recently (about a month ago) a bill proposed in congress to streamline the permitting process for the construction of new refineries. Key items on the bill were: decrease the amount of time and money involved in the 'permiting process' from the current average of 10 years and 10's of millions to something like 18 months and single digit millions, and also decrease the amount of court time from NIMBY (not in my backyard) attitudes toward building more refineries by allowing the purchase or lease of land from the federal government (the proposal mostly pertainted to closed military bases and other federal lands that were being closed down or the functions drastically reduced. This bill included not only traditional oil refineries, but also alternative fuel refineries such as ethanol.

The bill was shot down. It was proposed by mostly republicans, and opposed by mostly democrats. Once you got past all the partisan politics, it was mostly due to concerns over the environmental impact and worries about allowing big business to 'cut corners'.

Its all a pretty big game to me. All this technology and we don't know how much oil we have left? We have to "estimate"? And furthermore divide it into 'quantifiable qualities' and then guess on that too? Reserves don't mean reserves... they mean 'profit' for speculators.. of which we all are in one way or anther.

I'd complain to my representatives, but they're as corrupt as big oil. Some of them ARE big oil! Anything that makes sense for the people would have laws made to prevent it.. And that's from both sides, and those who call themselves independents too.

Maybe oil is how the democrats are funding their election run in '08?

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StuderSL, Saudis also seem to think that refining is the problem:

PWR-SAUDI-SCPMA-OIL
Saudi Arabia attributes oil prices hike to lack of advanced refining capacities

RIYADH, July 2 (KUNA) -- Saudi Arabia attributed on Sunday the current hike in oil prices to the lack of advanced refining capacities, not shortage in supplies of crude oil.

According to Saudi Press Agency (SPA), Secretary-General of Saudi Arabia's Supreme Council for Petroleum and Mineral Affairs (SCPMA) Dr. Mutalib Al-Nafisa said the council held a meeting today that included reviewing the oil market's current status in light of the fluctuation in prices that do not serve oil producing or consuming nations.

The council expressed comfort with the current balance between supply and demand with the availability of surpluses that are the highest for quite few years, he added.

The meeting, headed by Saudi King Abdullah bin Abdul-Aziz, approved a national petroleum strategy for 2006 to ensure the market's stability on the short and long terms.

The strategy includes increasing Saudi Arabia's production capacity to meet anticipated international supply and demand, as well as boosting refining capacity by establishing refineries capable of refining heavy crude oils, boosting the oil market's transparency and encouraging the development of international oil industries. (end)

Now, I know that saying "crude is up because of refinery bottlenecks" sounds the same as saying "the price of wheat is up because of bakery problems/bottlenecks" because in fact a refinery bottleneck would increase the price of one type of e.g. light sweet crude and create a glut of another type e.g. heavy sour crude oil.

Which it has (created a glut of other types) so we read that SA, Iran etc can't find buyers for all their oil anymore. Btw that oil had real buyers in the past (which proves there's some demand destruction, due to high prices).

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Since there's so often misinformation, here are the latest numbers on crude oil inventories ("stockpiles" or "stocks"), at highest levels in over a decade (and 20yr highs for OECD countries). These are the "commercial" inventories at ~350million barrels, not counting the ~700 million barrels in US SPR (Strategic Petroleum Reserve).



combined with US SPR, they're at the highest level ever.

Also, much higher than "normal" levels for this time of year (from DoE website):

Crude oil inventories


And gasoline inventories


source: http://tonto.eia.doe.gov/oog/info/twip/twip_crude.html

IMHO this data is basically irrelevant, as the issue here is a cornered financial market, but just in case you want to watch the "funnymentals".

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I've tried to explain the crude oil pricing mechanism as best as I could and why I think it's broken. I'm not sure if I was able to make things clear enough.

A very good description of the flaws of the current pricing system of crude oil comes from Robert Mabro (a scholar and highly regarded consultant with 3+ decades of experience in the oil market, now retired). He explained the issues in his 2000 article:

http://www.oxfordenergy.org/comment.php?0008

which I think is a must-read for anyone who wants to understand the oil market (I've linked to it in the 1st post in this thread). Btw the situation back then (1998, 2000) was much less acute than today.

Here's an extract from the abovementioned article:

"As mentioned before, because of the lack of good information on production, stocks and demand, what rules the market is the consensus view about these numbers rather than the actual situation. This has an important implication for OPEC. When OPEC has to decide on a production policy in order to reverse a price fall as in 1998 and March 1999, it is obliged to reduce production by the volume demanded by traders and not by the amount required to restore the supply/demand balance. And the market has a tendency to believe in myths, such as the myth of the `missing barrels' in 1998. In that year OPEC, together with Mexico and Norway, reduced oil production twice (in March and June) to no avail. The oil price continued to fall. The market did not believe that the reductions were large enough. In March 1999 OPEC cut production by the large amount demanded by the market. This turned out to be too much as evidenced by the relentless price increase that followed throughout that year.

It is nice to say that markets should rule. The statement is however meaningless and indeed dangerous in its implications if one does not specify which market, and the conditions that qualify a market to rule. The oil futures markets as they exist today and for the reasons mentioned earlier on do not qualify. Yet, OPEC has to follow their whims to influence the course of oil prices and this seems to be an important cause of high volatility."

Mabro's CV, Awards (by OPEC, the Queen etc :-). He published several books and articles on the oil markets.

"In December 1991 Mr Mabro was awarded the International Association for Energy Economics 1990 Award for Outstanding Contributions to the Profession of Energy Economics and to its Literature.

In December 1995 he was awarded a CBE by HM the Queen in the New Year's Honours List. In 1997 the President of Mexico awarded him the medal of the Mexican Order of Aguila Azteca and in 2000 the President of Venezuela awarded the medal of Francisco Miranda, and in 2001 was promoted Officier des Palmes Academiques (France).

In 2004 he received the first OPEC award for contribution to oil studies."

PS: Mabro is retired. I don't know why more people in the oil industry don't speak up CLEARLY about this subject, considering the economic damage inflicted upon consuming nations ... (they do speak, e.g. Leo Drollas https://boinc.bakerlab.org/rosetta/forum_thread.php?id=1707#19322 but it's not always clear what the cause and effect is)

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here in the Britain it recently hit £1/litre - currently about 97p/litre. I've seen a lot more dual fuel cars around recently!

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As crude oil price in NYMEX (New York Merc) Sep-06 traded over $80/barrel earlier today, which will cause more financial hardship to millions of people, you need to keep in mind that this entire "energy crisis" has been ENGINEERED, FABRICATED from A to Z in the derivatives markets of NY and London.

Here's something that I meant to send, but wanted to check archives to make sure it had actually been said (and was not some kind of "urban legend"):

‘‘Leon Hess, whose oil company made more than $200 million by trading oil futures during the Persian Gulf crisis ... said he longs for the days when oil company barons could get together and decide prices and supply levels largely among themselves, rather than depending on the violent price swings created by traders who react to rumors and headlines.
‘‘‘I’m an old man, but I’d bet my life that if the Merc [New York Mercantile Exchange] was not in operation there would be ample oil and reasonable prices all over the world, without this volatility,’ Hess said at a hearing the Senate Committee on Governmental Affairs held on the role of futures markets in oil pricing.’’ —‘‘Oil Baron Longs for Past, Not Futures,’’ Newsday, November 2, 1990

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Following up, the 14-Jul-2006 date of my previous post incidentally marked the high of crude oil and it has been falling since:



The primary reason for the drop isn't "warm weather" or "resolving of geopolitical tensions" etc, but like the uptrend again has to do with the players of the financial markets (investors), which exit their position once the trend changes.

In the previous months another trigger for the change in trend may also have had to do with GoldmanSachs (investment bank) re-balancing its GSCI commodity index (which is tracked by billions $$$ in "passive" commodity investment funds) which meant that they had to start "lighten up" investment position in the energy complex (much like when a stock enters/exits an index like Nasdaq100 or SP500, index tracking funds have to buy/sell it).

Coincidentally, the newly appointed US Treasury Secretary, Paulson, was the previous manager of GoldmanSachs (which runs this index) and they did the change a few months before the elections. A somewhat conspiratorial piece titled Friends in high places has more on this...

Right now the big fall in the last few days in 2007 is due to the quarterly redemptions of hedge funds (investors bail out), which in turn liquidate positions (i.e. sell "paper-oil" contracts).

PS: A similar situation as in oil above happened in nat.gas market in Sep-06 (due to the blow-up and forced liquidation of the Amaranth hedge fund which held big positions in nat.gas futures contracts) which drove natural gas price temporarily -50% (!!!) in a few weeks.

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