Oil prices: what if it is caused by speculation?

[bordelond]

@xtisme

AFAIK, no one in this thread is telling gonzo that the rise in prices has nothing to do with speculators, so I guess the answer to that is no. What people have been trying to convey to gonzo is that it’s a complex system, and that speculation is only part of it.

Granted. Given that, though, I still think it’s reasonable to be concerned about speculation.

I’m unsure what they mean by increasing supply there…afaik, supply is fairly static, though I suppose it may have risen a bit lately when I wasn’t looking.

“Lately” might well be the key – it makes sense if your article was considering price movement over, say, the last 5 years while mine was focusing on the first quarter of 2008.

[XT]

@bordelond

Granted. Given that, though, I still think it’s reasonable to be concerned about speculation.

Ok. Consider then…what could be done about it? The market IS volatile atm. Should the government somehow place guarantees on delivery and supply? How? What exactly can and should the government do about speculation in such a market? How do you limit world wide demand? How do you force increased supply? How do you constrain or change the commodities market while these two factors are in play?

Myself, I think we need to be concerned about oil period. Do we want to continue with an oil driven civilization? If so then what will eventually happen is the price of oil is going to drive prices up to the point where reserves that are more costly or difficult to exploit are going to be exploited. At that point supply will once again meet or exceed demand and the price of oil will come back down (somewhat…it’s never going to come back down to where it was in years past).

@bordelond

“Lately” might well be the key – it makes sense if your article was considering price movement over, say, the last 5 years while mine was focusing on the first quarter of 2008.

It’s possible, though I’ve heard nothing about any major moves to increase supply. To increase supply you don’t just turn the taps on harder…normally what it takes in increased infrastructure (new oil wells, new holding facilities, new or improved transport, more refineries, etc).

-XT

[bordelond]

@xtisme

Ok. Consider then…what could be done about it?

Well … yeah. Your greater point about reducing oil dependence is certainly granted. Short-term relief would be nice to the consumer, still in all. Not sure how it would come about … but it would be nice.

… it’s never going to come back down to where it was in years past.

Indeed. A return to $2.50 - $2.75/gal would be welcome nevertheless.

[gonzomax]

@xtisme

AFAIK, no one in this thread is telling gonzo that the rise in prices has nothing to do with speculators, so I guess the answer to that is no. What people have been trying to convey to gonzo is that it’s a complex system, and that speculation is only part of it. Also, that speculators aren’t manipulating the market to attempt to further drive up the prices, since you can’t horde oil the way you do, say, gold (in the gold commodities market). The reasons the market is volatile has less to do with some mustache twirling capitalist out to stick it to the little man than a series of complex issues that have already been discussed.

I’m unsure what they mean by increasing supply there…afaik, supply is fairly static, though I suppose it may have risen a bit lately when I wasn’t looking. Demand has also fallen lately (as noted by someone in this thread in an earlier post). But here is the thing…demand has fallen, but it’s still outstripping supply. If, for example (this is only an example mind), supply was -3% of demand, and supply goes up .5% and demand goes down .5%…well, you are STILL at -2% correct? Yet supply has risen and demand has fallen. See?

-XT

You stick to your popguns don’t you.? Small gradiations in supply and demand result in doubling at the pump. Sure thing. Many experts in the field say price should be around 80. it will soon be 130 in face of dropping demand. You are unable to grasp simple figures. 130 is about 62 % over the 80 bucks. Do you have a huge demand or incredible drop to explain. Nope. It does not exist. Demand drops then price should. if you are even close to correct. But you are not.

[LonghornDave]

@bordelond

Again … worldwide consumption has not increased over 25% in four months.

Yet price-at-the-pump in the U.S. has increased over 25% in four months. Why is the price-at-the-pump in the U.S. rising that much faster than worldwide consumption?

To keep things simple, you would be better to focus on crude oil prices and not gasoline prices. Obviously, they are highly correlated, but they do not move 100% in lock-step with each other. The topic is complex enough without having to get into crack spreads at refineries and the different products that are produced from crude.

[LonghornDave]

@Polerius

Agreed, but isn’t the present value of the future stream of cash flows very different for a good with a limited supply left in the world, vs a good that has a practically unlimited supply?

I don’t see the difference. Further, you seem to be operating from the assumption that production can be increased at such a rate that producers could flood the market with oil and drop the price. In reality, the amount that production can be increased is very minimal. You can do severe damage to the integrity of the reservoir by over-producing it. Further, all of these companies are constrained by the amount of capital available to them.

[gonzomax]

http://www.globalresearch.ca/index.php?context=va&aid=8878 Yep speculation according to these people results in a 60 percent rise in prices. Strangely thats approximately the number I came up with. It is world wide so American regulation is unable to act ,if it wanted to.

[gonzomax]

Wow .oil went to 139. today. Last nights demand must have been huge.

[XT]

@bordelond

Not sure how it would come about … but it would be nice.

Unknown, though obviously we will eventually reach a point where oil is completely non-viable as a fuel source. However, if the market (a.k.a. people) decide that other associated costs for using oil are to great (i.e. CO2 emissions and such) then these will also factor in and could produce a shift to some alternative. Without those pressures it’s still possible that extracting hydrocarbons from tar sands/shale oils/coal/etc will push the costs up to the point where some other alternatives become viable enough to invest the capital into major investment. I actually think we are on the cusp of that already, but that’s just MHO there.

@bordelond

Indeed. A return to $2.50 - $2.75/gal would be welcome nevertheless.

Well…to be sure, it would be welcome to me personally as well. For a variety of reasons though it may be both improbable (without things like subsidies which have a host of problems all their own) and perhaps not such a good thing from a macro perspective (as price drops demand usually soars…and unless supply can keep pace you are eventually back in the same boat but with a bunch of new problems).

-XT

[LonghornDave]

@bordelond

And yet the article I just quoted says exactly the opposite – that supply has increased while demand has fallen.

Am I missing something? The article you just posted and the quotation you took from it says the following.

high oil prices are a result of surging demand from China and India, and a curtailment of oil supply from Nigeria and Iraq

[LonghornDave]

@gonzomax

Wow .oil went to 139. today. Last nights demand must have been huge.

The primary drivers for the last two day increases appear to have been further weakness in the dollar and rumors of an attack of Iran. Certainly that would affect supply a great deal considering that Iran is the 4th largest producer (I believe). Further, Morgan Stanley made a prediction of higher prices in the future due to strong demand in Asia.

[mazinger_z]

@xtisme

Well, the quote is a bit misleading in one part…overall the Chinese etc are still paying the same rates for oil as anyone else (though they may be paying less due to the ability to buy more or further in the future…I’m unsure how it works for countries to be honest. Like I said, it’s rather complex), it’s just that the governments are subsidizing the oil to their refining corporations, making the gas cheaper to their citizens (though of course this probably means they have to ration gas but I doubt their citizens are going to complain).

Yes, they do ration gas. I had a link to a NYT article that listed what conditions were like. I’m too lazy on a Friday to find the link again, sorry. As I recall, there are 10 hr diesel lines for trucks, which wouldn’t be used anywhere in the Western world (as I had remarked, “where is there Kyoto treaty?”), and all they could do is buy a quarter tank. And, the Chinese can’t afford it – less they lose their capitalistic image and adopt something more feudal; but then, they’ll run out of money even faster, as the rest of the world still uses currency – lines have grown longer and available gas to purchase is even more restricted.

I feel, though I haven’t researched it enough to make an educated guess, that the Chinese market is still government controlled and not as free as they like Westerners to believe. If there isn’t outright manipulation on state-controlled producers, there is clearly subsidization and monetary controls which definitely makes the market less free. The problem they will soon face, I predict, if they aren’t facing it already, is that if they free up their currency, let the market run free, and end subsidization, there might be economic collapse and hyperinflation. They don’t have a diverse economy (not like the US or other Western nations), so factory workers can find themselves rioting as they are laid off en masse.

[bordelond]

@LonghornDave

Am I missing something?

The part you quoted, if I understand correctly, is explaining the longer-term increase in gas prices (the next sentence after the one you quoted cites a six-year downturn in the U.S. dollar).

The sentence that I marked in red is the one I cited, and seems to be worded (“lately …”) to pertain only to very recent trends.

[LonghornDave]

@bordelond

The part you quoted, if I understand correctly, is explaining the longer-term increase in gas prices (the next sentence after the one you quoted cites a six-year downturn in the U.S. dollar).

The sentence that I marked in red is the one I cited, and seems to be worded (“lately …”) to pertain only to very recent trends.

Sorry, I skipped over that sentence thinking it was just a headline.

I have a hard time finding recent statistics on global consumption as well as global production. The U.S. statistics are very clear: U.S. consumption has recently reduced about 1%. Most research reports that I read state that recent global demand is still up although slowing. I usually see statements about consumption growth in India and China being about 4%.

[XT]

@bordelond

The sentence that I marked in red is the one I cited, and seems to be worded (“lately …”) to pertain only to very recent trends.

Well, like I said, I’m not sure where they are getting that from. When I google World Oil Supply most of the links I get (that aren’t Peak Oil stuff) seem to indicate that the current supply is pretty static with perhaps a bit of an increase. Demand is down in the US (and a couple of other places) but is rising sharply in several other countries, so overall demand is still up.

While I doubt every oil producer is running flat out, they have very little ability to massively increase supply without the capital expenditure of new infrastructure (or developing/discovering untapped reserves). Oh, the Saudi’s SAY they can increase supply…but no one knows how much or even if the really can as they are a secretive lot and play their cards pretty close to the vest. It could all be smoke and mirrors.

If you can find a cite showing that the over all world oil supply is going up and is meeting current demand then that would say something. From what I’m looking at everything indicates that demand is up (overall) while supply is fairly static…which is one of the factors that is leading to the rising price of oil. Even if supply was outstripping demand though, it’s only ONE factor…and uncertainty is going to be a harder nut to crack.

-XT

[Precambrianmollusc]

@RTFirefly

This IHT article doesn’t give much of a clue of how various countries set gas prices, but it gives an indication of how widespread the practice is in South Asia. The article’s mostly about protests in the wake of fuel price hikes in India and Malaysia, but it also mentions Taiwan, Sri Lanka, and Indonesia as having recently raised fuel prices.

Two main ways that a government can set the price in country.
1st is to subsidize, by either directly giving money to the national retailer/refiner to buy the crude oil, or just force the refiner/retailer to sell at a fixed price, the R/R will just have to suck up the loss. As the R/R is invariably a state run enterprise it all ends up at the gov treasury one way or the other. (nb you may see the likes of Shell and Exxon petrol station, but these are just franchises using the name)

2nd is to fix the crude sale price in country (only if you happen to be a producing country) and ensure you have horrific export taxes and controls so it is not worthwhile exporting. This method does not require a state oil company, but does dampen the enthusiasm for external companies to invest. This is the case in Argentina where the local oil market price is 50 bucks a bbl and realistically there is no where else to sell the oil.

As another example of state subsidies, Iran, a major crude exporter is also a large refined product importer. Again the gov basically uses other revenue streams to subsidize the cost of importing the refined fuel.

Also don’t forget some non producing govs are good friends of producing countries. In the middle east it is not uncommon for the big producers to gift or sell oil a a massive discount to a neighbor (eg Iraq to Jordan pre gulf war)

[XT]

FWIW, I found this cite about the world oil supply:

*

  West Texas Intermediate (WTI) crude oil spot prices increased from $101 to $120 per barrel over the first 3 weeks of April as supply disruptions in Nigeria and the North Sea and continuing strong demand growth in the emerging market countries pressured oil markets.  WTI crude oil prices, which averaged $72 per barrel in 2007, are projected to average $110 per barrel in 2008 and $103 per barrel in 2009.  These projections are about $9 per barrel higher than the projections in last month’s Outlook.
*

  The projected prices for crude oil in 2008 will result in higher prices for all petroleum products.  Regular-grade gasoline is expected to average $3.52 per gallon in 2008, or 71 cents above the 2007 annual average price.  The monthly average regular-grade gasoline price is projected to peak at $3.73 per gallon in June.  
*

  World oil consumption is projected to grow by 1.2 million barrels per day (bbl/d) in 2008.  U.S. consumption of liquid fuels and other petroleum is expected to decline in 2008 by about 190,000 bbl/d as a result of the economic slowdown and high petroleum prices.  After accounting for increased ethanol use, U.S. petroleum consumption is projected to fall by 330,000 bbl/d in 2008.   
*

  The Henry Hub natural gas spot price averaged $7.17 per thousand cubic feet (Mcf) in 2007 and is expected to average about $9.70 per Mcf in 2008 and $9.40 per Mcf in 2009.

The oil supply system continues to operate at near capacity and remains vulnerable to both actual and perceived supply disruptions. The supply and demand balance for the remainder of the year is tighter than in last month’s Outlook. World oil markets are particularly tight during the first half of 2008, with year-over-year growth in world oil consumption outstripping growth in non-Organization of the Petroleum Exporting Countries (OPEC) production by over 1 million bbl/d. The combination of rising global demand, fairly normal seasonal inventory patterns, slow gains in non-OPEC supply, and low levels of available surplus production capacity is providing firm support for prices.

Consumption. World oil consumption is projected to grow by 1.2 million bbl/d in 2008. Almost all of the growth in 2008 is expected to come from the non-Organization for Economic Cooperation and Development (OECD) countries, led by China, Middle East oil producing countries, and Russia, as well as Brazil and India (World Oil Consumption). China’s oil consumption is expected to rise by 0.4 million bbl/d in 2008, with Chinese oil imports in March showing an increase of 0.8 million bbl/d from year-earlier levels. OECD oil consumption is projected to remain relatively unchanged, with growth in consumption in Europe, where weather factors constrained oil consumption in 2007, offsetting declines in the United States.

Anyway, lots of stuff in there. However, overall it looks like the supply is pretty near capacity according to the cite, while demand is rising especially in what they are calling OECD countries.

-XT

[LonghornDave]

@gonzomax

http://www.globalresearch.ca/index.php?context=va&aid=8878 Yep speculation according to these people results in a 60 percent rise in prices. Strangely thats approximately the number I came up with. It is world wide so American regulation is unable to act ,if it wanted to.

Please note the following according to your article.

@Article

…as much as 60% of the today oil price is pure speculation. No one knows officially except the tiny handful of energy trading banks in New York and London and they certainly aren’t talking.

Sounds like they have no idea; they are purely speculating.

Further, not to call into question the validity of the entirety of that article, but they do have some completely incorrect items in there. For one:

@Article

As a result, over the past two years crude oil inventories have been steadily growing, resulting in US crude oil inventories that are now higher than at any time in the previous eight years. The large influx of speculative investment into oil futures has led to a situation where we have both high supplies of crude oil and high crude oil prices.

U.S. inventories are not something that are in dispute. They can be pulled directly from the department of energy website. As I stated in the 22nd post to this thread:

@LonghornDave

Just to take a look at this a step further, here is a summary of my look at the current storage levels (data from 8/20/82 through 5/23/08). The average inventory level for the first 21 weeks of 2008 is 308,382 mbbls. This compares to an average for the past 26 years of 325,440 mbbls, for the past 10 years of 309,393 mbbls, and for the past 5 years of 313,633 mbbls. The high was in 1983 at 361,009 mbbls, the low was in 2003 at 277,464 mbbls, and 2008 was the 20th highest out of the 26 years.

Just looking at the 21st week reported for each of the last 26 years yields the following results. The current storage levels are at 311,559 mbbls versus an average of 334,553 mbbls for the past 26 years, 319,718 mbbls for the past 10 years, and 326,405 mbbls for the past 5 years. 2008 is the 22nd highest out of the past 26 years.

I would say that by most measures, we cannot be considered to be anywhere near a high for storage levels by historical standards.

[Precambrianmollusc]

@xtisme

FWIW, I found this cite about the world oil supply:

Anyway, lots of stuff in there. However, overall it looks like the supply is pretty near capacity according to the cite, while demand is rising especially in what they are calling OECD countries.

-XT

nitpick - demand is rising in** non **OECD countries, falling in OECD countries.

[Quartz]

It’s been an interesting discussion, but I’m really getting the message that while some of it is due to speculation, no one really knows the extent.