if you enter a futures contract to buy or sell oil at a future date at a specific price, then on the day, depending on what the actual price is, you either pay the difference or pocket the difference… i can’t see why this should be imagined to affect the actual price of oil?

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BP The futures market is leveraged to the hilt, fueled by Peak Oil mythology and US government policy.

Funny that the oil futures market has moved from permanent backwardation to contango.

Some reasons to invest in oil futures:
1. Oil, unlike other futures choices, is embedded in all other commodities.
2. The market does not recognize net energy, the differences between (short term) flow and (long term) reserves or net exports. As these concepts permeate the investing public, it will result in higher price floors.
3. Oil price spikes will likely be negatively correlated, or at least uncorrelated with other asset classes, so provide beneficial diversification.
4. All renewable sources of energy (wind, solar, biomass refining, etc) require oil to transport their goods and employees. Even if we seamlessly transition from a world of fossil fuels to one of renewables, we cant make windmills from wind or solar panels from sun. Oil will continue to increase in value.
5. We still are firmly entrenched in a neo-classical system that believes in perfect substitutes so ‘hoarding’ behavior is not yet being seen. Hoarding could occur at local, regional and national levels and once the concept of finiteness of oil is more widely understood, the hoarding aspect will represent another permanent increase in demand.

And some of the risks associated with oil futures:
1. Oil is priced at the marginal unit, so demand destruction, even in the face of less future reserves, will result in price drops. Large exogenous shocks to the system, like bird flu or some other natural (or man-made) disaster could cause oil prices to drop precipitously.
2. Oil is only storeable to a point by end-users, so a situation like the one above would preclude end users (that are aware of long term scarcity issues) from `hoarding’ at the margin and prices could stay low until the economy recovered.
3. If oil prices go high enough, there is the risk of nationalization of the resources, rationing, windfall profits taxes on oil companies, all of which change the dynamics of the oil pricing market.
4. In a real collapse, money in futures in a brokerage account might be meaningless.

(Thanks to Nate Hagens at The Oil Drum).

Interesting times ahead.

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Samian The early version was on about Maori justice and how she (probably) couldn’t work with National. She said how she doesn’t do deals like NZ First and Dunne deals. Now there’s 4 reasons why she’s not in government now and won’t be after November.

I must have listened to a different interview to you. Can you supply a transcript of the words you found problematic?

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>>people would need to be storing vast amounts of oil

No they don’t.

>>You can’t run a huge long-term speculative bubble on oil

Yes you can, and they are. The futures market is leveraged to the hilt, fueled by Peak Oil mythology and US government policy.

Watch for the shorts. Comin’ to a computer screen near you soonish….

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I would definitely vote for this afternoon’s Jeanette but not this mornings Jeanette.
The difference? The early version was on about Maori justice and how she (probably) couldn’t work with National. She said how she doesn’t do deals like NZ First and Dunne deals. Now there’s 4 reasons why she’s not in government now and won’t be after November.
The later version was Green only and came up with positive and practical ways to advance NZ’s future efficiency.

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Good interview with Jeanette this afternoon on RNZ. (unlike this morning on 9toNoon where she was not allowed to finish her sentences).

http://www.radionz.co.nz/audio/national/aft/the_panel_-_part_13
Start at 3:20 in.

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icehawk, BP – while I agree with icehawk on the fundamentals, I am willing to concede a bit of speculation in the current surge in prices. Perhaps 5-10% at the top end. That could still mean a reasonable reduction should a minor speculative bubble be forming. But it won’t last long at all for the reasons that icehawk points out. Same applies for the US dollar devaluation scenario. 12% drop in the dollar over the last year. 100% increase in oil prices. Sure, dollar collapse is a contributor, but not the significant one. BP – we have a supply issue, and all the oil companies, the IEA and the EIA agree that this is the case. The IEA will formally publish their significant supply downgrade in November. Stay tuned…

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From Dallas news Editorial [take note bounders from Deomographia]

” Our economy and way of life – especially in sprawling, car-crazy North Texas – depends on a steady and affordable supply of oil. It can’t last, because oil is not an infinite resource. We might not be at the end of the cheap oil era yet, but when that day comes, its dawn will look something like what we’re living through today.”
http://www.dallasnews.com/sharedcontent/dws/dn/opinion/editorials/stories/DN-oil_26edi.ART.State.Edition1.462618b.html

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What you guys don’t seem to realise is that the price is predicated on the subjective theory of value i.e. the seller sets the price of what he thinks the buyer is willing to pay. Its much easier in a captive market such as oil, because its easy for buyers to collude to agree on a favourable price and thus removes the ability of the buyer to demand a better deal from someone else.

“You can’t run a huge long-term speculative bubble on oil because when your options come due you’ve got to either use it or store it – ”

Well obviously they “use it”, which they can and are doing, because the “market” is signalling that they’re willing to pay whatever the seller is demanding. It doesn’t matter whether the “market” believes that the price reflects the underlying fundamentals or not. Its actually irrelevant cos they don’t have a choice.

You can maintain a speculative bubble on anything as long as the consumer is willing to pay whatever you’re demanding.

“All it suggests is 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.”
http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article3980797.ece

“U.S. oil executives told Congress yesterday that prices should be between $35 and $90 a barrel. John Hofmeister, president of Shell Oil Co., the Houston-based subsidiary of Royal Dutch Shell Plc, pegged the proper range “somewhere between $35 and $65 a barrel.”

Saudi minister al-Naimi said in March when oil was trading near $100 that prices were unlikely to fall below $60 or $70, representing the cost of producing alternatives such as biofuels or tar sands.”
http://www.bloomberg.com/apps/news?pid=20601109&sid=aNpbEqWbUwok&refer=home

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STH: “I don’t know what particular rules you’re alluding to, but Saudi Arabia has always imposed a lower production quota on other member States.”

The production quotas for most OPEC states (inc SA) are based on the ratios of their declared reserves. SA has the biggest reserves, so they get the biggest quota…

Of course, this rule when introduced caused some “interesting” reserve adjustments to take place…

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BP: “Supply exceeded demand from 2004-2006. In 2007, demand exceeded supply. In 2008, there has been a surge in supply that will meet demand.
I’d watch closely for shorts…that bubble is getting mighty large….”

I recommend you stay out of the market.

By “supply exceeded demand” they mean is “people stored up some oil”.

But that’s very misleading: because the price also increased over the same period. And the price increase because actually demand increased faster than supply.

To run the sort of bubble you’re claiming people would need to be storing vast amounts of oil. They don’t: they can store only a very short-term amounts (up to a few days supply). The US strategic reserve is by far the biggest of these. They ran it down 2004-6 to try and contain oil prices – and failed. Since then they’ve replenished it (because it’s a strategic reserve).

You can’t run a huge long-term speculative bubble on oil because when your options come due you’ve got to either use it or store it – and several million barrels of oil isn’t something you just quietly stash. The entire world’s stores of oil, including all oil in transit and in refineries, is less than 1/6th of a year’s production.

It’s not a speculative bubble. It’s supply and demand. If you want a conspiracy theory, build one around artificial manipulation of supply: that would still be kooky but at least the numbers would add up.

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>>high prices

Speculation. Artificial scarcity. Production issues. Wars. All play a part…

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BP: “I’m leaning towards a capacity issue, rather than a scarcity issue.”

That seems implausible. Because if so you’d expect production to be increasing now that we’ve had high prices for the last 4 years – and yet it is not.

That production is declining at a time of stupendously highly prices suggests a true lack of resources rather than a mere lack of capacity to exploit resources.

Icehawk

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Yep, kahikatea. The resource consent process is actually slightly, although not onerously, more arduous for brothels than for most other activities. See s 12 Prostitution Reform Act:

12. Resource consents in relation to businesses of prostitution
(1) When considering an application for a resource consent under the Resource Management Act 1991 for a land use relating to a business of prostitution, a territorial authority must have regard to whether the business of prostitution—

(a) is likely to cause a nuisance or serious offence to ordinary members of the public using the area in which the land is situated; or

(b) is incompatible with the existing character or use of the area in which the land is situated.

(2) Having considered the matters in subsection (1)(a) and (b) as well as the matters it is required to consider under the Resource Management Act 1991, the territorial authority may, in accordance with sections 104A to 104D of that Act, grant or refuse to grant a resource consent, or, in accordance with section 108 of that Act, impose conditions on any resource consent granted.

(3) Subsection (1) does not limit or affect the operation of the Resource Management Act 1991 in any way, and it may be overriden, with respect to particular areas within a district, by the provisions of a district plan or proposed district plan.

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BluePeter Says:
May 26th, 2008 at 10:41 pm

> I think the prostitution law is a good thing, however I do take issue with a 24/7 business in a residential area.

> The fact it is a brothel/panel beater/pub/restaurant involved is immaterial. It’s the perceived level of disturbance.

For once, I agree with you. I supported the prostitution law reform bill, but I did so on the assumption that town planning rules would be used to restrict the location of brothels in the same way that other businesses can be restricted in their location on the grounds that they’re too noisy or the area has insufficient parking.

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dbuckley

Precisely why would they want to reduce the price of oil when their revenues have quadrupled in seven years?

The last time they increased production was when the Soviet Union tried to bust the OPEC quotas in the late 80s. It was the Soviet Union that got busted instead cos Saudi Arabia can produce its oil far more cheaply than anyone else. The Oil Glut subsequent to the Oil Crisis in the 70s was a significant contributing factor to the fall of the Soviet Union.

Up until recently the struggle between some OPEC members was keeping production levels low enough to maintain prices like Iran as opposed to others who just wanted to maintain market share as Saudi Arabia did.

”The Saudis are fed up with OPEC,” said a well-placed oil official from the Persian Gulf region who asked not to be identified. The Saudis’ principal concern now, he said, is to hang onto their market share at any price.
http://query.nytimes.com/gst/fullpage.html?res=9B0DE5D61130F933A25751C1A961948260&sec=&spon=&pagewanted=all

“In the US there was a dramatic decline domestic exploration, and the number of active drilling rigs was nearly halved in 1982.”[23] Oil producers held back on the search for new oilfields for fear of losing on their investments[24]. As of May 2007, companies like ExxonMobil are not making nearly the investment in finding new oil today that they did in 1981.”
http://en.wikipedia.org/wiki/1980s_oil_glut

I don’t know what particular rules you’re alluding to, but Saudi Arabia has always imposed a lower production quota on other member States.

As I said in my earlier comment, the situation is far more complex than most imagine. Theres just not enough information thats reliable available to make any definate assertions.

I’m all for the development of plans for energy self-reliance and independance, because it would free us from the whims and vagaries of the commodity speculators and the oil cartel.

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travellerev Says:
May 26th, 2008 at 2:43 pm
While I’m sure that oil is a finite resource it pays to remember that oil only went up after the invasion of Iraq

the invasion took place precisely because the neocon cabal controlling the US government does believe in an oil peak soon or even now

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@SleepyTreeHugger quoting (I think) Ed Morse: “…allowing the cartel to maintain its suffocating grip on the U.S. economy”

Yeah, right. Like OPEC have any control over oil prices any more.

A few years ago, sure; OPEC could up their deliveries by 10% anytime they wanted to, and decrease it as well. Today, they’ve got nowhere to go.

And I’d be very wary of dramatic claims of increased reserves; most announcements on existing reserves for the last several years have been downwards. Not to mention that Iraq’s existing numbers for reserves are widely (universally?) believed to be inflated anyway, due to the OPEC rules…

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@BP I’d forgotten that the IEA often hide nuggets within their publications. Thanks for the link.

Back to the debate. For sure you can reduce demand in any area. However, there is no such thing as a free lunch. Where is the capital for replacing oil dependent infrastructure coming from ?

E.g. To meet IEA’s 342 million BOE/day in 2030 (all energy) envisions energy sources to grow thus (from 2004 base):

Coal 55.5 to 88.8 = 1.6 X
Oil 78.8 to 111.5 = 1.4 X
N. Gas 46.0 to 77.4 = 1.7 X
Nuclear 14.3 to 17.2
Hydro 4.8 to 8.2
Biomass/Other 24.7 to 38.8
Total 224.1 to 341.9

If you then want to shift significant primary energy supply from oil, you’ll need investment in the alternatives plus investment in existing oil infrastructure to prevent depletion rates from disrupting the market too quickly. An orderly transition is preferable to a collapse.

It’s not a good market to be looking for investment capital at the mo ;(

Oh, and by the way cars are approx 1/3 of oil useage. It’s hard to get accurate stats as refinery products are normally reported by fuel type, rather than end useage. E.g. motor gasoline is mostly used by cars but includes trades vehicles, middle distillates are used commercially and by private vehicles.
The speed of the shift away from oil powered vehicles is constrained by rate of vehicle replacement amongst other things. Hirsch covers this quite well. He thinks 20 years is required. I’m not sure we have 20 years for the orderly transition so hold on for a bumpy ride.

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The situation appears to be more complex than anticipated.

“Iraq dramatically increased the official size of its oil reserves yesterday after new data suggested that they could exceed Saudi Arabia’s and be the largest in the world.”
http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article3964957.ece

“Some conspiracy nuts believe the Bush Administration had a secret plan to control Iraq’s oil. In fact, there were TWO plans. In a joint investigation with BBC Television Newsnight, Harper’s Magazine has uncovered a hidden battle over Iraq’s oil. It began right after Mr. Bush took office – with a previously unreported plot to invade Iraq.”

According to Ed Morse, another Hess Oil advisor, the switch to an OPEC-friendly policy for Iraq was driven by Dick Cheney. “The VP’s office [has] not pursued a policy in Iraq that would lead to a rapid opening of the Iraqi energy sector… that would put us on a track to say, “We’re going to put a squeeze on OPEC.”

“Cheney, far from “putting the squeeze on OPEC,” has taken a defacto seat there, allowing the cartel to maintain its suffocating grip on the U.S. economy.”
http://skeptically.org/oil/id1.html

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