On my latest trip to Amsterdam this week I saw 19 oil tankers parked off the coast in the North Sea (ironically next to a Dutch offshore wind farm). These tankers are being used for floating storage due to the glut of oil in the market. Despite this, oil prices have been on a steady climb. Oil passed $66 today – despite a global recession and all of that oil parked offshore. The Wall Street Journal thinks we are headed back to $75:
Oil Prices: $75 Crude, Here We Come
Oil prices aren’t rising because demand is recovering or because record-setting oil inventories are being burned off. Rather, Mr. Horsnell says, the market believes OPEC is coordinated enough to defend a price floor, presumably through acting together and keeping production in check. Add in a growing belief that the economy could be regaining its footing and oil prices will climb to the price that OPEC is willing and able to defend.
Some say this is all due to speculators. If the reason cited above is correct, then I guess speculation is a good way to describe the recent price rise. There is an expectation that OPEC will maintain discipline and push prices back above $70, which is what OPEC hopes for. Further, if the economy recovers, demand will recover somewhat, further supporting higher prices. Those expectations are being priced in, hence the price rise.
I just hope oil prices don’t make another swift run to $150. In the long run, I do favor higher oil prices because it incentivizes conservation of oil, but if prices change too quickly we are going to find ourselves in The Long Recession.
36 thoughts on “Oil Moving Back Up”
An interesting article from The Business Mirror a few days ago:
Written by Alexander Kwiatkowski / Bloomberg News
Tuesday, 26 May 2009 22:19
“As oil passes $60 a barrel for the first time in six months, the fastest-growing options trade in July on the New York Mercantile Exchange is for an 18-percent decline. The number of options to sell oil at $50 a barrel for July settlement rose 22 percent last week to 24,948. Traders expect prices to fall because US crude inventories are 1.8 percent below the highest level in two decades and the International Energy Agency says demand is falling the most since 1981. There’s enough unsold crude to supply the US for a week stored in tankers anchored offshore.”
“The number of contracts to sell July oil at $50 a barrel, or so-called put options, tripled to 24,948 on May 21 from May 7, according to Nymex data. The second most-popular contract for July settlement is the right to sell at $40, with 23,254 outstanding. There are almost twice as many positions that profit if oil falls as low as $40 a barrel as there are bets on a rise to $70.”
Speculators seem to be betting against oil price increases, rather than driving them upwards. Commodities are going up across the board, it’s not just an oil phenomenon. However, US natural gas remains suppressed (as does milk, cattle, hogs, sugar, and lumber). So the levitation is not purely a speculative play applying to all commodities – fundamentals are playing their usual role.
I have to admit though, the strength of this oil rally in the face of global inventory increases – the Economist reports the highest forward cover since 1993 – has me puzzled.
It’s not impossible for this to be a dueling speculators scenario.
Personally, I believe the run up in oil prices has to do with the fed quantitative easing policy. The fed is trashing the dollar. Bonds sold off this week. Fixed income investors are looking for better investments – such as commodities – when inflation is in the picture.
A couple articles about this topic that I enjoyed:
“I do favor higher oil prices because it incentivizes conservation of oil, but if prices change too quickly we are going to find ourselves in The Long Recession.”
Interesting — Could increasing the price of oil via taxation (or via disguised taxation such as Cap’n Trade) also cause The Long Recession?
“OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”
High crude prices are indeed an incentive to conserve (RR has my wholehearted agreement), but they are also an incentive to keep up exploration and the development of new oil fields, which is essential if we want to maintain a steady oil supply and avoid more devastating price spikes. More deepwater oil rigs must be built and deployed, and that will cost a lot of money. Further, oil-exporting countries need to balance their budgets and maintain social stability. If they descend into chaos, that would be a serious blow to production. All things considered, I think we should be paying at least $80/bbl.
Manipulation and speculation, thy name is NYMEX.
If you were Putin, and your future, maybe even your shrimpy little hide, depended on higher oil prices, would you not set aside a few billion to primp prices on the NYMEX?
In the short-run, oil demand is inelastic. We see that even with a huge drop in oil prices, demand for crude is down 8 percent in the US, even in a recession.
Still, I have to say, the long-run for oil may not be so bright. We have natural gas coming out of our rear ends, for generations. There have been huge advances in battery cars.
OPEC faces a choice: Keep oil cheap and reliable, or lose market share continuously.
The expected demand surge from China may never happen. They seem to have discovered the PHEV, and are building a coal-fired power plant every day.
In the next 20 years, oil companies may make money, and at times handsomely. So did the top newspapers (my industry) from 1980 to 2000. Deep into the late 1980s, newspapers were considered pretty hot, and made money.
But I see the handwriting on the wall.
Europe, Japan are moving aggressively to limit their oil use, as is Thailand, Indonesia and several other countries. China is a mercantile nation–they are not adverse to setting national policies to limit imports, such as oil.
There is, of course, the Banana States of America, and we will continue to stumble along, exporting money and building up debts. Even here, however, oil demand will go down, due to the new CAFE standards (a bad idea). There may be fleet switching to natural gas.
I wonder if the world will ever again demand 87 mbd as in 2007. I suspect that was the year of Peak Demand.
Meanwhile, it seems the Haynesville natural gas field, the largest ever discovered, has another field right on top of it, 150 meters higher, until recently undiscovered.
It is clear the Peak Oil doom scenarios are simply garbage at this point. There are lifeimes and lifetimes of natural gas in the USA. Your great grandchildren will have too much NG to know what to do with.
So, you drive a CNG car or a PHEV. This is the end of the world?
Benny: Why look abroad for enemies when there are so many here at home. The climbing interest rates, the declining dollar, the price of oil, all point in one direction, Washington DC where Congress and the Administration have conspired to make ‘trillion” an ordinary word, and the Fed is so intent on preventing a replay of 1929, that it runs a very real risk of replaying Germany in 1921.
We are in a whole world of hurting.
“Manipulation and speculation, thy name is NYMEX. If you were Putin, and your future, maybe even your shrimpy little hide, depended on higher oil prices, would you not set aside a few billion to primp prices on the NYMEX?”
I don’t think it’s quite this simple Benny. Oil has been traded on futures markets since the early 1980’s. In 1986 there were a lot of people whose future depended on oil, and yet we saw oil prices drop to the $20 +/- range for almost 20 years. Why didn’t those people simply manipulate prices then?
Your assumption seems to be that buyers can easily outwit sellers. All sellers have to do is invent some pressing supply or demand fable, and buyers will meekly fork over the cash. I don’t buy this. I’ll bet that buyers are just as sophisticated as sellers, and that the market would see through insubstantial attempts to manipulate prices.
And what about people whose futures, at least for a few decades, depend on low oil prices (i.e. importers)? Japan, India, the US, Europe, to name a few. If Putin et al can so easily manipulate prices upwards, why couldn’t importers also play the PR game in the opposite direction?
So, Putin might not set aside a few billion to prop up prices, because he knows it probably wouldn’t work. If it was a reliable way to raise prices, then I don’t see why this approach wasn’t used in the late 1980’s, 1990’s, and early 2000’s. A huge windfall in oil prices would have done ol’ Gorbachev and the USSR wonders in the late 1980’s, when it was producing about 21% of the world’s oil and enjoyed some real leverage. Perhaps it would have saved the USSR for several more years or even decades. But Gorbachev and his cronies decided against price PR for some reason. Now, when Russia produces 12% of the world’s oil, Putin suddenly thinks it’s time to flex?
I’d also wonder when the last incremental dollar spent on this kind of manipulation would take place. Seems like it would always be a winner and the bad folks would always clamor for more of same.
Remember the famous quote from HL Hunt after he and a few others tried to corner the silver market and lost some 30 years back – ‘A billion dollars ain’t what it used to be’.
Now that is double true due to inflation.
It seems to me that to move the oil market prices would take fantastic amounts of funds.
Goldman-Sachs estimated the other day that global oil storage, including floating storage, would be full by June. Some recent sell-offs of floating inventories appear to have been just to take advantage of cheaper alternative tankers. Floating storage prices can be around a dollar per barrel per month — that’s a lot of moolah for a 2-million barrel VLCC.
This is just what I read. Can someone more knowledgeable tell me what’s going to happen when there is no more storage. Surely prices must plummet unless OPEC can cut production even further, i.e. by more than the rate at which crude is currently being stored so that inventories start to fall again?
“Surely prices must plummet unless OPEC can cut production even further, i.e. by more than the rate at which crude is currently being stored so that inventories start to fall again?”
For about a decade, highly paid speakers were telling conferences that rising inventories were going to cause a drop in prices. When prices did actually fall, after many years of predictions, it seemed to have more to do with demand than with inventories.
It may be that we do not have a proper understanding of “inventory”.
Back when Carter was getting his turn to screw things up, one of the factors behind gasoline lines was that he frightened US motorists into wanting to keep their gas tanks full — a big volume swing, not normally considered part of inventory. Should shut-in production in Saudi Arabia be considered part of “inventory”?
One of Matt Simmons repeated points has been that the world lacks the data to understand the oil supply situation. OPEC members do not even report their actual production to each other!
On a related topic, years ago someone pointed out that the optimum oil price profile for the Saudis would be a price that was generally high, with occasional excursions to low price — to scare funding away from alternatives.
“On a related topic, years ago someone pointed out that the optimum oil price profile for the Saudis would be a price that was generally high, with occasional excursions to low price — to scare funding away from alternatives.”
Right on !
I think Tom Friedman in his film “Addicted to Oi” has some footage of the Saudi oil Minister saying exactly that. Every time somebody moves to get away from the addiction, the Saudis open up the spigots and lower the price to keep everybody strung out on oil.
I think your commonly held assumption is incorrect.
In 1981, oil was selling for about $36 per barrel, and the Saudis were producing over 10 million barrels per day. In 1986, oil was selling for about $14 per barrel: by then Saudi production had steadily fallen to just over 5 million barrels per day.
In July 2008 when oil prices peaked at almost $150, the Saudis were producing 9.7 million barrels per day. By January 2009, oil was at $35-40 per barrel, and Saudi production had declined to about 8 million barrels per day.
The two largest oil price collapses in history were associated with decreases in Saudi production. Saudi Arabia also reduced production by about 700,000 bopd after the third largest decline, in 1998.
Although you claim that Saudi Arabia is willing to invest about $250 billion per year (work out the math) to deter some notional advances in alternative energy (I’m wondering why they don’t just use the money to buy the competition instead), I think most analysts would attribute the recent collapse in oil prices to other reasons.
Classic economics says that when the price of something becomes too high, demand falls off.
When oil is heading for $150 dollars a barrel, the Saudis crank up production because they are making money hand over fist. When the price of oil becomes obscene and demand slackens and oil drops to $50 a barrel, they cut back production.
Since oil is their “cash cow”, they want the highest price the market will bear. Low prices tend to low volume.
The Saudis can play “the waiting game” because the know that the transportation infrastructure of most industrialized nations is heavily dependent on oil.
When prices rise because basic infrastructure needs in the transportation sector must be met,
they ramp up production in response to demand and price increases.
The Saudis turn the spigot on when prices are high. They turn it off when prices are low. I suspect that’s why you see production declines after price spikes.
The Saudis are wisely taking their limited resource and maximizing gains on the price increase “upside” and minimizing “losses” on the price decrease “downside” by decreasing production.
My sad sentiments mirror yours. Each Administration seems to wallow in debt (save the Clinton years).
When Great Britain entered WWII, Churchill told Brits, “I have nothing to offer you but blood sweat and tears.”
When we went to war in Iraq, Bush told Americans, “Take the tax cuts and go shopping.”
It may be too late now. After WWII, the Republican Congress and President shoved tax rates up to 90 percent (on incomes of more than 200k) to pay down the national debt. And they did.
Now, Obama can’t propose even a three percent hike in the top rate. He is too weak.
I hope the FEd does not prevent a recovery. Inflation seems well at bay, indeed one can again argue there is the threat of deflation, what with house prices — all real estate — in decline, and all other assets, from stocks to commodities in flux, and wages soft. My guess is oil will collpase again, although…..
On the NYMEX: The size of the NYMEX trading in oil has exploded in recent years. That allows manipulation that was not possible in the 1980s. And who knows? Maybe the NYMEx was used to prevent oil from falling to $10 a berrel in the 1980s and 1990s, instead of the $20-$25 it traded for.
Anyway, my point is this: Putin would have to be a dunce, along with OPEC, not to at least try to goose the NYMEX. It is in their interest to do so.
Every once in a while (see 2007) our own financial quislings also go long on oil, bringing into alliance oil thug states and Wall Street speculators.
To paraphrase Fat Man, who needs enemies when you have Wall Street?
As always, the future is a conundrum: On the one hand, we have intelligent skillful people, working to build batteries, exploit natural gas, or in other very productive enterprises.
Then we have Wall Street and D.C., source of so much right and wrong.
In the long run, I suspect the good guys and progress will prevail.
“The Saudis are wisely taking their limited resource and maximizing gains on the price increase “upside” and minimizing “losses” on the price decrease “downside” by decreasing production.”
Exactly. They are doing what any other manufacturer does. Increase supply when demand (prices) goes up, and decrease supply when demand (prices) goes down. I don’t see why one has to resort to some premeditated plot for an explanation. Seems like simple economic principles to me. My company and your company would do the same thing. I think you are confusing cause and effect here. The Saudis aren’t intentionally causing the demand (price) collapse – they are responding to it by lowering output. Otherwise they just pump oil into storage tanks.
“When the price of oil becomes obscene and demand slackens and oil drops to $50 a barrel, they cut back production.”
OPEC can not simply set the price of oil to some desired figure. Go check the historical price of oil:
What do you think OPEC was doing from 1986 through 2004? You’re suggesting that Saudi Arabia was producing let’s say 7 million barrels of oil per day for 18 years at a $15-20 price discount to the early 1980’s to counter some imagined alternative energy developments. That’s close to a trillion dollars. I’m skeptical.
“Since oil is their “cash cow”, they want the highest price the market will bear. “
OPEC knows, from its experience in the 1970’s embargoes, that extortion of oil importers is not a good long term strategy. They learned it’s not good business sense to send your customers into a recession. Look at the western response in terms of energy efficiency and increased exploration since the 1970’s: most countries now use about 50% of the oil they used in the 1970’s on a per GDP basis.
Sure, it would make sense for exporters to goose the NYMEX. But it would make equal sense for importers to degoose it. Why do you assume the goosers always prevail?
Do you have some specific, and proven, examples of how this manipulation might work? I listened to a Deutsche Bank speaker a little while ago discuss the oil futures market, and he was very dismissive of such ideas. I don’t say it’s impossible, but I sure haven’t seen any convincing evidence.
I’ve also looked at recent prices for a lot of other commodities and have seen price behavior similar to oil’s over the past few years. We were in a commodity bubble last year that impacted most commodities in a similar way. Either all were goosed similarly, or all were market driven, or oil alone is subject of manipulation. I think this is a case for Occam’s Razor. Normal (but possibly irrational in last year’s case) market forces seem like an adequate explanation. The same forces that gave us the dotcom boom and the housing bubble.
“What do you think OPEC was doing from 1986 through 2004? You’re suggesting that Saudi Arabia was producing let’s say 7 million barrels of oil per day for 18 years at a $15-20 price discount to the early 1980’s to counter some imagined alternative energy developments. That’s close to a trillion dollars. I’m skeptical.”
Keeping prices artificially low or selling below cost might be called “dumping”. Do I think that OPEC is really capable of something like that ? Yes. After all, these are the same folks that gave us the “Oil Embargo” If I am not mistaken the Saudi Oil Minister said exactly that. They were going to drop the price of oil in response to conservation efforts and to forestall any movement away from oil.
I will re-visit the film if I can find it and get an exact quote. If I am wrong, I will retract what I said.
Just finished watching a two hour session from the OPEC conference, Session 3. O’brien from Chevron had some interesting things to say, O’brien says outlook a bit cloudy for crude supplies but natural gas supplies look pretty good. We need the equivalent of three Saudi Arabia’s in crude by 2015 says O’Brien. Half of the world’s top 15 oil producers are in decline.
They also had an hour long session “de-bunking” the bio-fuels.
It seems that the fine, upstanding members of OPEC have suddenly become concerned over the effect that bio-fuels may have on world hunger.
The Sausi Oil Minister also took a few swipes at the bio-fuels:
We frankly court disaster if these supplemental resources on which such high hopes for energy security and sustainability are pinned do not fulfill the high expectations. While all viable energies will ultimately have a role in meeting world demand, many of these sources are either in their infancy or face too many unresolved sustainability issues to serve as more than supplemental resources for some time. Just as the oil industry needs a long-term horizon, so do many alternatives.
In years to come, if traditional energy supplies should prove inadequate because capital expenditure was curtailed due to unsustainable prices, unreliable indications of future demand, or hopes for a substitute for oil cannot deliver, such a supply crunch would be catastrophic.
“Court disaster.” “Catastrophic.” “In their infancy.” These are logical statements for someone who represents the Saudi oil industry, but it sure sounds like someone is working hard to dial down expectations for anything that threatens the dominance of oil.
THAT, in a nutshell, is why I bought a “flexfuel” car. I cringe to think that a dollar of mine could be going to those people.
From: "Addicted to Oil" narrated by Thomas Friedman.
From a transcript of the film"
For those of us who remember the oil crisis of the 1970's there's an unmistakable sense of deja vu. Back then the price of gasoline skyrocketed and it led to a burst of innovation in alternative energy and fuel efficiency. In fact from 1977 to 1985 our oil imports from the Person Gulf fell 87%. And our total consumption dropped 17%. We did so well it caused an oil glut and OPEC oil ministers had a ready response.
(camera cuts to William Mcdonough)
William Mcdonough (Founder, McDounough & Partners:Environmental Design):
"In the 70's Sheik Yamani speaking for OPEC in London said:
"We will drop the price of oil, destroy those investments on Wall Street, and then put the price of oil back."
Which is exactly what they have done every single decade.
So what's different this time? A lot. Islamic terrorism has changed the geopolitical equation, and petro-dollars are now funding networks of Islamic militants.
Interesting post on Friedman.
Also different this time is our huge reserves of natural gas, thansk to the Haynesville discovery and others. We have 120 years and counting. To paraphrase a certain set of banditoes, “We don’t need no stinking oil.”
CEO of Chevron, O’Brien thinks Nat. gas reserves look pretty good. I just saw a motorcycle “a chopper” made by Orange County that uses Nat Gas. It’s a “one-off” deal, a special project, but you get the idea.
For everyone who is hopeful about Natural Gas Vehicles here is a book to read:
"Paving the Way to Natural Gas Vehicles", by James S. Cannon — published 1993.
That's right. Published 16years ago, very excited about the potential for NGVs, based on the prior half-century of extensive use in places like Italy, Russia, and New Zealand. 16 years ago.
Not trying to rain on the parade here. Simply observing the history — which shows that there are a lot of obstacles to NGVs as well as a lot of potential benefits.
Two of the obstacles:
(1) the "Chicken & Egg" problem of which comes first, the filling stations or the NGVs? No-one wants to buy an NGV until the stations are there across the country, yet there will be few stations until there are lots of NGVs.
(2) the woman we have all seen at the gasoline pump, cell phone in one hand and gas pump in the other. Do you want to be on the same side of the street as her when she is handling a 5,000 psi high pressure gas line?
Full disclosure, I read Mr. Cannon's book back in 1993 when it was hot off the press. At that point, I was very enthusiastic about NGVs and thought I saw a business opportunity related to them, in which I sank a lot of time & effort. So did many others. Sunk costs.
And while we are talking about relevant books, try this one:
"Victory: The Reagan Administration's Secret Strategy That Hastened the Collapse of the Soviet Union", by Peter Schweizer (1994)
The short version is that the Saudis had been trying to defend the price of oil almost single-handedly during the early 1980s — cutting their production from ~10 Million BOPD to ~3.5 Million BOPD.
President Reagan convinced the Saudis to flood the market — which turned out to take actually a rather minor increase in Saudi production. This cratered the price of oil around the mid-1980s — denying funds to the Soviet Union at the very time they were trying to compete with ballistic missile defense. Exit (eventually) the USSR.
In exchange, the Saudi royal family got a promise of US protection from all enemies, foreign & domestic. Later renewed by President GHW Bush, and extended to the Kuwaiti royal family. Hence Desert Storm.
Note that, if Mr. Schweizer's story is correct, the destruction of the US domestic oil industry by low oil prices in the mid 1980s was collateral damage from the ending of the USSR. Kind of like Churchill not intervening to stop the German destruction of Coventry in WWII — collateral damage from keeping secret the success in breaking the German codes.
Welcome to the club of failed business ventures.
And the woman with the cell phone and the gas pump? You forgot to mention the cigarette in her mouth.
Still, you forgot to mention what happened since 1993—oil prices sank and sank some more, hitting $10 in 1998-1999. That killed off a lot of alternatives.
What I am saying is that if oil ever stays above $100, we will see rapid acceptance of fleet NG, truckers and busses. The singles will come later.
Who bought the first fax machine, when there was no one to fax to? Then, you wake up one day, and everybody has a fax machine.
Now, the same with e-mail. Sure cars cost more money, but the day you fill up for $5 a gallon, and the NG is doing $1.00 is the day you tell your local gas station guy, “Hey, how about installing a NG pump?”
No, not a panacea. Yes, takes more time to fill up, and you have to fill up more often.
But, it is better than walking. Burns cleanly. Destroys any doom scenarios. They say a PHEV-NG car is not practical, as both NG and battery take space. So likely, fi you go to NG, you will have to fill up more often. But I am sure the high mpg cars can be built.
Reagan destroyed the US oil industry? I think our whole foreign policy is geared to destroying US industry. Domestic policy too.
Overall I agree with your view that natural gas is in for some rough sledding. However, there are opposing points of view.
First, the Haynesville (and offshore Gulf of Mexico) needs about $6/mcf to really be attractive. So a prediction that the prices are going to crash because of the Haynesville is in effect the opposite prediction: it’s a prediction that prices will rise to $6 or so. It’s a self correcting mechanism, exacerbated by the fact that gas comes on line, and declines, relatively quickly.
Second, Bloomberg reports that “AMP Capital Investors, with $95 billion under management, is selling oil futures to buy natural gas contracts in anticipation of an “imminent” price spike. “
AMP cites the oil/gas price ratio in terms of ($/bbl)/($/mcf). For a long time that ratio hovered around 6. A few years ago it was hitting 12. Now it’s almost reached 19. Are oil prices too high, or gas prices too low? AMP is betting on the latter. My bet is on the former. Besides the Haynesville, there are other relatively underdeveloped gas giants like the North Slope and Qatar LNG looming out there.
Consider these two periods:
Boom = 1980-1985
Bust = 1986-1990
Let’s look at the record from the BP Statistical Review, figures averaged over the Boom and the Bust periods.
Oil prices DOWN 44.0% (by $13.91)
Consumption UP 8.0% (by 4.73 mmbopd)
Saudis DOWN 16.4% (by 1.11 mmbopd)
OPEC UP 6.5% (by 1.33 mmbopd)
Non-OPEC UP 11.7% (by 3.03 mmbopd)
Global UP 7.1% (by 4.2 mmbopd)
Who flooded the market?
Saudi production fell in every year of the Reagan term except two: 1986 and 1988. Their production did not rise significantly until 1990. Saudi production fell by over 50% between 1981 and 1983. Where does the charge that they flooded the market originate? They did open the taps in 1986 to discipline their OPEC colleagues, who were cheating on quota, but I don’t see any evidence that this was a long term strategy to hook the world on oil. Price weakness in the late 1980’s can more simply (without the need for conspiracy theories) be attributed to global production increases roughly meeting demand growth, even as Saudi production fell.
Following the Bust, from 1991 through 2000, Saudi production rose 7.6%; global production rose 14.9%. Global consumption rose 14.2%. Prices were flat (apart from another bust in 1998). Rather than some Saudi plot, it was western production more than keeping pace with consumption that kept prices down in the 1990’s.
From 2001 through 2006, Saudi production grew by more than the global total, but prices increased anyway.
Alternative energy research has been active for decades. Apart from the data showing the charge is false, to suggest that the Saudi government would wager hundreds of billions of dollars on the hope that lower oil prices might impede some research (knowing it wouldn’t stop all research)… well, that seems like a very foolish decision to me. The most promising research would tend to survive, if nowhere else in universities and governments. The incentives for a competitive alternative source of energy are enormous. If a breakthrough occurred anyway, what would you as a ruler of Saudi Arabia tell your people, who had just lost a trillion dollars on a 20 year bet?
Your quote from Yamani in the 1970’s sounds like bluster to me. At that time, OPEC was indeed hostile to the west. They were using oil as a political weapon (before they learned that that was not a very good strategy, see above statistics). If you were a judge, would you find OPEC guilty now in 2009 based solely on such a comment? The data does not support it, and a lot has happened since the 1970’s.
The other comments on catastrophe and so on are nothing that a number of commentators have not said already (including RR): energy policy based on underinvestment in oil, riding on the wish that some new alternative energy will appear just around the corner, invites future disaster. I didn’t read it as a threat. I read it as reasonable advice.
To be sure, OPEC is acting foremost in its own self interest. It’s not an altruistic organization. But I believe that OPEC has recognized that its interests are best served by having healthy customers who can support higher oil prices, but not so high as to drown them. I also believe that there is a huge logical leap between observation of OPEC’s self-interests and therefore a conclusion that they are trying to destroy alternative energy research, especially when simple economics can explain past events much more easily.
The Oil Embargo
(from Wiki biography of Yamani)
“Following progress with Arab-Israeli disengagement agreements, a decision was taken to end the (oil)embargo, which was formally lifted on March 17.
Saudi Arabia continued to push for price reductions from the $11.65 level, opposed by other OPEC members. This increasingly became seen as a pro-American stance by the other producers although defended by Yamani as a safer option for the world economy. Saudi Arabia has also been criticised for using its position to force its own interests, as a lower price enables the country to keep a high market share and
DISCOURAGES RESEARCH INTO ALTERNATIVE ENERGY SOURCES, SUITING THEIR LONG TERM PRODUCTION CAPACITY.”
As Sheikh Yamani said:
“Technology is our enemy because technology will create alternatives to oil.”
“We will drop the price of oil, destroy those investments on Wall Street, and then put the price of oil back.”
Yamani was Saudi Oil Minister from 1962 to 1986, helping to construct Saudi oil policy for a period of 24 years. He was also an OPEC Minister for 25 years.
Anonymous armchair261 said…
Consider these two periods:
Boom = 1980-1985
Bust = 1986-1990
Thanks for your pains-taking efforts. I will go over the figures.
Regardless of what Yamani said back in the 1970’s and 1980’s, nevertheless the historical data since then strongly suggests that the Saudis did not in fact flood the market to cause price to go down.
The Saudis did, and still do, support more moderate prices than many other OPEC members. They recognize that practicing extortion on their customers will
1) reduce oil revenues – production and price – when those customers go into recession;
2) through high oil prices in effect subsidize competing oil companies around the world, and
3) and yes, accelerate the development of alternative energy sources and conservation.
I would say that #1 and #2 are much stronger, more tangible, and more immediate incentives than #3.
This is a long term strategy. Does it therefore follow that Saudi Arabia flooded the market intentionally to bring down prices? That therefore #3 is their key strategic driver? If so, then you might wonder why their 2008 production increased from January to July, peaked in the same month that prices peaked, and then fell through December. They were growing production into higher prices, and pulling back when prices fell. This is in direct contradiction to your thesis. The general public perception is that OPEC squeezes supply to drive up prices, and then floods the market to drive them down, in a plot to throw elections or throttle alternatives… or something. Yet the record shows the opposite is a better description. They behave really like other oil producers. They drill more wells and develop more reserves when prices are high; they reduce activity when prices fall.
I think the Saudis are trying to walk the fence. They see that $1000 per barrel would be disastrous to them and the world. They see that $1 oil would be giving away their country’s resources. So they “aim” (read, would prefer) for a realistic middle ground price. They’re looking out for their future, but they also need a healthy global economy to prosper. Whether we like it or not, it’s their oil and not ours. If I were them I’d probably do the same thing.
This is a long term strategy. Does it therefore follow that Saudi Arabia flooded the market intentionally to bring down prices?
Yamani won. His strategy worked. By the time Reagan took office in 1980 the U.S. was already “back in the OPEC fold”
The energy initiatives instituted by Carter were already ancient history. Yamani accomplished exactly what he said he would. With supplies restored, he effectively killed off interest and investment in alternative energy.
There was little need to “subvert” alternative energy in the two following decades by dropping prices. It was already effectively “dead”.
Why don’t we see any correlation between prices and alternative energy “threats” ? The answer is simple. Alternative energy was effectively dead for two decades.
Yamani (who was one of the architects of the Arab oil embargo) was at least “honest” about what he was doing. I have a grudging admiration for the man.
He was by far the most outspoken and interesting of the Saudi Oil Ministers. He was at one time kidnapped by the terrorist “Carlos the Jackal” and was almost assassinated.
While OPEC oil prices may seem to follow the classic supply/demand/price curve, they do not always do so and often are the result of geo-political pressures and Arab hegemony (i,e The Arab oil embargo). There is also squabbling within OPEC. Like the old saying goes: If you get a dozen Arabs together, you will have two dozen opinions.
True, the Arabs don’t want to “kill the goose that laid the golden egg”. On the other hand they are free to set prices according to their own agenda.
Kinaudrach had an interesting post concerning a book he read about Reagan where Reagan supposedly made ” a deal” with the Saudis and the Kuwaiti Royal family whereby oil supplies would be kept open in exchange for perpetual military care and defense from the U.S.
Do I think the Saudis might still slash prices in response to real or perceived threats ? The answer is” “Of course.”
Yamani won. Alternative energy was effectively tabled in the U.S. for 20 plus years. No need to keep prices artificially low to fend off potential threats. There was no real threat to the dominance of oil.
“Yamani accomplished exactly what he said he would. With supplies restored, he effectively killed off interest and investment in alternative energy.”
Not true. Investment was reduced but not killed off. Investments were and are still in place. Your assumption is that this gamble, even if it worked, was more valuable to OPEC than 20 years of production with an additional $15 revenue per barrel. I would question this, and given the thriving alternative industry now, I would question whether after all that pain Yamani really “won.”
And, according to your model, why have prices almost doubled since January?
“On the other hand they are free to set prices according to their own agenda…… Do I think the Saudis might still slash prices in response to real or perceived threats?”
The Saudis don’t set prices. OPEC doesn’t “set” prices. They try to influence them. I think history has shown, since the early 1980’s, that the market trumps OPEC. They slashed production in the 1980’s, and still prices collapsed. They ramped up production over the past few years, but prices still rose.
“…Reagan supposedly made “a deal” with the Saudis and the Kuwaiti Royal family whereby oil supplies would be kept open in exchange for perpetual military care and defense from the U.S.”
Saudi oil production declined in 6 of the 8 years of Reagan’s term. It was 44% lower when Reagan left office than when he entered it. You confuse the concept of security with the concept of flooding the market to lower price.
John, I think you reason in a way that is very common when it comes to the oil industry. The general public tends to completely ignore historical data and instead mold observations to fit pre-conceived ideas and biases. Rumors and anecdotes are magnified, data is ignored or forced to fit conspiracy theories, when market explanations are perfectly adequate. Guilt is assumed, rational motives are dismissed. We can agree to disagree on this one.
The second most-popular contract for July settlement is the right to sell at $40, with 23,254 outstanding. There are almost twice as many positions that profit if oil falls as low as $40 a barrel as there are bets on a rise to $70.”
The second most-popular contract for July settlement is the right to sell at $40, with 23,254 outstanding. There are almost twice as many positions that profit if oil falls as low as $40 a barrel as there are bets on a rise to $70.”
I agree with you. Why are there
so many “short sellers” while inventories rise ?
Actually, crude oil stocks (in the US anyway) have been falling for 4 weeks in a row, and are now about 3% below their May peak.
But I'm not sure I understand your question. In any industry, rising inventory (in this case from production growth outstripping demand) means downward price pressure. Crude oil inventories in the US had been rising relentlessly since July 2008. I think if I had a lot of money to play with, I might be shorting oil too in the short term.
"I think if I had a lot of money to play with, I might be shorting oil too in the short term."
Yes, I agree.
The fundamentals seem to indicate a decline in price. The only thing I can think of is that perhaps those betting on a rise in price are figuring on a summer-time rise in gas prices ?
The summer time rise in gas prices is predictable and therefore I don't think has too much impact on traders other than some normal seasonal effect.
I think what's more important are factors like perception of future demand in an improving global economy, increased health of the Chinese economy, 4 week drop in US oil stocks (until this week – note price drop today), and probably most importantly, the decline in the value of the dollar.
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