Speculation and the Price of Oil

Some observers think that speculation is the cause of the escalating oil price – an escalation that, as I have pointed out in many lectures and publications (e.g. 2007), is capable of cutting the ground out from under the international macroeconomy. Put another  way, these ‘pundits’ (= self-appointed experts) believe that we are dealing with a bubble, which is a price movement  unsupported by fundamentals.

Among the gentlemen claiming that excessive speculation is responsible for the bad oil news being experienced by the buy side of that market, are the billionaire financier Mr George Soros (who admits that he is not an oil market expert, and that the oil price bubble has strong fundamental underpinnings), the influential television personality Mr Bill O’Reilly, and Lord Megnad Desai, who is a professor of economics at the London School of Economics. Many years ago Lord Desai and myself had a disagreement about the price of copper that  terminated in  the select learned journal Econometrica. I don’t recall  how the referees ruled on that dispute, although I do remember that with copper – as at present with oil – I took great care to avoid making embarrassing mistakes.

Nor do I intend to make one here. The steadily rising oil price that we have witnessed of late is basically explained by the relation between  ‘flow’ supply and ‘flow’ demand, where the term ‘flow’ will be explained in the next  section. What has happened – as you know as well as I – is that ‘normal’ demand is tending to  outrun ‘normal’ supply, causing a fundamental supply-demand imbalance.  What you may not know is that this keeps inventories below the desired level, and leads to the earlier rather than later production of a certain quantity of oil, although ‘later’ could reduce the present value of  intertemporal  production costs by allowing a less intensive exploitation of high cost deposits. (Among other things, this might lower the rental rate for some production equipment, as well as reduce ‘overtime’ costs  for  employees.)

Almost as important, the financial market is now playing a more meaningful role than usual in the forming of  (oil price) expectations, which is largely due to the  price of this crucially important commodity rising higher and/or faster than the great majority of observers thought possible. The result is the oil price being observed and thought about much more intensely than before. This mention of  very close observation brings to mind Werner Heisenberg’s uncertainty theory which, employed in financial economics rather than physics, means that false signals are often generated.  For instance, when the influential oil investor T. Boone Pickens stated that oil could surge to $150/b, prices immediately moved higher. This display of respect for Mr Pickens’ acumen was impressive, although the term ‘over-reaction’ immediately flashed through my brain.

I don’t know if Lord Desai is familiar with enough academic energy economics to understand what is going on in and around the oil market today, but I am sure that George Soros has a superior insight, and Mr O’Reilly is probably ready to claim that he deserves to be honoured  for taking an interest in the topic. For instance, in l992 Mr Soros was responsible for a magnificently correct bet that the British government would be forced to devalue sterling. Ostensibly, Soros’ Quantum Group of hedge funds had ten billion dollars on the table, and London wine-bar gossip at the time (and later) was prone to claim that  a billion of the resulting  windfall  ended up in Mr Soros’ pocket.

Mr O’Reilly, of course,  does not operate at those heights, but not too long ago he blamed “little guys in Las Vegas” for high oil (and motor fuel) prices. As Tina Turner might say, ‘what’s Las Vegas got to do with it’, in that he not only was completely wrong,  but expressing himself in that carefree manner would hardly endear him to more sophisticated members of his congregation.  Similarly, Senator Joseph Lieberman was considerably out of his depth when (in l990) he asserted that “It’s startling to think of oil prices being set by young guys on the floor of the exchange screaming at each other on the basis of rumours’. Actually, it is so non-startling that ten years later, when Lieberman was Senator Al Gore’s running mate in the U.S.  presidential  election, I forgot my allegiance to the Democratic Party and didn’t bother to exercise my franchise.

A more important person on the oil price scene is Abdullah el-Badri, secretary-general of the Organization of Petroleum Exporting Countries [OPEC], who last month summarized his thinking on the oil price by saying “The market is really crazy”. In a broad sense this is absolutely correct, because much of the craziness originates with politicians and civil servants in the oil importing countries, who until recently believed that OPEC would never get its act together, and as a result the oil price was destined to go south rather than north. The chairman of BP (British Petroleum) offered some quaint remarks on this dilemma recently in Stockholm, saying that “the (present) oil price has an influence on the world economy that is not positive. To deny this is silly.”  As Dave Cohen, who writes the weekly column for ASPO-USA has pointed out though, the denial club still has many members.

The Pricing of Oil: What They Should and Could Have Taught You in ECON 101  

What I want to do now is to  systematize, on a very elementary technical level, the most important aspect of short-run pricing in the oil market, even if it has been claimed that oil traders are altering their views and focus on the oil markets, shifting from short-term to long-term. This is not entirely false. You already know something about this topic if you are a careful reader of the financial press, or have watched Bloomberg and perhaps Fox News instead of the daytime soap operas.  In elaborating on this matter the present  section also contains an original diagram that I forced on  first year economics and finance students in Sweden. It  taught them something  about short-term commodity pricing, which in some cases enabled them to feel a cut above their colleagues.

A few years ago, in the Financial Times (November 4, 2004), the commodities page contained the following information. “Crude oil futures moved lower in volatile trade, following a large increase in U.S. commercial crude inventories, signalling that the oil market is well supplied.” Let’s put this statement in equation form: the change in price (Δp) is a function of the difference between desired inventories [DI], and actual  inventories [AI]. If that equation is linear, then we could write Δp = λ[DI – AI], where  λ (or ‘lambda’) is a constant, and Δp (‘delta’ p) is the change in price.  I wouldn’t be surprised if I could explain this simple relationship to the students at the secondary school I attended in Chicago – which, at that time, was one of the worst in the U.S.  

Both CNN and Bloomberg – especially the latter –  constantly  mention inventories, but without explicitly referring to a relationship of the type presented above. That expression is also completely absent from mainstream microeconomics textbooks,  and the same is true of  most books on energy economics. This is one of the reasons why many academic discussions of the oil and gas markets are without any scientific value.

We are now going to work our way up to the above equation again, and in the course of doing so look at my diagram.  This diagram, which at first glance may appear difficult, is actually extremely simple. It is so simple that it should be  examined by all readers, and become a part of their conversational equipment! I can mention that graduate students in my course in oil and gas economics in Bangkok who could not reproduce and thoroughly discuss this diagram in the final examination were assured of a failing grade, and a similar promise was made to my first term, first year (i.e. Econ 101)  students at the universities of Stockholm and Uppsala.

To begin however, I  slightly extend the above discussion. Oil inventories (i.e. oil stocks) are a stock concept : they are defined in e.g. barrels, and measured at a certain point in time, but they lack a time dimension. They have been designated  AI and DI. On the other hand, current production (s) and demand (h) are flow concepts: they are defined and measured in terms of a certain unit of time (e.g. million barrels of oil per day (= mb/d).  Microconomics 101 deals almost exclusively with flow variables.

Stocks and flows are closely related, since the change in stocks is determine by the net investment (or disinvestment) in stocks during a given period, or s – h:  i.e. flow supply (s)  minus flow demand (h).  Moreover, in this model we define that famous concept equilibrium  as the situation where desired stocks [DI] are equal to actual stocks [DI = AI], and the resulting ‘state of rest’ (i.e. equilibrium)  is characterized by Δp = 0.

But if the stock market is out of equilibrium, e.g. DI > AI (because of expectations about present or future demand), then in the flow market we must have s > h in order to close the  [DI – AI]  gap. To obtain s > h,  price must increase: the increased price raises flow supply (s) while decreasing flow demand (h). The  size of  (s – h)  says something about how rapidly inventory holders want additional inventories. Hopefully, in the analysis,  DI will eventually equal AI, and Δp = 0.  Please note that the equation,  Δp = λ[DI – AI], or  p_t+1 – p_t =  λ[DI – AI],  is a simple linear relationship between excess stock demand and the price change, assuming λ is a constant. Now let us look at the diagram.

The current (or flow) supply (s) goes into stocks (i.e. inventories) and current (i.e. flow) demand (h). Price is formed by the relation of  actual stocks [AI] to desired stocks [DI], with the flows playing a secondary (but important) role. 

The equilibrium expression is AI = DI, and when this situation prevails, s = h, and price is constant (i.e. Δp = 0)! Put another way, a stock equilibrium implies a flow equilibrium, while a flow equilibrium does not imply a stock equilibrium. In this type of model expectations are very important because of their influence on desired stocks, and in the real world expected prices are undoubtedly more difficult to describe than via the simple implicit expression shown in the figure – i.e.  p^e = f(p) –  but right or wrong it is these expectations that are and have always been a key element in determining the oil price, however it was only when the oil price moved past $100/b that they were given their true weight in the scheme of things.

Students of electrical engineering should immediately note that the diagram (with its feed-back ‘circuit’ p↔DI)  takes on the appearance of a servomechanism, in which case very high volatility is perfectly natural. This volatility is one of the reasons why futures and options markets for oil are so important, because they have permitted buyers and many sellers  to hedge price uncertainty. For example, even though price spikes might be narrow, there are times when they can ruin  unhedged buyers or sellers.

That immediately insinuates that a few comments about oil futures markets are justified.  In l980 the volatility of physical oil prices became so large that a futures market became attractive to speculators as well as dealers in physical oil.  For instance, , there was a decreased propensity by some categories of  the latter  to hold inventories as a precaution against having to buy in a rising market. Instead, individuals and firms requiring oil in the future bought a number of futures contracts, which (as explained in my textbooks)  enabled them to lock in the existing oil price. Later they went into the spot market to buy their oil, while at the same time making an offsetting sale of futures contracts. The markets for oil options and oil futures-options also functioned well. Without going into detail, the presence of these  derivative markets contributed to restraining rather than increasing the price of oil, since they  reduced the risks faced by buyer and sellers. They upgrade market efficiency by providing an increase in the quality and quantity of information and, as noted once by Professor Lester Telser, “they facilitate trade among strangers”. Well, so do some of the bars near the university where he teaches, but perhaps that subject belongs in another scientific discussion.

Then why has the oil price been  lingering around $130/b for the last few weeks?  To begin, it is not “little guys” in Las Vegas or big guys at the New York Mercantile Exchange (Nymex) or the International Petroleum Exchange (in London) who are responsible,  but changes that have taken place in the actual  movement over time of  [FLOW] supply and demand, as well as the expected movement. To be precise,  expectations about the long run price are greatly influenced by the rapidly increasing demand of China and a few other countries,  as well as the steadily increasing demand of many other countries (to include countries that are large producers and exporters of oil), and movements in short run prices.  The latter now helps to emphasize the slow growth of readily accessible conventional and non-conventional oil supplies – the simple fact that the supply response is no longer as flexible/spontaneous as it once was.

Barbara Lewis, in the International Herald Tribune (May 23, 2008), says that the change has been indicated by “record-high oil prices for (futures) contracts stretching out to 2016”. This statement is incorrect, because anybody who possesses a practical knowledge of the futures market would make a point of avoiding contracts of that maturity (8 years), for which there is hardly any liquidity, and therefore the price of the contract might be very unfavourable when the position is closed.  This matter of liquidity and maturities brings should never be overlooked by serious students.

Speculation or Fundamentals?

Speculation means that there are some aspects of a bubble present. By way of  broaching this subject it might be useful to consider three famous bubbles, of which two were all bubble, or ‘extreme’ phenomena,  and the third largely but not entirely bubble. I am thinking of the South Sea Bubble (‘An unnamed venture that will bring great riches’), and the Tulip Bubble (‘Buying and selling simple tulips for fantastic prices’) for the first two, and the 1929 stock-market crash for the third. My international finance book (2001), and GOOGLE can tell you about these. The bottom line in all three was mass irrationality and excess  greed that the market eventually  identified and punished. This suggests that in the long run, on average, markets are more intelligent than individuals, and because of technological  progress the long run is now much shorter.

What is going on in the oil market just now is no bubble or scam, because if it was the market would have found out, and the bubble component of the oil price would have been liquidated. Instead, oil should be judged scarce on the basis of scientific predictions of the amount that will be demanded at the present time and in the future,  as well as the  optimal behaviour of the major oil producers – by which I mean ‘Big Oil’ as well as the big producers in e.g. the Middle East. It is easy to give the illusion of an unstoppable ‘bull’ market if there is a deluge of buying at the right time, as has been the case during the first half of 2008, but  if  oil  prices did not feature an extensive fundamental component (or ‘base’), then it should be expected that if demand falls, as has occasionally happened, the price would rapidly  decline.   The opinion here is that if  buying slackens, the producers of oil in the Middle East have the means and probably the intention to keep the price up by ‘adjusting’ supply.

They definitely have the means, but suppose that in reality they do not have this intention. Speaking as a teacher of economics and finance, I would advise my political masters to always assume that they do have this intention until they obtain irrefutable proof that such is not the case, because the kind of economics that I study and teach leads me to insist that, theoretically, adjusting supply in such a manner as to keep the dollars rolling in makes all the sense in the world.

In claiming that there is no bubble or scam here, I am also claiming that there is no irregular amount of speculation in this market.  There is instead an evolving supply crunch, that features a disappointing non-OPEC supply.  But if this is so, why would people like George Soros and (Professor) Lord Desai come to another conclusion?

George Soros already has many billions of dollars, and if he makes the right bets on oil, he can easily  pick up some extra lunch money. The right bet that I am thinking of is the one made after convincing  other players that insightful speculation by high achievers (like themselves) could result in  amassing more ‘green’ then, for example, the  confused amateurs who rushed into Nymex a few weeks ago to buy long-term contracts for reasons that a veteran psychologist would find it hard to comprehend. As most of those punters will soon discover, their net  worth might never  measure up to that of Mr Soros and his colleagues, who bet fundamentals rather than rumours or headlines.

What about Lord Desai?  In a column written for the Financial Times, he informs his admirers that the oil market bubble must be “pricked” before it results in some ugly macroeconomic damage. His recipe for dealing with this issue is for the (futures) market’s clearing house to increase  margin – or ‘security deposits’ –  for all transactions in order to squeeze open interest, which he sees as a measure of speculation,

Normally I would hesitate before commenting on this suggestion, but not on the present occasion. It is theoretically possible – though unlikely – to  have a very high open interest in a market without any speculation at all! Furthermore, ceteris paribus, squeezing open interest would reduce liquidity, and thus could make it more difficult for traders in physical commodities (i.e. non-speculators) to hedge price risk. Desai is also upset by the growing tendency to deal in contracts with a maturity of e.g. 8 years. I can’t understand why, because on the basis of the open interest statistics now available, a market with an 8 year maturity is almost totally illiquid, and therefore is strictly for chumps. The oil futures market was and is a short term hedging and speculation tool.

In a Business Week article (January 21, 2008), it was stated that six Gulf States control sovereign wealth fund assets of about $1.7 trillion – or as much as all the hedge funds in the world.  I consider the importance of hedge funds largely a dramatic myth where influencing the global macroeconomy is concerned, however I am prepared to admit that something that cannot be disregarded is the ability of money generated in that part of the world to influence the price of oil.  This is not the place to provide a comprehensive resumé of that issue,  although I will say again that  (ceteris paribus) the higher the oil price, the greater will be the pace of diversification (into e.g. refining, petrochemicals and tourism) by the major oil and gas producers of the Gulf (and Russia); and the more rapid this diversification, the more modest will be the intentions and effort  to produce and export larger amounts of oil and gas.  For readers who intend to make a thorough study of oil market fundamentals, this  should never be forgotten.

Final Statements

“I don’t think this is about financial investors,” the U.S. Treasury secretary said a few weeks ago. “It’s about long-term supply and demand.” Analysts at Barclays Capital and the Commodity Futures Trading Commission think likewise.

And, as quoted by Barbara Lewis, Olivier Jacob of Petromax said that “The fundamentals rule, but the question is whether the futures market should reflect the fundamentals of the next few months or the next few years.” 

It may be a question to him but not to me: after six months, and often less, the decline in liquidity in a futures market is precipitous, and longer maturities should be avoided.

But recklessness and ignorance aside,  the fundamentals have always ruled in paper (i.e. futures) as well as physical markets. Let’s put it this way: the professionals – unless they have ulterior motives – say fundamentals, while the amateurs and conspiracy theorists  say speculation. The reader can take it from there.

References

• Banks, Ferdinand E. (2007). The Political Economy of World Energy: An Introductory Textbook. World Scientific: Singapore, London and New York.
• ______ (2001). Global Finance and Financial Markets. World Scientific: Singapore, London, and New York.
• ______ (2000).  Energy Economics: A Modern Introduction. Kluwer Academic Publishing: Boston, Dordrecht, and New York.
• ______ (1980).  The Political Economy of Oil. Lexington Books: Lexington Massachusetts.
• Hicks, John R. (1939). Value and Capital. Clarendon Press: Oxford.
• Lindahl, Björn (2008). ‘Rekordpris trots fyllda oljelager’. Svenska Dagbladet  (Feb. 21)

Comments

[CLH:]

A very long post about something very simple --speculation. Everyone speculates and its not immoral but in the human gene. If you gas up tonight because you think gas will go up tomorrow, you are speculating. If you buy a house today instead of next year you are speculating.

What is stupid is when people get carried away and pay more then something is worth --thats a bubble. Its not immoral to pay too much but stupid. The value of oil is probably about half what it is now selling for now. Don't be a sucker and buy at the top.

2008 Jun 15 07:37 AM

[StoptheBS:]

Wow. So much technical data it must be accurate. Forget common sense. For the record, the oil market is not a free market - OPEC is a cartel that controls supply and influences pricing. What is a free market is the financial marketplace of commodity related products that can be invested in, and just like the share price of Google, when you have more buyers than sellers the price will rise - it's that simple. Go look at how much institutional money and hedge money now considers commodities (oil) the key asset class. Once again it's as easy as following the money. Windfall profits are not coming from the oil companies, check the speculators.

2008 Jun 15 07:49 AM

[SRT:]

If he's so smart, why is he a democrat?

2008 Jun 15 07:58 AM

[saifl:]

Check the CFTC report on oil Speculators have been addressed here but here is more
www.cftc.gov/dea/futur...
go down this and see Crude oil Light Sweet. Figures change every week. For the current week
218,3848 long contracts for speculators and 193,238 short contracts for speculators. That is a net long position of about 25,300 contracts. That is the amount the world uses in less than 8 hours. Do you really believe we can influence prices with that?
Trivia qt number 1: Which market has the largest net short position of Speculators in 2008?
Answer:Natural gas
What happened to natural Gas prices?
Went up by 70%. Outperformed even oil
Largest short position and went up 70%. How do you explain that?
Trivia qt number 2:
Since 2006 which commodity has had a very large net long speculator position and gone down by 40%?
Sugar. you know why? Because production always trumps speculation. World production increased creaming the speculators who were long.
Not convinced?
Trivia qt number 3.
which commodity has outperformed all others since 2002?
rhodium...up 2400%... and guess what no commodity futures market for Rhodium.
Till a year back Uranium was outperforming oil with a price increase of 2000% or 20 fold from $7 to as high as $150 a pound and they did not even have a futures market for it till recently. In fact the price peaked 3 weeks after the futures were introduced by Nymex.

2008 Jun 15 08:23 AM

[Jerbear:]

What did he say?

2008 Jun 15 08:35 AM

[haydete:]

"You already know something about this topic if you are a careful reader of the financial press, or have watched Bloomberg and perhaps Fox News instead of the daytime soap operas."

Gee, is that how you feel about the people you hope read this article? May the bubble to pop be your head.

2008 Jun 15 08:45 AM

[pachanguero:]

Very well done. Speculation is not the reason for the high price of oil. It is very simple. Demand and supply. But people love a boogieman to blame t on. Fear is the tool used by liberal and right wingers. Wait till that punk ass dip shit Obama gets his hands on the pie. Fear will rule.

Global warming is another scam that uses fear.
People are sheep.

2008 Jun 15 08:58 AM

[pachanguero:]

BTW, if the political fools blame speculators then they take the heat off themselves for not DRILLING and EXPLORING in our own country.

What a fools believes.......

2008 Jun 15 09:01 AM

[Kezorm:]

Excerpt from article:

"Speaking as a teacher of economics and finance, I would advise my political masters to always assume that they (the suppliers of crude in this case) do have this intention (maximize profit) until they obtain irrefutable proof that such is not the case, because the kind of economics that I study and teach leads me to insist that, theoretically, adjusting supply in such a manner as to keep the dollars rolling in makes all the sense in the world."

So, if the Saudi's do release an extra 500,000 bbl's/day, might that inspire other suppliers to restrict their outputs by comparable amounts?

2008 Jun 15 09:33 AM

[Semper Gumby:]

Crude will continue to climb in price. Strong demand, flat to shrinking supply, increased global money supply, geopolitical tensions, pension funds, Morgan Stanley and Goldman Sachs, etc... The best week for the dollar in three years yielded a mere $3 dollar pullback for crude oil. The West doesn't live an hour without touching something that is petroleum based. If oil is full of speculation then the NYSE or NASDAQ is as well. Equity holders speculate that earnings for XYZ company will be greater than last quarter. I have spent the last twelve years of my life serving as a Marine running off to every corner of world that has oil or gas deposits. Briefings usually focus on countries with Oil and Gas interest. I have done the math and doubters will still be there when oil is $500 / barrel.

2008 Jun 15 10:08 AM

[Merger Mania:]

Hopefully they will step up production of bio algae before oil reaches $500 a barrel. That is if the oil companies don't continue their fight against alternative fuel sources. The oil companies and auto makers did away with the electric car. Why? Because these corporations work in cahoots. Now big oil , auto makers, and investment bankers are working together to drive up the price of oil through speculation. Why are oil companies fighting like hell against alternative fuel sources? Because they want to keep the price of oil artificially high!!
The auto makers want us dependent on oil, so they can sell us bigger cars and suvs. There's more money to be made with great big
Hummers and Suvs. Who could make any money selling little piss ant cars for under $11,000? Big oil's long-term strategy is to keep us dependent on oil - and especially oil that is imported from the ME. The investment bankers want oil to remain artificially high in order recoup their losses from the housing and subprime fiasco. It's really no coincidence that oil started to skyrocket right after the
investment bankers started losing money with all these subprime writedowns. Bursting the speculation bubble is really key to lowering oil and gas prices.

2008 Jun 15 10:50 AM

[DIGGER:]

What I think I just read and am digesting is that there is (1) an ongoing shortage of oil & gas brought about by a more or less constant supply that can not meet increasing world demand(2) Speculators are ostensibly short term players, otherwise they would be investors(3) The industrial world had better find new energy sources PDQ, as the oil producers can readily adjust to supply and demand by turning off the pumps.

2008 Jun 15 11:06 AM

[cynic69:]

Right on Merger Mania! In addition to what you said our "friends" in OPEC don't need to export as much oil because they are making so much money at current levels. This is a pathalogical feedback loop that will gurantee that oil prices will continue to increase forever.

2008 Jun 15 11:26 AM

[cynic69:]

Digger - Its way too late to develop any alternative that will offset a meaningful amount light sweet crude. The oil lobbies have always put the cybosh on the development of workable alternatives. Read Kunstler's "The Long Emergency". He says that it will take 30 years of hard work by industry to make a dent in the 20 million barrels of oil we currently use everyday. In the mean time we can expect starvation, chaos and energy wars.

2008 Jun 15 11:37 AM

[Al Fin:]

We are to believe that oil jumps $10 in one day due to a sudden change in flow? No. A sudden change in f-e-a-r. Fear=speculation. Speculation=bubble.

Peak oil doobies believe that demand stays high regardless of price. In this speculative market, price threatens to stay high regardless of demand.

2008 Jun 15 12:39 PM

[Isnt_It_Jus...:]

Always be wary of people who cloud their argument with math. Suppose US oil refiners see demand destruction in the US and decide that oil prices going forward will drop for that reason. Then it makes no sense for them to import oil at current prices and they will allow inventories in the US to fall (as we are now seeing). US oil refiners believe that oil prices should be in backwardation and they are behaving accordingly. Inventory levels are controlled by the US refiner expectation for oil prices being in long term contango (in which case inventories will rise) or backwardation (in which case inventories will fall) It's really that simple and no math required.

2008 Jun 15 01:09 PM

[Dr. No:]

Banks was careful to cite himself several times in his lengthy and wordy piece of self-appreciation, pointing to other sources he likes. But why skirting around the testimonies of Masters and Greenberg, which in detail lay out the isssues in the factually uncontrolled commodity markets refuted all his theory? ICE/IPE and DME use the same legal loophole created in 2000 to allow Enron energy trading without FTC/CFTC/SEC supervision. A market without supervision is certainly trustworthy?

World assets under management increased by 50% since 2000, this money has to go some place and creates demand for new asset classes as old ones (stocks, bonds) are perceived as tainted. With GS & MS setting up commodity exchanges they kindly marketed those to their clients and demand for investable assets first created the CDO bubble and then the commodity and energy bubble.

If please someone would look at actual numbers of physical and financial/index speculators and their demand and supply, you would realize what is going on. You can overlay the dot.com, housing and CDO and commodity bubbles and will see the not so strange similarities.

That said, long-term, i.e. over the next 10-15 years we may see real issues covering the global demand. But if the increase in oil demand from China is roughly that of financial speculators trading on ICE/IPE/NYMEX etc., and as long as Morgan Stanley holds two entire annual wheat harvest, we are likely seeing other phenomena at play.

2008 Jun 15 01:22 PM

[OMG:]

This is the kind of article that people who understand what models are use to convince people who do not of some point they want to make, whether or not it is backed up by a corroborated model or not. If there was a scientific paper to demonstrate the utility of this particular model in this particular case, then it might be credible. But if not, this is no more useful than any other pundit's.

2008 Jun 15 03:12 PM

[User 210859:]

I don't see anyone one on the right track - crude oil is America's Natural Resource - it is Lifted at less than $20 a barrel. Oil companies then sell it to themselves at the market price - that is where their wind-fall profit is.

2008 Jun 15 04:38 PM

[barnburner:]

so is this headline:"UN chief says Saudi Arabia plans to increase oil production by 200,000 barrels a day" going to bear down oil prices and oil/gas stocks?

2008 Jun 15 04:40 PM

[ghamilton:]

Banks states what his diagram does not support.

He says, "The steadily rising oil price that we have witnessed of late is basically explained by the relation between ‘flow’ supply and ‘flow’ demand".

However, his diagram shows specifically that the difference between available inventories (AI) and demand inventories (DI) impact price, not the difference between supply flow and supply demand.

In fact, according to his diagram, price impacts flow supply and flow demand, not the other way around.

2008 Jun 15 05:21 PM

[Moses:]

It's funny, I hear all this talk about shortages but I have yet to hear about someone not being able to buy gas because there was a shortage. Alternative energy is here to stay and as time and technology progress it will supplement our oil demand more and more.

2008 Jun 15 09:28 PM

[farhad:]

psssssssssssssssss

whas that I is hear?

thats right. air leaking out of another bubble.

and the equation for it is f''(x-2y)=4X*1/2+EKt/V...

GO AHEAD. JUSTIFY

2008 Jun 15 09:59 PM

[farhad:]

explain this with your equation? Everyone says that the price of oil will continue to increase and oil will be the place to invest. If that is the case, I would think that the first people to invest in oil and oil companies would be the CEO’s and the VP’s of the oil companies. But looking at the insiders transactions posted on InsiderCow.com, all of the CEO’s and the VP’s of the big oil companies are selling their shares as if there is no tomorrow. Since January 2008, Chevron CVX insiders have sold more than $100,000,000 shares. $0 buy.
Transocean RIG more than $50,000,000 insider shares sold. $0 buy.
Schlumberger SLB more than $45,000,000 insider shares sold. $0 buy.
Exxon XOM more than $40,000,000 insider shares sold. $0 buy.
Halliburton HAL more than $22,000,000 insider shares sold. $0 buy.
Occidental OXY more than $20,000,000 insider shares sold. $0 buy.
Conoco Phillips COP more than $14,000,000 insider shares sold. $0 buy.
Apache APA more than $13,000,000 insider shares sold. $0 buy.
XTO Energy XTO more than $1,000,000 insider shares sold. $0 buy.
BZP more than $700,000 insider shares sold. $0 buy.
What gives? Don’t these CEO’s and VP’s want to make money like the rest of us?

2008 Jun 15 10:01 PM

[paso11:]

Its so simple: rampant demand from China, India etc, a lack of sufficient spare capacity to offset effect of rampant demand and, weak dollar.

Whats worrying is that the Saudi's have the latest oil extraction technology but are investing heavily in existing wells rather than new fields...how much oil is really left?

2008 Jun 21 06:48 PM

[rozebud55:]

When global oil production really starts to drop off, we'll slowly come to realize that oil has actually been UNDERPRICED for decades...

2008 Jun 22 10:57 PM

[Ron Nelson_:]

As the CEO of a solar startup in silicon valley and an interested oil investor (I hold about $200,000 of USO), I have been trying to dig down into the “fundamentals” of spot oil prices. As I understand it, the spot price we usually see in the press is for light sweet crude for delivery a month or so out (August is quoted today). I’m trying to figure out the profits pulled out by the “hands” that oil delivery contracts go thru along the way to consumption. My basic question is, what is the price that the actual producers of that oil charge when they enter into a contract to sell the oil that is then delivered in August by whoever is “holding” it? My assumption is the difference between this “wholesale” price of oil and the final spot market price before delivery is captured by the either speculators or actual consumers of oil who are protecting themselves against price runups.

2008 Jun 30 03:16 PM

[LCR:]

Who else is sick of academic "pundits" saying you should have learnt it in Econ 101? Just because you taught it to your students doesn't make it the only or correct view.

Truth is, if you believe the bubble / peak oil / fundamentals arguement strongly enough put your money where your mouth is and take a position in the market....otherwise just admit like the rest of us you don't know!

2008 Jul 08 10:17 PM

[fireball:]

this is odd to recieve this on july 10. the exchanges seem to be the ones getting hammered by all of this. they have not broken any laws or regulations. people are squealing so politicians are reacting. together the exchanges carry a big stick. i would love to see them swinging it at congress where much of the blame lies. it reminds me of reno and microsoft. you make products that need your products. how unfair in the socialist paradise.

2008 Jul 10 11:17 AM