Introduction to a Long Lecture on Oil

The world oil market is a very different thing today from what it was just a decade ago. The strength of global demand for oil has surprised just about everybody – except me, of course – while at the same time it has become clear that there is and has been insufficient investment in additional production capacity.

The core issue here is that it has become increasingly difficult to locate additional large deposits of oil, and as a result, the major oil producers consider it uneconomical to look as hard as their customers want them to look. Unlike many observers in the economics faculties of the larger universities, the executives of these firms have a comprehensive insight into the cost and risk that are associated with exploring and producing in marginal regions, and as a result they are paying more attention to the preferences of their shareholders.

This short article is the introduction to a long lecture that I gave at the Ecole Normale Superieure (Paris) a short time ago. Among the things, I attempted to make clear was that Saudi Arabia and some other countries have no intention of interrupting their diversification efforts by exporting more oil, since a greater export would decrease the price or growth in the price of oil. I also suggested that even if Iraq eventually conformed to the dreams of the International Energy Agency [IEA], their best efforts would be inadequate for bridging the (ex-ante) gap between demand and supply that I mistakenly thought would appear after 2010, but which may already be the case. It even looks like influential decision makers are ready to accept that only very large demand-suppressing price increases can keep the oil market in a semblance of balance, and contrary to the sort of thing that the financial press often wants us to believe, the absence of balance could prove to be macroeconomically devastating.

THE STORY IN SHORT

For some years now, I have been try to convince my peers and superiors that the world oil market was in the process of a rapid transition, and the combination of resource scarcity and accelerating demand (relative to supply) would cause a fundamental transmutation that would be reflected in some very dramatic oil price changes. Of course, until recently I was unable to prove a few of the things that needed proving in order to reinforce this contention, but it seems that this deficiency has vanished: it began to fade away when the price of oil reached $100/b and continued to rise, because with that price and the present movements of global oil supply and demand, proofs are no longer necessary: this time the wolf is really here!

In the American Navy there was once a saying that ‘On every ship there is someone who doesn’t get the message’, however on this ship everyone is getting the message, where everyone includes a former head of the Petroleum Industry Research Foundation in New York, who once claimed that OPEC is “on its way into a stagnant volume environment at best”. That upbeat but misleading statement can be translated as ‘OPEC’s oil is increasingly unimportant’.

For me OPEC is – and has always been – the oil producing countries of the Middle East. I’ve never concerned myself with the others because, as Matt Damon said in the film Syriana: “It” – meaning oil – “is running out, and most of what is left is in the Middle East”. As I never miss an opportunity to point out, some people find this difficult to accept, however some people specialize in being wrong. The Cambridge Energy Research Associates [CERA] once said that OPEC’s fate was not in its own hands, although the truth is that it has always been in its own hands, with the difference being that now those producers are fully aware of what is – for them – a very satisfactory turn of events.

Unfortunately, or fortunately as the case may be, dealing with Middle Eastern energy resources also involves issues far outside that part of the world, because it happens to be true that it is no longer advisable to discuss Middle Eastern prospects without considering the actions and/or goals of other energy producers, and vice versa. Here we have a perfect example of what in game theory is called ‘strategic interaction’.

Hopefully this will become at least partially clear in the sequel, but to begin I want to emphasize that as a teacher of economics and finance, I have been fully occupied with trying to convince students that I have something useful to say about what has and is taking place on the global energy front. Note what I said: has and is taking place on the energy front, because many observers, students, experts and decision-makers are in total or partial denial about crucial developments in recent energy history.

I have also tried to offer a valuable insight into one phenomenon that will characterize the future oil market, which I will repeat now, because it should never be forgotten. Regardless of what you have heard or will hear, read or will read, thought or will think and regardless of the assurances that the oil and gas exporters in the Middle East give or will give, it is doubtful whether those exporters are able or for that matter willing to provide the energy resources that their customers desire or will come to desire, at prices resembling those of the recent past.

And here once again I ask my favourite question: would you supply these resources if you were in their place?

Some years ago in Rome, at a meeting of the International Association for Energy Economics [IAEE], I was attending a lecture given by a young lady who enjoys a certain status in the energy economics world. After her talk there was an exchange of comments, during which – out of a clear blue Roman sky – she informed her audience that Professor Banks was totally and completely mistaken about the oil market in general, and prospects for oil producers of the Middle East in particular.

Naturally, when I received this negative evaluation of my research abilities I protested mildly, and later approached her for the purpose of making her acquainted with two long articles that were related to her talk and research, both of which were United States (U.S.) government publications, both of which are relevant to this presentation, and both of which are almost completely unknown to the great world of academic energy economics. In one of these there was a map showing possible landing zones for marines and paratroopers in the Gulf in case exports of oil fell to a level that governments of the oil importing countries felt were intolerable. I didn’t have that article with me at the time, however it didn’t make the slightest bit of difference, because after briefly describing its contents, I saw from the look of disgust on her face that she considered me a tiresome know-nothing, and conceivably unbalanced for bothering her with my reference to some boring document, assuming that it actually existed.

The second article (1979), which – for obvious reasons – I chose not to mention, began with a long passage on the intended production program of the foreign companies that managed oil facilities in Saudi Arabia (and elsewhere in the Middle East), before the governments in that region decided that despite rumours that had been spread far and wide by Big Oil and others, they were just as qualified to manage the resources located within the borders of their countries as the ‘Seven Sisters’, as ‘Big Oil’ was known at the time.

This unexpected transfer of ownership took place shortly after the October War in the Middle East, in l973, and I have often discussed that event in my work, to include mentioning it in my new energy economics textbook (2007), but unfortunately insufficient attention has been paid to my humble efforts. To my way of thinking, had the decision makers in the oil importing countries been more alert, then it is possible that the price of oil would not be at its present level – which happens to be a level that, if sustained and eventually augmented, poses a clear and present danger to the international macroeconomy, due to the presence of various other macroeconomic and financial stresses. There is also the danger that this price could spike to an extreme value in the event of what is sometimes called an ‘anomalous event’ in or close to one of the major oil producers, where ‘anomalous event’ is a polite way of describing gunfire or extensive property damage caused by high explosives.

The agenda of the foreign producers in Saudi Arabia ostensibly featured a progressive raising of oil production to twenty million barrels of oil per day (= 20mb/d), and keeping it there as long as it made economic sense – i.e. was profitable. The thing to be understood is that the strategy underlying this production profile turned on maximizing profits over a limited time horizon, and here I want to emphasize that the choice of a time horizon was as important or even more important than other components of their production strategy, which is an observation that you did not encounter in Economics 101. You didn’t encounter it because most of the teachers of Economics 101 do not know how to handle the production of exhaustible resources like oil. However, after the assets of these companies were confiscated by their previous hosts, a very different agenda was introduced

The apparent intentions of the confiscating governments, and especially Saudi Arabia, also turned on maximizing profits, although over a much longer time horizon. In addition, when the opportunity arrived, these profits were to be used to diversify their economies in such a way that the main source of prosperity would be reproducible capital – i.e. structures and machines – rather than exhaustible natural resources such as oil and gas. The opportunity arrived in full bloom when the price of oil suddenly exceeded 40 or 50 dollars per barrel, because those prices gave the governments of many oil producing countries the kind of freedom that President Bush and his colleagues believe only comes about by living or trying to live the American Dream. Everyone who has watched CNN or the U.S. program ‘60 Minutes’ has probably seen a brilliant example of this process in that lucky and superbly managed ‘emirate’ Dubai. Returning to the agenda for Saudi Arabia, ‘sustainable’ oil production over an indefinite future was envisaged at about 10 mb/d, or less, while an additional 1-2 million barrels per day were to constitute surge capacity (which is capacity intended for use over a short period).

Notice the or less in the above, because the present King Abdullah of Saudi Arabia recently said that the world cannot count on large increases in the output of his country after 2010, which is interesting because some observers think that today’s oil production is less than Saudi production a year ago.

Needless to say, this kind of thinking and acting on the part of Middle Eastern governments did not win approval everywhere, although I want to confess that it made all the sense in the world to me. By way of contrast, the position taken by an outspoken Nobel (Prize) Laureate, the late Professor Milton Friedman of the University of Chicago, was that the general welfare was always best served by unambiguous profit maximizing behaviour, supervised by hard-core capitalists. When the assets of the short-run profit maximizers throughout the Middle East were confiscated, and formal production quotas for oil established by OPEC, Friedman predicted that the price of oil would collapse and OPEC would fall apart. Friedman’s irrational forecast is best forgotten, but even so I want to present and comment on a similar goofy vision of the Middle East oil scene that was put together by another University of Chicago Nobel Prize Winner, Professor Gary Becker. Writing in Business Week (March 17, 2003) he presented his audience with the following soap-opera:

Middle Eastern nations are far less important to world oil production than they were immediately after the formation of OPEC. Their share of world oil production has fallen from almost 40% to less than 30% now. In order to raise the global price of oil the OPEC cartel, led by Saudi Arabia, had to restrict its members’ production. This raised prices, encouraging non-OPEC nations, including Russia, to expand production. Also, oil companies have made greater efforts to find new deposits deep in ocean waters, in the frozen tundra of Siberia, and in China and elsewhere.

This statement is completely without any scientific value, and will be touched on later, but a comment is in order now. Becker’s twisted faith in deep water deposits, as well as large new deposits becoming available in Russia and China is best described as bizarre. Although a few years ago the best energy economist in Russia said that his country could raise its oil production to 30 mb/d of oil and keep it there, the truth is that oil production in Russia has now roughly flattened at about 10 mb/d. According to Leonid Fedun, vice-president of the largest independent company in the Russian oil sector, it is unlikely that output will ever exceed that amount. He could be slightly wrong of course, but it would hardly increase by enough to result in Professor Becker being nominated for another Nobel. Something that needs to be appreciated by all oil importers is that Russia is potentially a very rich country, and an increasing fraction of Russian energy production is going to be consumed domestically.

China is already a country with a large oil deficit, and where the growth in oil consumption is much larger than the growth in domestic supply. These deficiencies are probably increasing faster than anywhere else in the world, to include the United States. Oil companies are making great efforts to find new deposits “deep in ocean waters”, are drilling boreholes everywhere, exploiting deposits in remote locations in the far north of Alaska, and perhaps far up in the Arctic Ocean, and desire greater access to coastal waters. Regardless of how much desiring and drilling and exploiting they do however, it will not suffice to replace Middle Eastern resources, nor greatly depress the oil price. Only a new energy technology in conjunction with a reduction in demand growth for conventional oil is likely to do that! This unpleasant truth has escaped Professor Becker, but it is well known in the executive suites of both ‘Big and Little Oil’.

Please note that I say in the above a reduction in demand growth, and NOT a reduction in demand. A reduction in demand is something that is that is very unlikely to take place under normal circumstances.

Finally, attention can be directed to the decline in OPEC production that was mentioned by Becker, and which that scholar interpreted as a misfortune for those nations. The earlier decline in OPEC production, and its present slow increase, is the key source of the new economic strength of the Middle East, as well as some of the other OPEC countries. If they had maintained their output at 40% of the total, they might still Nicolas Sarkis has published a paper (2008) in which he questions the willingness or the ability of OPEC countries to sweeten the dreams of the oil exporting countries, and perhaps to accommodate them in other ways. He knows, just as you and I know or would know if we thought deeply about it, that they might find themselves subjected to considerable economic and/or political discomfort if they become heavily involved in trying to make the impossible possible.

SOME FINAL REMARKS

Perhaps the main purpose of this short paper is to disabuse readers of their fantasies that the present bad news about oil is in the nature of a springtime fling. As the greatest singer of the twentieth century – Frank Sinatra – might have said, it could be for keepsville.

Some time ago it was pointed out in the important business publication Fortune that the Pentagon was making a study of the political turmoil that could result if the extreme physical consequences of global warming suddenly appeared. It was suggested that countries with sizeable military assets might be tempted to maintain their prosperity by imposing on weaker neighbours.

As far as I am aware, no one has investigated in detail what a peaking of global oil production might mean from a military point of view, however as noted above a U.S. congressional document appeared showing landing zones in the Gulf for military forces from the U.S. or for that matter a coalition of concerned Cadillac owners. Professor Douglas Reynolds of the University of Alaska is also familiar with publications discussing a possible seizing of oil producing assets by force, although it is not impossible that all of these documents/publications are part of an activity that in game theory is known as screening. This includes helping to concentrate the minds of rivals or potential rivals by circulating misleading information about your intentions. (According to Reynolds, Time Magazine carried an interview with Dr. Henry Kissinger in which the military option was ventilated.)

In any event, some question must be asked as to whether the motorists of North America and Europe would, in the event of an oil price approaching or exceeding $200/b be willing to garage their Volvos and SUVs, and calmly wait until a technology appears which permits an economical exploitation of assorted unconventional resources, or for that matter items such as conventional oil from The Chaco or Iceberg Alley. The thing to be aware of here is that the economy of much of North America, as well as e.g. the northern part of Scandinavia, cannot function without a large input of motor transport. I am also curious about the willingness of the politicians and bureaucrats of e.g. ‘peace loving’ Sweden to cancel their precious junkets to the restaurants and cafes of Brussels and Strasbourg because of a shortage of jet fuel. On the other hand, they would probably be overjoyed to avoid the tedium of the senseless meetings that are held in those capitals of the European Union.

A few years ago, in an issue of New Scientist (2004), Bob Holmes and Nocola Jones offered the following:

If production rates fall while demand continues to rise, oil prices are likely to spike or fluctuate wildly, raising the prospect of economic chaos, problems with transporting food and other supplies, and even war as countries fight over what little oil is available.

Len Gould and others in EnergyPulse (www.energypulse.net) have expressed the same concern. I do not know in what room in the Pentagon questions of this nature are being treated, but I certainly hope that it isn’t the one in which I had the good luck to fail my first officers’ candidate board.

REFERENCES

• Banks, Ferdinand E. (2008). ‘OPEC and oil’. Petromin.
• ______ (2007). The Political Economy of World Energy: An Introductory Textbook. London and Singapore: World Scientific.
• ______ (2004). ‘A new world oil market’. Geopolitics of Energy (December).
• ______. (2001). Global Finance and Financial Markets. Singapore: World Scientific
• ______. (1980). The Political Economy of Oil. Lexington and Toronto: D.C. Heath.
• Caruba, Alan (2008). ‘From the Soviet Union to Putin’s Russia’. EnergyPulse (www.energypulse.net).
• Crandall, Maureen S. (2006). Energy, Economics and Dreams in the Caspian Region.Westport Connecticut: Praeger.
• Holmes, Bob and Nicola Jones (2004). ‘Brace yourself for the end of cheap oil’. New Scientist (2 August).
• Holthusen, Eric (2008). ’Future transport fuels: meeting the growing demand in an environmentally and socially responsible way’. Hydrocarbon Asia (Mar-April).
• Sarkis, Nicolas (2003). ‘Les prévisions et les fictions’. Medenergie (No. 5)
• Robelius, Fredrik (2006). ‘Oljefyndet är en bluff’. PsX Press.

Comments

[tuj:]

"The apparent intentions of the confiscating governments, and especially Saudi Arabia, also turned on maximizing profits, although over a much longer time horizon. In addition, when the opportunity arrived, these profits were to be used to diversify their economies in such a way that the main source of prosperity would be reproducible capital – i.e. structures and machines – rather than exhaustible natural resources such as oil and gas."

You nailed it. This is, for the most part, one of the best oil articles on SA that I have seen.

2008 Jul 14 08:18 AM

[john s. gordon:]

coal conversion to syncrude - let's get crackin'.
> jack

2008 Jul 14 08:18 AM

[Brian Pursley:]

"It [oil] is running out." -- Matt Damon

"Several times in the past we have thought we were running out of oil whereas actually we were only running out of ideas." -- Parke A. Dickey, 1958

Matt Damon never had any ideas to begin with.

2008 Jul 14 08:19 AM

[Brian Pursley:]

"It [oil] is running out" -- Matt Damon

"Several times in the past we have thought we were running out of oil whereas actually we were only running out of ideas." -- Parke A. Dickey

Matt Damon never had any ideas to begin with.

2008 Jul 14 08:31 AM

[phdinsuntan...:]

time of oil corps in DC is going out,
so is time to cash out.
World oil demand has been going down in
last 18 months and collapsing now,
the sea is full of tankers, facing the
monopoly of refining capacity
only oil future prices kept price growing,
end of the game with contango,
bye oil bubble, welcome gold bubble.

2008 Jul 14 09:59 AM

[fireball:]

great article. i have one consideration. you mentioned a replacement energy technology. the us military was using faxes in the 50s they released to the public in the 70s. there are plenty of other examples of this. when i was talking with a guy who had just gotten discharged from the us army(intelligence) i commented that it appeared that the gov was about twenty years ahead of what the public knew in technology. he said yes but in some cases as much as 50 years. (JOHN S GORDON) it would not suprise me at all if they roll out a very good technology for an alternate liquid fuel. so roll it out already and let us get cracking on adaptations or new infrastructure. i have been thinking about coal conversion. i suspect it is time to give it to the us public even if it means we are not 20 years behind on this one. when i say give i really should find a better term. the us public paid for the research. it may not be coal to fuel but logic and limited knowledge tell me it is the most likely. another consideration that i think is impossible to calculate is the effect or influence radical islam could exert on oil supply officially or just by causing chaos.

2008 Jul 14 10:46 AM

[Henry L:]

More, more, please.

2008 Jul 14 10:52 AM

[Allen Fuller:]

A very good article.

To phinsuntanning, when you say that the sea is full of tankers, I assume you are referring to a news tidbit seized upon by people who doubt that supply is the problem and who want to pin it on speculators or some other scapegoat. The news tidbit was that there were tankers full of oil in the Persian Gulf just waiting because they could not find buyers at this price.

The only problem with that story is that these tankers were full of heavy, sour crude, which no one wants to buy because it is expensive to refine and hard to use. If it were "light, sweet" crude, it would have been snapped up in an instant. That is the stuff that is easy to refine and gives an enormous energy return on energy invested (EROEI). We will eventually be forced to use more heavy, sour crude, however, in spite of its low EROEI, because light sweet crude is becoming ever more scarce as demand for it soars.

2008 Jul 14 10:57 AM

[Rocknrollle...:]

Great article. Demand for a commodity like oil is relatively inelastic, and it's going to take a few decades for consumers to find reliable close substitutes. Demand from Chindia will only increase, and the way it looks now, American energy policy is all talk and no game. And by the way, phinsuntanning, oil is here to stay, and although I agree that there is money to be made in gold, I think that the precious metal where the greatest profits lie is actually silver, due to its relative scarcity.

2008 Jul 14 11:21 AM

[maximax:]

fireball - wrong. what a daydream. the US army is the biggest oil consuming entity worldwide. google for some articles by Sohbet Karbuz, he has researched US army oil use.

b pursley - not sure why i still react to your ramblings. not knowing you or m damon personally, i would still put him way above you in terms of ideas and insight, given that he is ex-harvard and roles like mr ripley simply couldnt have been played by a dumbass. but then his quotes relate to his movie character, not him personally.

2008 Jul 14 11:27 AM

[fireball:]

HEY JOHN take a look at gbrc. new small risky interesting. already stuck my toe in with a small position.

2008 Jul 14 11:28 AM

[fireball:]

MAXIMAX not saying that is the way it is. just thinking about possibilities. i am not cashing out of oil yet. actually trying to get situated to enter pbr. john seems to be really up on conversion so i just wondered what he thought. i guess the gov. would never waste tax dollars just because they wanted to keep something quiet. one thing a sudden release of something like that would wreak more havoc in the market. not saying that is the way it is. i am sure by now you realise that i have a jaded view of the federalis. not bringing a better cheaper solution to use is not beyond them. (i will not raise taxes)(i did not have sex with that woman) i do not really care about the second one. thompson steered the impeachment away from the issue that mattered. that was giving the chinese advanced supercomputer technology and missle targeting ability. in exchange for campaign funds was implied but not proven that i know of because instead fred was like HEY LOOK OVER HERE. and the sheeple went what where oh monica. from that point what was said was correct that was none of our business in my humble opinion. i doubt many of the politicians would know about it anyway. but coal conversion is an old technology so respectfully i would be suprised if they did not have improvements already worked out.

2008 Jul 14 12:00 PM

[fireball:]

MAXIMAX i will look at sohbet karbuz. i am always ready to listen and learn.

2008 Jul 14 12:12 PM

[mouth:]

During the 70's oil crisis, Saudi Arabia was actually fearful of Marines/Army landing in their oil fields to take over the oil. Saudi mined many of the pipeline areas to blow them up in case of an invasion of their oil

2008 Jul 14 12:23 PM

[pachanguero:]

great stuff!

2008 Jul 14 01:36 PM

[phdinsuntan...:]

fuller, rigth, world needs to use +heavy,
that means new refinery investment,
in the meantime, less money for valero
and end of oil trouble, just gold bubble,

2008 Jul 14 02:39 PM

[Cash_and_Fetal:]

You want to see PROOF that Oil pricing is a "SCAM".....

Take a look at some of the futures prices of a barrel of oil.

futures.tradingcharts....

Do you see a pattern there?

Look at the 2012 future prices for a barrel of oil...

2012 will be "election season"....

Speculators don't want to touch buying it...if we were really living in a "tight" market....and $150/$200 a barrel is here to stay...That's the BEST deal OF THE CENTURY you could find, you could TRIPLE your investment in 4 short years...what other investment is there with that kind of "guarantee"...A 300% return in 4 years....?!

Why are people not buying up those futures contracts as fast as
they can?

Because the price if FALSELY inflated....and Oil Pricing is a SCAM manipulated on the ICE markets.

2008 Jul 14 05:19 PM

[Urbane Gori...:]

Great article.. I particularly have understood the following quote from the article for quite awhile:

"And here once again I ask my favourite question: would you supply these resources if you were in their place?".... Which brings me to the next point...

If the OPEC nations are growing economically and they too want the same (or better) standard of living as we have, then understand that they will need to use more of their own oil to produce electricity. Couple that with plans to develop the largest aluminum smelting plant in the world (which is expected to consume a **very large amount** of their electricity production, and as OPEC also seems to be depleting their own known allocations of oil, does anyone find it surprising that IRAN might actually intend to build nuclear plants? Lord knows, I wish we would!

Thx jegan ;-)

2008 Jul 14 05:29 PM

[[e-mail]:]

I have believed for a long time that the standard rhetoric from high places is too incompetent to be believed even by them. I have been disappointed by the steady stream of illogical statements from all politicians- Democrat and Republican. I have read about the Bush relationship with the Saudis and the history of the 7 sisters. Once they acquired the engineering, only a fool would let the west control bringing the oil to market and managing the price. You , Sir, are worth listening to. Thank you for stating the obvious with documentation. We have been sold out by a consortium of politicians and business elite for their personal enrichment. There is a big wave coming. No matter how hard we work to strengthen the dollar, it will not cause cheap oil. With the rise of China, and eventually India, colonial Saudi Arabia does not need the US Market.

What do you think the solution is for our dilemma, Dr. Banks?

2008 Jul 14 07:13 PM

[alajac:]

1. there is no oil shortage
2. oil is being stored in tankers off-shore so the oil doesn't show up in inventories
3. Thank Phil(Yall r jest whiners)&Wendy Gramm for the legal loophole that lets all commodities get bid up like a stock price
Already proven in 2006 Senate hearings; how could out idiot representatives not know this? read it here:
www.star-telegram.com/...
www.star-telegram.com/...

2008 Jul 14 08:46 PM

[alajac:]

Let's try it with a title: Beware of "peak oil" lies and the lying liars who tell them
1. there is no oil shortage
2. oil is being stored in tankers off-shore so the oil doesn't show up in inventories
3. Thank Phil("Yall r jest a bunch of whiners")&Wendy Gramm for the legal loophole that lets commodities get bid up like a stock price
Proven in 2006 Senate hearings: how could our idiot representatives not know the Senate already went over all of this? read it here in 2 parts:
www.star-telegram.com/...
www.star-telegram.com/...

ps, we went into Iraq to curtail supply not obtain it, and that is just what we have done: kept the violence stirred up so that oil didn't get pumped and drive down the price. Oil is on it's last legs and they need to wring every last dollar out of existing inventory. XOM is buying stock and raising dividends; nothing is going toward exploration even at these prices because they know they already have all the product they will ever need sitting on the shelf.

2008 Jul 14 09:01 PM

[cynic69:]

Have any of you readers seen the kind of stupid crap that goes on in the Senate as they debate what to do about energy. These "law makers" are so ignorant and stupid it defies description. There is zero talk about the "peak oil" study and what effect it might have on the situation. I have an idea that might be a step in the right direction. Lets stop charging income taxes for the nations railroads and at the same time institute a one dollar per gallon sales tax on diesel. What you say, that will bankrupt the trucking industry. Guess what, we should have never allowed a long haul trucking industry in the first place and besides that the trucking industry is a dead man walking and will be extinct very shortly anyway.

2008 Jul 14 10:35 PM

[StateofConf...:]

We went to Iraq to secure oil supplies and as a minor point to prevent Sadam from re-start any WMD program once the UN was off his back.

China is a good example of a country securing energy sources. Many countries are and have nationalized their resources and with growing internal demand, they will export less. Again, china is a good example of this.

The Bush and Regan adminstrations were basically pushers for corporate control fo resources both here and abroad. Regan undid any initiative Carter started to have us become energy independant. The US will be disabled because oil is no longer cheap and Bush had driven us into deep debt so corporations and the Military Industrail complex could make billions.

Two oil men in power, Bush and Cheney, both from
Texas and both part of the corporate take over. But not many care until destruction happens.

2008 Jul 14 10:35 PM

[JJJake:]

Quite frankly, the snarky tone of the "lecture" nearly drowns out any potential insights Prof. Banks might have to offer. Indeed, I found Prof. Banks' petty jabs at people he apparently feels once slighted him to be especially distracting.

2008 Jul 15 04:26 PM

[Cash_and_Fetal:]

If you didn't believe me with my first teaser....trying reading these articles...

About ICE,IntercontinentalEx... Inc.


Ice, Ice Baby Part 1
www.star-telegram.com/...

Ice, Ice Baby Part 2
www.star-telegram.com/...


Here are some teaser quotes:


When Enron failed and took its private, unregulated energy exchange to the grave, another rose to take its place. The Intercontinental Exchange (ICE) was the brainchild of
Morgan Stanley,
Goldman Sachs,
British Petroleum,
Deutsche Bank,
Dean Witter,
Royal Dutch Shell,
SG Investment Bank and
Totalfina.

In 2001 ICE purchased the International Petroleum Exchange in London; renamed ICE Futures, it now operates as an "exempt commercial market" under section 2(H)(3) of the Commodity Exchange Act. As the Senate hearings pointed out in the summer of 2006, "Both markets operate outside of any CFTC oversight."

www.star-telegram.com/...
We started as a society that worships hard labor and the basic business ethic of building value into the goods you create. How’d we get from there to worshiping Wall Street’s billion-dollar boys — who create nothing, build nothing, own nothing and deliver no goods, and yet can throw so much money into products made by others that they determine what we consumers will pay for those goods?

Oil Movements tracks every tanker at sea, from both OPEC and non-OPEC oil countries, along with their cargoes’ final destinations. Anne O’Shea responded immediately to my request with their report dated May 8, 2008. Just so you will know, oil shipments are up from a year ago in almost every class, including Middle East oil in transit and Non-OPEC in Transit. The only class of oil shipment that has declined is covered on page 3 of that report. That chart is labeled, "4-Week Changes in Westbound Oil at Sea."

That’s right, shipments of oil headed west have shown serious declines during the month of April, down 800,000 barrels per day in the week before the publication of the report


This is EXACTLY what Enron did when it's Electricity Manipulation, Turning off power grids to falsely inflate demand on other grids....

2008 Jul 15 08:25 PM

[Cazimi:]

One interesting implication is that the oil-producing countries have an economic interest in seeing the major oil-consuming nations develop more effective conservation measures. Keeping oil prices high enough to spur conservation, but not so high as to cripple the system, would be in the best interest of a producer of an exhaustible asset who has a long time horizon. The analogy is a parasite that increases its feeding to drain its host whenever its host is feeling vibrant, but limits its feeding enough to keep its host healthy enough for the parasite to feed, thus maximizing the life-cycle of the parasite.

2008 Jul 16 02:56 PM

[fireball:]

GALEWHITAKER hi i like your posts and your awareness of the dumbasses in washington. but who should allow or disallow anything? we are supposedly still free. what i am saying is the free market has to decide these things in the end or we are not free. long haul trucking was not a bad idea when it was working. now it will probably die. even if a business idea is bad we still have the right to try. what we have in common is more than our differences. i wish the politicians were just stupid. that would be easier to stomach than what they are.

2008 Jul 16 03:07 PM

[Phil Anthropy:]

This is an excellent article with interesting perspectives. It is clear that oil prices are not determined by supply and demand. The growth curves of demand, showing the gradual reduction of spread between supply and demand, have been available for years, yet futures prices have not soared previously. Unless there is some nonlinearity in the mathematics that has suddenly manifested itself under a variant of chaos theory, prices should increase slowly until the point of actual shortage, at which time they will spike until demand slackens. The recent extreme fluctuations in oil prices do not reflect the reality, which is that there are no actual shortages. Therefore, it is logical that traders (or speculators, if you prefer) are driving prices up and down relentlessly, making money coming and going. The same thing happens, by the way, in the financials, where stocks like Bears Stearns, Citigroup and others can move 10% or more in a single day, which does not correspond to changing valuations. However, a consequence of laissez-faire free market capitalism is the cavalier manipulation of the markets by the capitalists, isn't it? For the Ayn Rand enthusiasts, there should be nothing surprising or malevolent about oil price manipulation. Money is being made, and if the rich are the ones making it, then presumably they will hire more of the poor to work for them. I'm not a fan of that approach to social evolution, but many are.

One it has been established that supply and demand are factors, but at this point not the major factors, affecting oil prices, the rest follows. We know that it is not OPEC manipulating prices, because if they had wanted to do that, they could have done it long ago by cutting production. There has been so sudden political epiphany by the Arabs that ruthlessly milking the rest of the world for dollars is a good thing. They know that if their customers become disgruntled enough, it could lead to violence.

The Arabs perforce must be recycling many of their petrodollars into our treasury bonds to help keep our interest rates low and our economy growing despite our massive budget and trade deficits, which flood the world with dollars. This, of course, is the answer to Greenspan's "conundrum" about how our interest rates could be so low; he gave an answered, which translated from Greenspeak, means, "If you think I'm going to tell you the truth about that, you're crazy."

Therefore, OPEC are actually the "good guys." They (plus China and other exporters) buy our debt and equities, buy our businesses and support our profligate economy. We shouldn't blame them for wanting oil prices that are at least at parity, relative to dollar inflation, with years past. Had they want to exploit us beyond the pale, they could have done it long ago.

So let's ask ourselves who benefits from higher oil prices. Wait a minute, I think I've got it. The banks benefit. The critical element of our economic future is that interest rates must not be allowed to go up. If they do, mortgages will reset higher, defaults will increase, and the banks will actually lose money for a change, as compared to their huge profits in years past from the immense leverage of their derivatives and CDO holdings.

So how do we hold interest rates down when we are continuing to inflate the currency with easy credit and budget/trade deficits? We have to take money out of circulation somehow, worldwide. Simple. Raise the price of oil.

Oil is priced in dollars. The dollars are sucked out of the world economy into the coffers of OPEC (but more important, into the coffers of the intermediaries, whoever they are). As long as OPEC and these intermediaries recycle their enormous oil profits into our treasury bonds, interest rates can stay low. The recent spike up in the price of oil corresponds remarkably to the payment of the "economic stimulus." Somehow, we had to soak up that excess currency before it boosted inflation. High oil prices did the trick.

We needed to slow the economy slightly, perhaps to a mild recession, which would also impede inflationary trends. There won't be much labor cost inflation if unemployment is increasing. The amount must be moderate, because we need the people who have mortgages to keep paying them, but we don't need inflation. What does it all? Higher oil prices.

Therefore, in the long run, the people who benefit most from higher oil prices are the American people -- or rather, the American banks, with hopefully a little trickle down for the rest of us. We continue to export our debt and inflate our currency without ill effects, as the dollars get sucked into oil prices. We finally have oil at the level it needs to be to bring us back to the 50 mpg cars of the mid-1970s (yes, nearly 50 mpg in the small Datsuns, using conventional engines, not hybrids). In our hour of desperation, we will develop "alternative energy," which means the nuclear companies will get rich (all part of the plan), since there is no viable alternative to nuclear power to meet our energy needs, barring a breakthrough in physics.

One actual solution, which is not likely to survive the political process has been suggested for a long time. Simply require all engines to be built to flexfuel standards, using anything from 0% to 100% ethanol. Lift the ban on imports of ethanol from other countries. Let imported and locally produced ethanol from switch grass, sugar cane and other sources compete head to head with gasoline. By dramatically reducing our gasoline requirements, we will reduce our oil requirements as well. I have heard that the engine techonology is already available and proven. If I recall correctly, the estimates for Department of Transportation certification of the modified engines would be several million dollars per engine, which the government could subsidize. We would save that much in oil dollars in a few weeks. However, this would be politically unpalatable to the oil and refining companies, and will therefore probably not happen.

So, as Pogo once said, "We have met the enemy, and he is us."

2008 Jul 18 05:31 PM