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  • Some Aspects of Iraq and Oil [View article]
    @ Carl Martin

    You might find my major post here

    (also at the Oil Drum) useful background in the context of the evolving oil market structure....

    More recently, there was this item on the Oil Drum, from an 'Asia Times' article of mine

    and a subsequent interview by Max Keiser.
    Sep 2, 2010. 08:33 AM | Likes Like |Link to Comment
  • Some Aspects of Iraq and Oil [View article]
    @ American in Paris

    "Your position is not clear. On one hand you talk as though a price conspiracy is involved and on the other that supply constraints are binding. "

    There's a difference between the market in physical crude oil, and the forward market in contracts to deliver oil, particularly the Brent/BFOE complex which actually sets the global oil price, and which requires a relatively small amount of financial resources to manipulate.

    I think that the Saudis are in all likelihood working with one or more investment banks in a similar way to the way that Hamanaka/Sumitomo worked with investment banks to manipulate the copper price for five years before being rumbled, and another five years after that.

    Cui bono from high oil prices?

    While the Saudis have some capability to withhold crude oil from the market and thereby affect prices, the current manipulation is based upon the relatively new capability to financially lease or repo oil via the Brent/BFOE market.

    Shell were transparently a pioneer of the oil leasing technique with ETF Securities. I suspect that BP, who were always structurally short, and Goldman's GCSI fund, which was structurally long, were using an opaque variant of this theme for 10 years before Shell got the idea.

    If you want a potential conspiracy theory, then BP and Goldman were joined at the head throughout that period.

    But of course that was nothing more than a strategic alliance.....
    Aug 31, 2010. 11:00 AM | 1 Like Like |Link to Comment
  • Some Aspects of Iraq and Oil [View article]
    @ American in Paris

    Also addressing Dave, I think there is in fact very little spare capacity in the system, and a whole lot of smoke and mirrors, and so I don't see the market being flooded by oversupply unless demand drops rapidly.

    But I also believe that there is a lot more elasticity in demand than people think, and also that there is a great deal of 'low hanging fruit' in that direction.

    The candidates for the greatest energy savings are the ones where hydrocarbon production is greatest, and waste occurs on a cosmic scale. eg any Middle Eastern producer; Venezuela; Nigeria; and Malaysia to name a few.

    So the best place to prospect for hydrocarbons now is actually to work with producers like these to save energy, and agree a share of the savings. Developed nations could simply swap renewable and energy saving technology for hydrocarbons.

    This recent presentation to a defence think tank covered this aspect in the context of global energy security and renewable energy generally, and Iran in particular.

    The key is to monetise savings.

    I take the point about increasing demand from developing nations, but I think that we will see a setback in demand even here, as a double dip - which IMHO is inevitable and imminent - hits home.

    @Carl Martin

    You are both welcome to join in, and to the point .
    Aug 25, 2010. 01:24 PM | Likes Like |Link to Comment
  • Some Aspects of Iraq and Oil [View article]

    I think that demand destruction starts in earnest around $85/bbl, and that's with current $ purchasing power parity. If the dollar declines relative to other currencies, then other countries may still be able to afford the oil but the US won't.

    But I do think that the constraint is in fact 'Peak Demand' and the deflationary effect on the global economy of sucking value from energy consumer nations to energy producer nations.

    Even if the Iraqis COULD produce at 12m bbl per day, to do so would be economically insane. Not very good for the planet either.

    With dollars at the zero bound it makes more sense for producers to keep oil in the ground - where it is stored for free, unlike oil stored by traders - and monetise it in other ways if they can (and I believe that such monetisation is precisely what is going on, opaquely).
    Aug 25, 2010. 12:11 PM | 1 Like Like |Link to Comment
  • Some Aspects of Iraq and Oil [View article]
    @ Ferdinand

    My view is and always has been that Iraq was about securing US energy supplies, and that the plan - 'Real Men Go To Tehran - was to liberate Iran, or rather its oil, in due course too.

    Of course, reality intervened, and some time in the first half of 2007 the US had their end of empire 'Suez Moment' when their major creditor - China - essentially threatened to pull the economic plug on them if they persisted, as the US did to the Brits at Suez.

    Ever since then the whole Iranian 'nuclear issue' has been posturing which suits both Israel and Iran to continue for political reasons. I smile ruefully when I read the latest sabre rattling story planted in the press. If either the US or Israel are going to attack someone, then they don't broadcast the fact in advance.

    As for sanctions, gasoline sanctions are actually what the Iranian elite WANT - they are trying to reduce consumption and cut subsidies, and here's the US giving them the excuse, plus massive profits to the people doing the sanctions busting (ie the IRGC). You could not make it up.

    I digress.

    In terms of the market price I see it undulating between an 'upper bound' trend line at which demand destruction kicks in, and the 'lower bound' trend line at which production destruction sets in.

    The oil price is currently in a position of unstable equilibrium, supported by interest-free loans from ETFs. I think that the Saudis are essentially operating as a Central Oil Bank, pegging oil against the dollar between (say) $75 to $85/bbl, and conducting (closed) market operations through the Brent/BFOE complex with the assistance of investment banks.

    This is not dissimilar to the way that Hamanaka worked with investment banks to manipulate copper prices, and he did this for five years before David Threlkeld blew the whistle and even THEN for five years after that.

    In the event of either:

    (a) oversupply, which could come about from (say) new Iraqi oil, or reduction in demand due to a 'double dip'; or

    (b) dollar interest rates rising above zero;

    then we would in all probability see the price collapse to - and temporarily through - the lower bound, as it did after the 2008 'spike' which in my view was probably engineered by the long standing partnership between BP and Goldman.

    A sign of an incipient collapse/discontinuity would probably be an oversupply of gasoline and other products.
    Aug 25, 2010. 11:47 AM | Likes Like |Link to Comment
  • Some Aspects of Iraq and Oil [View article]

    I must say I always enjoy your articles, and I agree with you on many issues.

    Unlike you, however, I do not have a brain the size of a planet, but I do have 25 years experience of market regulation and development much of it at top level, and a number of successful energy market innovations behind me eg Exchange of Futures for Swaps; Settlement trading, Volatility trading and so on.

    In my view the oil market has now become almost entirely financialised, with the key innovation being the technique of financial oil leasing.

    What that means in practical terms is that by using money borrowed interest free from ETF investors (who are NOT speculators, but the precise opposite) producers are able, in the absence of massive oversupply, to keep the oil price at an 'upper bound' where demand destruction sets in.

    ie producers are 'macro manipulating' the price as they always will when they can: eg the tin crisis; hamanaka/Sumitomo in copper; coffee, diamonds and so on. After all cui bono from high prices?

    Whether or not we have reached Peak Oil is moot, but I suspect we are approaching 'Peak Demand' simply in terms of consuming nations capacity to pay the price demanded.

    By contrast, the market in natural gas is over-supplied, but is NOT financialised in the same way as the oil markets, and the result is that the nat gas price is bouncing around a 'lower bound' where - to coin a phrase - 'production destruction' sets in.

    if crude oil is at an upper bound, and natgas at a lower bound, that would account for why the crude oil price has become detached from its historic relationship with the nat gas price.

    That's my thesis, based upon my very own brand of Coarse Economics, and no-one has yet tested it to destruction,.

    If anyone can, then it surely it must be the World's Greatest Energy Economist ?
    Aug 25, 2010. 10:30 AM | 3 Likes Like |Link to Comment
  • What Housing Bubble? [View article]

    'Houses aren't investments. They are wasting assets.'

    Yes and no.

    Land as location is an investment: moreover, as Mark Twain put it, they've stopped making it.

    But investment made in the land/location - such as improvements, and buildings such as houses - does indeed depreciate over time, and is therefore a wasting asset.

    In some locations, the value of the land may be pretty substantial and there are a vast number of property investors who recognise that it may be a pretty astute investment.
    Aug 23, 2010. 10:37 AM | 2 Likes Like |Link to Comment
  • What Housing Bubble? [View article]

    "Saving is investing is spending."

    Credit institutions aka banks create 'fiat' money when they lend money at interest to borrowers, and they simultaneously create a new deposit in the system.

    But what is often missed is that when banks SPEND money, by paying suppliers, staff, management or dividends to shareholders, or in buying (say) T Bills, then they are also creating credit and an equal and opposite deposit of new money in the system.

    So spending is most certainly NOT equal to saving.

    Spending plus lending could perhaps be said to equal savings plus investment, depending on how one defines terms.
    Aug 21, 2010. 11:36 AM | 2 Likes Like |Link to Comment
  • What Housing Bubble? [View article]
    @Lawrence J Kramer

    "I do not believe this is so. The asset in which we had a bubble was not the underlying collateral but the mortgages themselves. Low interest rates, which generate higher home prices by making them easier to carry, arise from an excess of savings available to buy mortgages."

    This 'savings glut' analysis ignores the reality (if that is the right word) of modern day credit creation by banks.

    The credit created by banks when they lend or spend deficit-based money into existence also instantaneously creates a deposit. If it were the case - as 'savings glut' proponents believe - that existing money is 'saved' and then 'lent out' as new loans then in fact there could never be any new money.

    @ H E Canada

    I see the role of securitisation and derivatives as the 'outsourcing' of credit risk by banks - whose economic function is essentially to guarantee the credit of borrowers and buyers - from their balance sheet to that of investors.

    (a) Securitisation - is total outsourcing of credit risk by selling loans to investors - this frees up a bank's balance sheet entirely in respect of the loan securitised;

    (b) Credit Derivatives - are in the plain vanilla CDS form, essentially a time limited guarantee in return for a premium, and therefore represent a TEMPORARY outsourcing of credit risk to investors;

    (c) Credit insurance - eg to Ambac - is essentially a PARTIAL outsourcing of credit risk to investors in insurance companies.

    And then we have toxic combinations of all three such as CDOs and CDO squared which diced and sliced credit risk no-one knew where.

    The investors to whom credit risk was outsourced in this way were referred to as the 'shadow banking system', and since this investor capital has withdrawn from the market, never to return, it follows that the pyramid of credit necessary to support property prices at bubble levels will never return.

    This is the case even if banks themselves were willing or able to put their own capital at risk at previous levels of leverage, which they are not.
    Aug 21, 2010. 11:25 AM | 5 Likes Like |Link to Comment
  • The Utter Futility of Government Cash Incentives [View article]
    @ Tony Petroski

    "You can't create somethin' out of 'nuthin' ".

    Pity the banking industry doesn't know that..........
    Aug 16, 2010. 10:29 AM | 3 Likes Like |Link to Comment
  • The Real Reason Banks Aren't Lending [View article]
    @Lawrence J Kramer

    "The depositor still has the money in his account, and the borrower has it in his. That's the new money. "

    The way I understand it, at the moment a loan is created, the bank debits a borrower's loan account, which is an interest-bearing asset to the bank, and credits the borrower's current or deposit account, which is a liability to the bank and an asset to the borrower.

    So at that point, the borrower and the depositor are the same person, and the borrower is both a creditor of, and a debtor to, the bank. Once the borrower spends the (new) money, his deposit at the bank has (if we leave cash transactions out of it) gone to another bank, and his own bank must find another deposit to replace it.

    Private banks also create credit when they pay management, staff and suppliers; buy government debt or other assets; and pay dividends to stock-holders. This spending also creates new deposits, and new money, in the system. When a Central Bank does this, it's called QE.

    So banks do not lend out depositors' money - they create new money, and new deposits, when they create credit both when they lend, or spend deficit-based money into existence..
    Aug 7, 2010. 09:13 AM | Likes Like |Link to Comment
  • The Real Reason Banks Aren't Lending [View article]
    @ ryanclarke

    "Banks ... the world over ... have to have 'new deposits' ... in order to make 'new loans' ... EVEN IN A FIAT MONEY SYSTEM."

    If - as you say - banks collectively take in existing (but new to that bank) deposits and lend them out again, then where does new money come from?

    (Putting aside notes and coin of course, which is less than 3% of money in existence).
    Aug 6, 2010. 01:38 PM | Likes Like |Link to Comment
  • Eating Gasoline in America [View article]

    "not central planning by some elite"

    Couldn't agree more.

    Implementation has to be bottom up and 'Peer to Peer' - without the State or any other middleman.

    That rules out Europe as well :-)
    Aug 6, 2010. 01:28 PM | Likes Like |Link to Comment
  • Eating Gasoline in America [View article]
    @isaac the terrible

    "Interesting, but most of the money from a carbon tax should go to enhancing non-carbon energy"

    This is precisely what I advocate above through the fund raised by the carbon levy.

    The difference achievable through monetisation is that all of the un-redeemed units in circulation - like any other money in circulation- constitute an interest-free loan in dollar terms aka 'seigniorage'.

    The beauty of this monetisation/unitisation concept is that you are raising value now in respect of the issue of inherently valuable Units (energy value) which will cost you nothing to redeem.

    This may be contrasted with the current situation with fiat currency like $, € and £ etc where inherently worthless currency units are issued which may be redeemed only for further inherently worthless units.
    Aug 6, 2010. 01:02 PM | Likes Like |Link to Comment
  • Eating Gasoline in America [View article]
    Your point about food stamps being a second, printed, currency to 14% of the population points to a solution I have been suggesting for some time, which is to:

    (a) gradually ramp up a carbon levy on all carbon fuel use;

    (b) invest the resulting pool of funds in renewable megawatts, and non-renewable 'negawatts' of energy savings;

    (c) issue a carbon dividend, to the US population generally, of 'Units' redeemable in payment for energy.

    Energy stamps if you like.

    Recipients of energy stamps have a choice - they can maintain profligate energy consumption, and use them to pay for energy, or they can save energy and exchange their Units for something else of value, or to repay loans denominated in energy and so on.

    The outcome would be an energy-based currency, and a transitional mechanism to renewables etc which actually might work in practice, instead of the complete nonsense of emissions trading brought to us by the usual suspects.
    Aug 6, 2010. 09:48 AM | 3 Likes Like |Link to Comment