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Harry Johnson
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Harry C. Johnson Highlights 1978 - 1995 Founder and CEO of Red Eagle Resources Corp., Oklahoma City, OK., an oil and gas exploration and production company listed on the American Stock Exchange. Experience includes private and public offerings, taxation, litigation, and the solution of problems... More
My company:
Portal Petroleum Corp.
My blog:
Oil Prices Explained
  • Do You Really Want Speculators To Set The Price You Pay For Gasoline ?

    Actions that can be taken by the CFTC to insure that crude oil prices respond to physical supply and demand, rather than to speculation and manipulation.

     

    1. Permit delivery on the NYMEX Crude Oil Futures Contract of any crude oil imported into the United States at any port of entry.

    At present, delivery on the NYMEX Contract can be made only at Cushing Oklahoma. No pipeline capacity exists to transport more than a few thousand barrels of the 10,000,000 barrels of oil imported every day to Cushing. Moreover, the NYMEX Contract permits the delivery on the Contract of only three grades of foreign crude. As a result, the price of imported oil is set by an artificial mechanism that permits speculation and manipulation to override price movements that would normally result from changes in physical supply and demand. An easy and quick first step would be to designate the Louisiana Offshore Oil Port (the LOOP) as a delivery point. The LOOP facilities make Cushing look like a corner Quick Stop.

    2. Classify all non-producers and non-users of crude oil as Non-Commercial Speculators, including counterparties in swap transactions, and subject them to position limits.

    In the recent past, the CFTC has not only failed to carry out its role under the Commodity Exchange Act, it facilitated the speculative run-up in crude prices to $150 per barrel by granting Wall Street banks an exemption from speculative position limits (at the request of Goldman Sachs).

    3. Establish a system that automatically resets margin requirements on crude oil futures commensurate with price movements. This should be done on a logarithmic scale such that a doubling of oil price over a period of less than five years would result in a 100% margin requirement.

    During the time that crude oil more than tripled in price, margin requirements remained below 10%. There is little left to be said about the ruin left in the wake of somnolent regulators, other than to note that neither the Fed nor the CFTC ever used margin requirements to cool speculation, although it remains as one of the most basic tools to evolve from the great depression.

    4. Appoint people to the CFTC whose experience isn't limited to gaming the system.

    Contributors to the current mess have been appointed to regulatory positions.

    Feb 13 10:35 PM | Link | Comment!
  • Evaluating The "e" in Mcfe and Boe
    Seems like most oil and gas companies convert their reserves to oil and gas equivalents based upon the respective energy content of oil and gas.  This is okay for thermodynamics, but hardly realistic for economic purposes.  Six Mcf of natural gas has about the same energy content as one barrel of crude oil, but economic considerations are better served if the conversion factor is calculated by dividing the average price received for oil by the average price received for gas during a particular period.  At $85/bbl for oil and $3.80/Mcf for gas, the relative economic value is about 22 to 1; not the 6 to 1 commonly used.  In other words, you have to sell 22 Mcf of gas at $3.80/Mcf to match the revenue from the sale of a barrel of oil at $85/bbl.  Thus, a company that converts its gas reserves to equivalent oil using a factor of 6 to 1 is overstating its equivalent oil reserves by 366% (22 divided by 6).  Might be something to consider if a company talks a lot about volumetric reserves, but not much about specific current economic value and next to nothing about how accurate it has been in forecasting the cost to develop its PUD reserves.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Aug 30 2:07 PM | Link | 6 Comments
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