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Prices & speculators - June 28

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Many more articles are available through the Energy Bulletin homepage


Fuels on the Hill

Paul Krugman, New York Times
Congress has always had a soft spot for “experts” who tell members what they want to hear, whether it’s supply-side economists declaring that tax cuts increase revenue or climate-change skeptics insisting that global warming is a myth.

Right now, the welcome mat is out for analysts who claim that out-of-control speculators are responsible for $4-a-gallon gas.

... Why are politicians so eager to pin the blame for oil prices on speculators? Because it lets them believe that we don’t have to adapt to a world of expensive gas.

Indeed, this past Monday Mr. Masters assured a House subcommittee that a return to the days of cheap oil is more or less there for the asking. If Congress passed legislation restricting speculation, he said, gasoline prices would fall almost 50 percent in a matter of weeks.

O.K., let’s talk about the reality.

Is speculation playing a role in high oil prices? It’s not out of the question. Economists were right to scoff at Mr. Masters - buying a futures contract doesn’t directly reduce the supply of oil to consumers - but under some circumstances, speculation in the oil futures market can indirectly raise prices, encouraging producers and other players to hoard oil rather than making it available for use.

Whether that’s happening now is a subject of highly technical dispute. (Readers who want to wonk themselves out can go to my blog, krugman.blogs.nytimes.com, and follow the links.) Suffice it to say that some economists, myself included, make much of the fact that the usual telltale signs of a speculative price boom are missing. But other economists argue, in effect, that absence of evidence isn’t solid evidence of absence.

What about those who argue that speculative excess is the only way to explain the speed with which oil prices have risen? Well, I have two words for them: iron ore.
(27 June 2008)



6 Myths About Oil Speculators

Rick Newman, U.S.News & World Report via Yahoo!Finance
who are these party crashers? Where did they come from? How are they doing this? And who can stop them? We'd all like to see a superhero swoop in and smite the speculators, saving Gotham from the peril of $4 gas. The only problem is, speculators aren't quite the bogeymen that politicians want us to think--and they even play an important role in the oil markets and the global economy. Some major misconceptions:

Speculators are inherently bad for the economy. ...

There's a Speculator Star Chamber somewhere Global markets are so abstruse to ordinary folks that it's easy to imagine a cabal of evil geniuses pulling the levers from some fortified complex in London or Geneva. But that's the Hollywood version. "The market is so competitive that that's nonsense," says Bob Hodrick, a finance professor at Columbia Business School. "There's no way for everyone to communicate and get together and say, 'We're going to buy and drive the price up.' ...

Speculators are super-rich market manipulators. ...

The government tracks speculators and knows who they are. ...

Speculators are creating a huge bubble in oil. ...

Speculators should be banned. Few, if any, economists or energy analysts advocate this. In fact, some fairly modest regulatory changes could bring greater transparency to oil markets and force them to operate more like stock and bond markets. Buying a contract for oil futures, for instance, typically requires the buyer to put down less than 10 percent of the value of the contract; the rest can be borrowed. That allows buyers to roll up big stakes with relatively little cash. Raising the "margin requirement" to 50 percent, the usual threshold for stocks, would cool demand for oil futures, while still keeping the speculators in business. And maybe get the witch hunters off their case.
(27 June 2008)



Flat-earther blind to oil facts

Henry C K Liu, Asia Times
Celebrated New York Times columnist Thomas L Friedman, ... wants the president to tell the country an allegedly much larger truth: "Oil is poisoning our climate and our geopolitics, and here is how we're going to break our addiction: We're going to set a floor price of US$4.50 a gallon for gasoline and $100 a barrel for oil. And that floor price is going to trigger massive investments in renewable energy - particularly wind, solar panels and solar thermal. And we're also going to go on a crash program to dramatically increase energy efficiency, to drive conservation to a whole new level and to build more nuclear power. And I want every Democrat and every Republican to join me in this endeavor."

Friedman talks as if he wants the president to be an autocratic dictator. Does Friedman not know that with $4.50 gas and $100 oil, a large number of working people will not be able to make ends meet with their current income, or retirees on social security will not be able to heat their homes this winter? Airlines and other transportation companies would face bankruptcy? Does he not know that in a democracy, sustained $100 oil translates into a serious political problem? The oil problem does not lend itself to simplistic solutions. Yet that is precisely what our flat-earthling proposes.

... According to the US Geological Survey, the Middle East has only half to one-third of known world oil reserves. There is a large supply of oil elsewhere in the world that would be available at higher but still economically viable prices. The idea that only the Middle East has the key to the world's energy future is flawed and is geopolitically hazardous.

The United States has large proven oil reserves that get larger with rising oil price. Proven reserves of oil are generally taken to be those quantities that geological and engineering information indicates with reasonable certainty can be recovered in the future from known reservoirs under existing economic and geological conditions.

Henry C K Liu is chairman of a New York-based private investment group. His website is at http://www.henryckliu.com .
(27 June 2008)
Long article by the mysterious and prolific Henry C K Liu. -BA

Contributor TVeblen writes:
For a lot of reasons, this article really cries out for a response from someone qualified to provide one. Henry Liu is someone who usually has his facts straight. In this article he challenges several popular (mis?) conceptions about oil.

1- his definition of "proven reserves" - which sounds pretty solid and echoes a point the journalist Greg Palast tried to make and got boiled in oil, so to speak - as varying directly with the price of oil needs to be further explored. This opens up an issue that needs to be further explored: the question of using economic criteria (cost) vs. physical criteria (EROEI) to determine remaining oil reserves. Because there appear to be few substitutes, it would seem one could even count 'oil' reserves with a negative EROEI if they were essential for say growing food. [BA: I think TVeblen means 'an EROEI less that one' - EROEI is a ratio]

2- Liu states unambiguously his view of the motives for the US invasion of Iraq and the general conduct of foreign policy during the Bush administration if not long before that:

The fact of the matter is that the US already controls most of the world's oil without war, by virtue of oil being denominated in dollars that the US can print at will with little penalty. Petro-war is launched to protect dollar hegemony, which requires oil to be denominated in dollars, not physical access to oil. Much anti-war posturing in an election year is merely campaign rhetoric. Military solutions to geopolitical problems arising from political economy will remain operative options for the US regardless who happens to be the occupant of the White House, populist or not.

There seem to be more are more reasons to believe that the devil's bargin Nixon made with the Saudis in 1973 and not any immediately compelling physical necessity is behind the increasing resort to force in the conduct of US foreign policy.

These are obviously very important questions. If Henry Liu didn't get the answers right, then someone needs to.

What do you think? Leave a comment below.

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