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Bad oil on new crisis: this is only round one
James Kirby, Melbourne Age
OIL prices are going wild. Now Kevin Rudd says he “can’t do anything” about pump prices, it’s clear we’re in the throes of a new oil crisis. Transport costs will rise immediately, but that’s just the start of some very big changes. Here’s 10 things you may not know about the new oil crisis:
1. Oil prices can go a lot higher. In the oil industry, the most famous “oil man”, T. Boone Pickens, says oil – now $US133 ($A138) a barrel – will go to $US150 in the near future.
In the oil markets, the most famous oil analyst, Arjun Murti of Goldman Sachs, says it will go much higher still. Murti is the guy who made his name accurately forecasting oil at $US100 a barrel. He got world headlines again when he forecast $US200. Murti reconfirmed his $US200-a-barrel forecast two weeks ago – and this is one reason oil prices suddenly soared.
2. It’s the end of food-based biofuels. The rising cost of oil, coupled with higher food prices, has flattened biofuel stocks – they are among the worst performing companies on the ASX. Recently-listed biofuel stocks have tanked miserably. Natural Fuels is down about 90% since it floated; Australian Biofuels Group is down about 80%. Worse still, new investment in biofuels is set to evaporate. Why would anyone invest in biofuels when there is money being made, hand over fist, in oil stocks?
3. OPEC can’t change things. Members of the global oil cartel were the “bad guys” in the last oil crisis. This time round they seem to be making things worse by refusing to lift production, but increasingly it’s looking like OPEC won’t lift production because in reality it can’t – the extra oil is simply not there.
In November, the International Energy Agency is due to publish a landmark report on the condition of the world’s 400 biggest oil fields – it is expected to show OPEC has less oil than everyone thought.
(25 May 2008)
Oil: A global crisis
Geoffrey Lean, UK Independent
The Iraq War means oil costs three times more than it should, says a leading expert. How are our lives going to change as we struggle to cope with the $200 barrel?
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The invasion of Iraq by Britain and the US has trebled the price of oil, according to a leading expert, costing the world a staggering $6 trillion in higher energy prices alone.
The oil economist Dr Mamdouh Salameh, who advises both the World Bank and the UN Industrial Development Organisation (Unido), told The Independent on Sunday that the price of oil would now be no more than $40 a barrel, less than a third of the record $135 a barrel reached last week, if it had not been for the Iraq war.
… Dr Salameh, director of the UK-based Oil Market Consultancy Service, and an authority on Iraq’s oil, said it is the only one of the world’s biggest producing countries with enough reserves substantially to increase its flow.
Production in eight of the others – the US, Canada, Iran, Indonesia, Russia, Britain, Norway and Mexico – has peaked, he says, while China and Saudia Arabia, the remaining two, are nearing the point at of decline. Before the war, Saddam Hussein’s regime pumped some 3.5 million barrels of oil a day, but this had now fallen to just two million barrels.
Dr Salameh told the all-party parliamentary group on peak oil last month that Iraq had offered the United States a deal, three years before the war, that would have opened up 10 new giant oil fields on “generous” terms in return for the lifting of sanctions. “This would certainly have prevented the steep rise of the oil price,” he said. “But the US had a different idea. It planned to occupy Iraq and annex its oil.”
Chris Skrebowski, the editor of Petroleum Review, said: “There are many ifs in the world oil market. This is a very big one, but there are others. If there had been a civil war in Iraq, even less oil would have been produced.”
(25 May 2008)
$100-plus oil will be here for years as China motors ahead
Liam Halligan, UK Telegraph
… It used to be a given that a slowdown in the US, the world’s biggest oil importer, would by itself bring about a fall in crude prices. And cheaper oil would then help the States get back on the path to strong growth.
But the world has changed. Any cut in oil usage by a slowing US will now be dwarfed by the unstoppable increase in the energy needs of the fast-growing emerging giants of the East.
To really understand what’s happening, one needs to peer into the crude futures market. This is a technical area, so I’d beg readers’ indulgence, for recent events in this arcane financial netherworld are hugely important.
… The crude market is now in a rare state known as “contango” – with future prices above those prevailing today. So, the world’s top oil experts think that, in 2016, the gap between oil supply and demand will be even greater than now.
And that’s hardly surprising. China has 1.3bn people, four times more than America. At the moment, each American uses 10 times more oil than each Chinese – which is why, for now, the US remains the world’s biggest crude consumer.
But as China’s industrialisation continues, and its vast workforce becomes richer, demand for cars and household appliances will accelerate. Over the last decade, Chinese car ownership has grown at double-digit rates every single year. But there are still only 20 cars per 1,000 people in China, compared with 950 in the US. So the scope for higher car ownership is huge.
Around 70 per cent of global crude output is used to fuel cars. And if China’s per capita car ownership rises to only a tenth of American levels over the next decade, as seems likely, the impact on world oil demand will be shattering.
(25 May 2008)
Dec ’08 Crude Tells The Tale Of Mkt’s Surge
David Bird, Dow Jones Newswires via Cattle Network
If there were such a thing an oil futures market archeologist, the December 2008 Nymex crude contract would be the perfect specimen to study to retrace the seismic shift in oil markets.
Etched in each trade since the contract debuted Nov. 20, 2001 – shortly after the terror attacks on the U.S. – is the story of dizzying generational changes shrunk into just a trim seven years. With six months still to go before its expiration in November, the contract also has set a mind-boggling milestone, that is unnerving to think may be broken.
December 2008 delivery crude hit a life-of-contract low of $19.75 a barrel on Feb. 26, 2002, $1.66 a barrel below the front-month contract that day, which ended at $21.41 a barrel. On Thursday, it hit a life-of-contract high of $136.25 a barrel, nearly seven times the record low, ending just 27c below the spot month contract. Already the contract smashed records, with a $116.25 a barrel span.
… Turning back to that price low and comparing prevailing data show a clear timeline of how we got there from here. Each thread of the tapestry speaks to the notion that it isn’t a single issue – weak dollar, speculators – that fueled the change. The complexity of the changes underscores the now-echoing cliches of a lack of magic wands, silver bullets or other quick fixes.
(24 May 2008)
Understanding crude oil prices
James D. Hamilton, Econbrowser
… my latest research paper. Here’s the summary from the paper’s introduction.
How would one go about explaining what oil prices have been doing and predicting where they might be headed next? This paper explores three broad ways one might approach this. The first is a statistical investigation of the basic correlations in the historical data. The second is to look at the predictions of economic theory as to how oil prices should behave over time. The third is to examine in detail the fundamental determinants and prospects for demand and supply. Reconciling the conclusions drawn from these different perspectives is an interesting intellectual challenge, and necessary if we are to claim to understand what is going on.
In terms of statistical regularities, the paper notes that changes in the real price of oil have historically tended to be (1) permanent, (2) difficult to predict, and (3) governed by very different regimes at different points in time.
… Our overall conclusion is that the low price-elasticity of short-run demand and supply, the vulnerability of supplies to disruptions, and the peak in U.S. oil production account for the broad behavior of oil prices over 1970-1997. Although the traditional economic theory of exhaustible resources does not fit in an obvious way into this historical account, the profound change in demand coming from the newly industrialized countries and recognition of the finiteness of this resource offers a plausible explanation for more recent developments. In other words, the scarcity rent may have been negligible for previous generations but is now becoming significant.
(24 and 22 May 2008)
Entire paper (PDF)
Summary
Whither the Price of Oil?
John Mauldin, Millennium Wave Advisors
Why has the price of oil risen so much in the past few months? Is it a supply and demand issue as some believe; or is it because of an out-of-control futures market driven by the proliferation of commodity index funds and rampant speculation, as everyone tries to get in on the rise in commodity prices? This is a very complex issue, with a lot of emotion attached to it.
This week I try to give you an understanding of why oil prices have risen and whether they are likely to stay at such lofty heights or maybe even fall! And we look at a very odd statistic: where are all the tankers? There are some very unusual things happening in the oil patch.
(26 May 2008)
Contributor Wag the Dog writes:
This newsletter also covers the shortage of tankers for storage of oil and their rising leasing costs, and explains this might eventually contribute to a busting of any speculative bubble in oil and commodities in general. But the author is still convinced the even after price fall in line with fundamentals, the long-term trend in prices is still upwards.
