Joined: Mar 04, 2005 Posts: 2642 Location: New Zealand
Posted: Sun May 11, 2008 11:58 pm Post subject: The Oil Nonbubble
The Oil Nonbubble
Quote:
All through oil’s five-year price surge, which has taken it from $25 a barrel to last week’s close above $125, there have been many voices declaring that it’s all a bubble, unsupported by the fundamentals of supply and demand.
So here are two questions: Are speculators mainly, or even largely, responsible for high oil prices? And if they aren’t, why have so many commentators insisted, year after year, that there’s an oil bubble?
The only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding — an increase in private inventories of black gunk. This actually happened in the late 1970s, when the effects of disrupted Iranian supply were amplified by widespread panic stockpiling.
But it hasn’t happened this time: all through the period of the alleged bubble, inventories have remained at more or less normal levels. This tells us that the rise in oil prices isn’t the result of runaway speculation; it’s the result of fundamental factors, mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China. The rise in oil prices these past few years had to happen to keep demand growth from exceeding supply growth.
After all, a realistic view of what’s happened over the past few years suggests that we’re heading into an era of increasingly scarce, costly oil.
The consequences of that scarcity probably won’t be apocalyptic: France consumes only half as much oil per capita as America, yet the last time I looked, Paris wasn’t a howling wasteland. But the odds are that we’re looking at a future in which energy conservation becomes increasingly important, in which many people may even — gasp — take public transit to work.
nytimes _________________ Human history becomes more and more a race between education and catastrophe. H. G. Wells.
Fatih Birol's motto: leave oil before it leaves us.
Joined: Mar 26, 2008 Posts: 1159 Location: Seattle
Posted: Mon May 12, 2008 1:06 am Post subject: Re: The Oil Nonbubble
Boy, this is really bad reasoning! But then, it is Paul Krugman.
Quote:
The only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding — an increase in private inventories of black gunk. This actually happened in the late 1970s, when the effects of disrupted Iranian supply were amplified by widespread panic stockpiling.
No, there was no "hoarding" in the late 70's, there was an actual shortage due to disrupted Iranian supply. There wasn't enough oil for anyone to hoard! Many gas stations limited the amount of oil people could buy at any one time (yes, I am old enough to remember sitting in gas lines).
Quote:
But it hasn’t happened this time: all through the period of the alleged bubble, inventories have remained at more or less normal levels.
DUH!! This is so stupid!! If inventories are at normal levels, this tells us there is sufficient supply. If, a) there is sufficient supply, and b) the price goes way up, this tells us that there IS speculation going on, not that there isn't.
If there really were shortages, then inventories would be going down, gas stations would be running out of gas and people - even in developed nations - would be lining up to get what little supply was available. None of that is happening. Therefore, there must be other reasons why the price of oil is going up.
Krugman also totally ignored the effects of a low dollar, which has definitely been part of the reason why the price has gone up. _________________ Abundance - what a concept!
Joined: Mar 04, 2005 Posts: 2642 Location: New Zealand
Posted: Mon May 12, 2008 2:38 am Post subject: Re: The Oil Nonbubble
Why high oil prices are not squeezing us more
Quote:
Ray Barrell, an economist with the institute, said the big change is that economies are less directly sensitive to oil prices than they used to be. The “energy intensity” of growth – the amount of oil, coal and gas needed to produce an increase in gross domestic product – has halved since the 1970s, reflecting greater energy efficiency and the shift away from heavy manufacturing.
So today’s prices are unusual. Inflation and the dollar’s weakness mean the $40 I wrote about three years ago should be adjusted to between $50 and $60. But that is a long way from $125, which is what the market says oil is worth.
So when will the oil bubble burst? Probably not until there is more solid evidence that both supply and demand are responding to higher prices. The higher the price, the more likely such a response. But it takes time. In some economies, like China, prices are controlled. Much oil is bought on long-term contracts, not reflecting current market prices.
As I have said before, oil spikes eventually end. But they do not always end quickly.
timesonline _________________ Human history becomes more and more a race between education and catastrophe. H. G. Wells.
Fatih Birol's motto: leave oil before it leaves us.
Joined: Sep 25, 2005 Posts: 1988 Location: Waiuku, New Zealand
Posted: Mon May 12, 2008 3:29 am Post subject: Re: The Oil Nonbubble
OilFinder2 wrote:
there was no "hoarding" in the late 70's, there was an actual shortage due to disrupted Iranian supply. There wasn't enough oil for anyone to hoard!
He said hoarding amplified the effects of the supply disruption. I don't know if Krugman's right (presumably he had some research to back it up) but hoarding always occurs during shortages, which is why the recent refinery problems in Scotland cause problems much more quickly than one might have expected due to the temporary supply drop.
OilFinder2 wrote:
Quote:
But it hasn’t happened this time: all through the period of the alleged bubble, inventories have remained at more or less normal levels.
DUH!! This is so stupid!! If inventories are at normal levels, this tells us there is sufficient supply.
Not at all; it tells us that consumption is being moderated by high prices. Inventories have actually fallen over the last 18 months (as one might expect when production can't match consumption). Inventories have remained in the "normal" range but have not remained static, but have fallen.
OilFinder2 wrote:
If, a) there is sufficient supply, and b) the price goes way up, this tells us that there IS speculation going on, not that there isn't.
That would be true, if there was sufficient supply. As there isn't, speculation is far harder to prove.
OilFinder2 wrote:
If there really were shortages, then inventories would be going down ... None of that is happening.
Yes it is. At least inventories are going down. Check out the latest EIA STEO.
OilFinder2 wrote:
Krugman also totally ignored the effects of a low dollar, which has definitely been part of the reason why the price has gone up.
Joined: Sep 25, 2005 Posts: 1988 Location: Waiuku, New Zealand
Posted: Mon May 12, 2008 3:49 am Post subject: Re: The Oil Nonbubble
Quote:
Ray Barrell, an economist with the institute, said the big change is that economies are less directly sensitive to oil prices than they used to be. The “energy intensity” of growth – the amount of oil, coal and gas needed to produce an increase in gross domestic product – has halved since the 1970s, reflecting greater energy efficiency and the shift away from heavy manufacturing.
I've read that this can also be viewed as a risk. Let's say 1 unit of oil was needed for 1 unit of economic growth, then a rise of 3% was needed for the economy to grow 3%. A halving of intensity means that 1 unit of oil is now needed for 2 units of economic growth. However, if oil starts to decline, 1 unit less oil takes 2 units off economic growth, instead of 1 unit. So maybe the reduction in oil intensity could have a nasty sting.
Quote:
As I have said before, oil spikes eventually end. But they do not always end quickly.
I guess he means "always have ended". There is no way he can see the future.
Posted: Mon May 12, 2008 6:43 am Post subject: Re: The Oil Nonbubble
OilFinder2 wrote:
uote]
DUH!! This is so stupid!! If inventories are at normal levels, this tells us there is sufficient supply. If, a) there is sufficient supply, and b) the price goes way up, this tells us that there IS speculation going on, not that there isn't.
If there really were shortages, then inventories would be going down, gas stations would be running out of gas and people - even in developed nations - would be lining up to get what little supply was available. None of that is happening. Therefore, there must be other reasons why the price of oil is going up.
.
I think that can only mean there is no hoarding AND demand is greater than supply
if the inventories stay level but the price goes up demand must be greater than supply
Crude oil inventories climbed by 5.7 million barrels from the week ended May 2. Analysts forecast a gain of 1.5 million barrels, according to a survey from Platts, an energy research firm.
At 325.6 million barrels, U.S. crude oil inventories are in the middle of the average range for this time of year.
Total motor gasoline inventories rose by 800,000 barrels last week, and are in the upper half of the average range. Gasoline inventories were expected to fall 500,000 barrels.
Inventories are not low. _________________ Abundance - what a concept!
Crude oil inventories climbed by 5.7 million barrels from the week ended May 2. Analysts forecast a gain of 1.5 million barrels, according to a survey from Platts, an energy research firm.
At 325.6 million barrels, U.S. crude oil inventories are in the middle of the average range for this time of year.
Total motor gasoline inventories rose by 800,000 barrels last week, and are in the upper half of the average range. Gasoline inventories were expected to fall 500,000 barrels.
Inventories are not low.
I didn't say they were low, I said they were down. You are looking at recent inventory builds in one country only. You did not quote from the STEO but from the TWIP. The STEO estimates that world inventories fell for 16 out of the last 18 months. The latest IPM estimates that 278 million barrels were drawn from inventories in 2007 (calculated from the difference between production and consumption).
By all means be optimistic, but don't mislead on facts.
Joined: Oct 14, 2004 Posts: 1203 Location: Left the cult
Posted: Tue May 13, 2008 2:40 pm Post subject: Re: The Oil Nonbubble
OilFinder2 wrote:
If there really were shortages, then inventories would be going down, gas stations would be running out of gas and people - even in developed nations - would be lining up to get what little supply was available. None of that is happening.
Asian refiners have been on allocation for some time. Is that not a shortage? _________________ It's all downhill from here
Joined: Mar 26, 2008 Posts: 1159 Location: Seattle
Posted: Tue May 13, 2008 9:03 pm Post subject: Re: The Oil Nonbubble
TonyPrep wrote:
I didn't say they were low, I said they were down. You are looking at recent inventory builds in one country only. You did not quote from the STEO but from the TWIP. The STEO estimates that world inventories fell for 16 out of the last 18 months. The latest IPM estimates that 278 million barrels were drawn from inventories in 2007 (calculated from the difference between production and consumption).
By all means be optimistic, but don't mislead on facts.
Well here's the EIA's STEO chart (for OECD). Sorry 'bout the mix-up on the data source.
Inventories. OECD commercial inventories at the end of the first quarter stood at an estimated 2.54 billion barrels, 22 million barrels above the previous 5-year average level. OECD inventories recorded a seasonal decline during the first quarter of roughly 0.3 million bbl/d, about 0.1 million bbl/d less than the average withdrawal rate during the first quarter. EIA’s projected balances suggest that total OECD commercial inventories likely will remain near average levels for the rest of the year
Would be nice if they had a chart like that for non-OECD, but at least judging from this, doesn't look or sound like anything noteworthy to me. _________________ Abundance - what a concept!
Joined: Mar 04, 2005 Posts: 2642 Location: New Zealand
Posted: Tue May 13, 2008 9:30 pm Post subject: Re: The Oil Nonbubble
I feel a bit guilty of interrupting the flow of discussion in this thread. But I thought this story is relevant to the theme of the thread - speculation in the commodity markets or lack thereof. There are also good comments at the end of this article.
The looming commodity crisis
Quote:
There is a crisis looming in the world's commodity markets, but it is has nothing to do with high prices, food shortages or the "peak oil hypothesis."
It has everything to do with the flood of capital into new financial instruments tied to commodity prices.
The ongoing debate as to whether this new "investment" demand has caused a price bubble is misdirected. We should be paying attention to the economic damage being done by these new instruments, which are creating a level and type of volume for which the futures exchanges are ill-suited. In our search for strong and uncorrelated returns, the investment industry is undermining a commodity production and distribution system that has served well for over 100 years.
If the commodities-as-investments trend continues, the market disruptions will only worsen. Without regulatory intervention, we will do enormous damage to the U.S. commodity production and distribution chain. This, in turn, will impose inefficiencies and very real costs on the U.S. economy in a fragile period.
While there are no easy solutions, the path to fixing this problem starts with recognizing the destructive role played by the volume of commodity participation by the investment community.
marketwatch _________________ Human history becomes more and more a race between education and catastrophe. H. G. Wells.
Fatih Birol's motto: leave oil before it leaves us.
Joined: Feb 27, 2008 Posts: 57 Location: Washington State (US)
Posted: Tue May 13, 2008 9:47 pm Post subject: Re: The Oil Nonbubble
Graeme -- I appreciate both stories. I invest in some energy production companies and the price of oil and natural gas affects my returns.
I've been concerned recently about the run up in the price of oil wondering if it really is speculation as so many seem to want to believe. I remember after Katrina being amazed at how quickly energy prices rose, and dismayed as they cratered for a time afterward. Of course by "cratered" we're talking a price that was half today's price. It's amazing how prices have recovered -- which is why I'm nervous.
In fact -- I'm nervous that prices will rise or fall. If they rise, rather than reap the rewards of my investment, I expect governments to start punishing the evil oil companies. If prices fall, nobody is going to write me a taxpayer funded check for my losses. Maybe I shoulda bought houses.
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