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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Why Crude Oil Prices Rise

Commodities / Crude Oil Jun 10, 2011 - 10:48 AM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleOne thing is sure: oil prices rise when they are not falling. There is an intermediate case: they stay flat, but that is not a trader-friendly situation, because making money from oil price speculation is only possible when prices change. The more they change, the more dosh can be made from organizing price dips and surges. Consequently, even the quickest glance of Nymex or ICE or Tocom (or any other oil market) prices shows one clear thing: they change.


For exactly the same reason oil prices are more changeable, and change more than ever before. Since early 2008 for example, oil prices from an arbitrary median value like $ 80 a barrel, have increased about 50 percent, fallen about 75 percent, then risen about 90 percent from peak to trough in their roller coaster ride. Likely because of this rousing knock-out proof of permanent speculation, and the low and slow change of filling station forecourt prices - which simply stay high or get higher - most people are less than interested in oil price markets and their one-only operating mode: speculative frenzy.  

Anybody can tell you average car fuel prices in most countries outside the USA, which ranks among one of the world's cheapest oil-price countries, at about 100 out of 140 countries ranked by price, are usually around $ 6 per US gallon of 3.785 litres. In some cases like record-high UK, the price is over $ 9 a gallon, and most European countries score at least $7.50 a gallon. Knowing there are 42 US gallons to a standard barrel of oil, we get the number for how much you pay at the pump per barrel. Even Gaddafi never wanted that much !

The margin - called government taxes and profits for oil corporations - is always big and often immense. The worst part of this story, for consumers, is that the higher the basic price of crude oil (supposedly set or influenced by OPEC meetings), the more taxes can be loaded on, and the more profits sucked out of consumers' pockets. We end up with pump prices as high as $ 350 a barrel, so where is the crisis if crude oil costs $ 125 a barrel ?

HIGHER PRICES
The basic threat to consumers is simple: not only the dangerous terror-aiding OPEC producer countries and greedy Big Oil corporations want higher prices, but so do our tax-loving democratic governments with a "rather pressing" urge to rack in revenues. These three players run their own struggles, conflicts and occasional oil wars - but the end result is cast in stone: higher oil prices.

As we know, oil is non-renewable and producing it costs more - a lot more - than in the "good old days" of the pre-1973 oil producing and consuming world when the standard uniform barrel price was one US dollar and 50 cents. At the time and to be sure, oil markets and their frenzied speculation were totally absent from the scene, as producer and consumer countries ran bilateral country-to-country supply deals.

Today, things are a lot more complex on the upstream production side, as well as the downstream of supply and pricing. This covers the oil market pricing circus, non-market deals and non-oil commercial, economic or even "pure financial" deals between producer and consumer countries. It can include "paper oil" contracts able to affect the price and quantity of oil or refined products taken by financial players, then marketed by oil and energy corporations. Today, hundreds of contracts rule the oil supply and final filling station prices for even a small country, and for big countries this will concern thousands of sometimes fantasically complicated contract arrangements.

Making for yet more complexity, "old style" liquid oil has given way to natural gas liquids and liquid oil condensed out of hot greasy gas, and a host of "secondary oil" production techniques using steam, solvents, compressed inert gases like nitrogen, and other "reservoir tweaking" ways to get the stuff out of the ground. These non-conventional methods now account for about 25 percent of all oil production, and they are growing as old-style oil depletes and diminishes.

Current "secondary, tertiary and non-conventional" oil output is around 22 million barrels a day, close to the combined oil demand of the USA and Canada, over 2 times Chinese oil consumption or about 4 times Japanese oil demand. The US, China and Japan are the three-biggest world oil consumer countries.

Soon, these methods will be joined by liquid oil produced by the same methods as shale and fracture gas, notably hydro-fracturing. Prices may decline a little but this is not sure - and oil market speculation, Big Oil profitmaking, and consumer government taxes will still be there to put a brake on any noticeable fall in filling station prices.

ENERGY TRANSITION
Globally we have a wind-down of conventional or old-style oil, a likely huge surge in world output of shale and fracture gas, and gas extracted 'in situ' from coal seams, the possible end of nuclear power at least in the 'old nuclear' countries, remaining huge dependence on coal, growing supplies from the renewables but often at high cost, and other mega changes. These add up to energy transition, but the process currently has no master plan or programme, no funding, and so many unknowns we can only be sure of a few things.

One is that oil prices will stay high, will only fall in steep recession like 2008-2009, and will rebound anytime there is the slightest economic recovery.

Like we know, oil is mainly used for road, marine and air transport. Switching to natural gas is easy on technical grounds for the bulk of this - land transport - but the switch is hard on economic and lifestyle grounds. People want gasoline and diesel fuelled vehicles, and change will only come under duress and stress: permanent pain-threshold oil prices. So-called imperatives like the "fight" against climate change count for little or nothing in the real world, shown by the total inaction of consumers to convert their oil-burning cars to cleaner-burning and much cheaper natural gas. The supposed "tech shift" for car transport is to all-electric cars, but at $ 45 000 for a midsize all-electric car, compared to $ 15 000 for an oil-burning car, this shift is going to be so slow we can forget about it.

This naturally feeds back as "incompressible" oil demand growth simply due to the world car fleet growing at about 55 million a year (net, after scrapping of old vehicles), the 100% oil dependent world airplane fleet growing as much as 7 percent a year, and the world's 100% oil dependent bulk carrier and container ship fleet growing at about the same rate, anytime there is economic growth. 

We can be sure its not possible to supply the liquid oil needed for these fleets, and for world agricultural machinery, and that conversion to gas will come a lot easier than conversion to all-electric vehicles. To be sure, there is another Total Solution: de-growth strategies and the end of economic globalization, trends which themselves could accelerate simply due to high oil prices.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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