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Towards And End To Crude Oil Price Speculation ?

Commodities / Crude Oil Jun 27, 2011 - 06:21 AM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleAs of the present we have a menacing but periodic slump in the upsurge of commodity prices, signalled by a slump in oil prices. This of course leads the bigger hedge fund strategists to predict a "V", betting on previous performance and drawing on the now conventional wisdom that oil is a scarce resource.


Global economy optimists however say that "Malthusian illiteracy" lurks behind remaining adherents of Peak Oil theory - which basically says conventional oil production will stagnate and fall but demand will go on growing. Since the sole interest of global economy consumers and their minders in Big Government is the oil price, the most important fundamental, for them, should be the massive and constant or fundamental manipulation of its price.

Curiously, this is treated as a controversial subject, as if it was perhaps, or probably not true. Out of sight - out of mind.

As for any resource, even renewable resources like food production and supply, we can argue that either new sources of oil will come online or alternatives will have been developed in some "adjustment period" which, for oil but certainly not food is supposedly under way since about 2005. After the energy or resource adjustment and transition period the global economy will seamlessly adjust, we are told, making all and everything pretty much like it was pre-adjustment. Dream on.

REAL MANIPULATION - REAL  ALTERNATIVES
As sure and certain as the massive manipulation of oil prices, we have the certainty of both short-term and immediate energy alternatives, and long-term solutions, both demand-side and supply-side. These facts are well known but the near invisibility of these two basic facts on world oil, a sort of permanent black out in political thinking and in government-friendly media is stunning. Even more extreme, is the refusal to do anything about this reality by the caste, class or generation of look-alike, talk-alike G20-style deciders who prefer illusionary fear-based themes like global warming for pushing up all energy prices and tax receipts with little or no attention to the fundamental needs of energy transition.

A rather sure sign of recurring and imminent crisis in the finance sector or circus - huge daily and weekly variations of the oil price, presently downward - can easily be linked and compared with data from the US CFTC (Commodity Futures Trading Commission) on amounts of futures and options purchased and traded, and types bought and sold - in particular the call/put ratios. These ratios show how many punters are betting on a hike, or a crash of prices. Refining the analysis of who fixes oil prices and how they do it, the role of "critical information and opinion" is highlighted - that is weekly production and publishing of bullish and bearish news, views and comments.

A recent example is the heavily publicized decision of the IEA to coordinate the release of  about 60 million barrels of oil from member country stocks - covering about 1.33 days or 32 hours of member country oil consumption.

Relating US CFTC data on weekly purchase and sale of oil futures options by the biggest players, like Goldman Sachs Group Inc, JPMorganChase, Pimco and others, to world oil data, information and comments able to be spun the right way, we can reliably map and anticipate their plans for driving oil prices up or down. The probability of a sharp "V" for oil prices, like gold prices, stands out.

At times of financial stress when major players like banks, insurance companies and mortgage lenders are seeking extreme-high returns their "recourse" to both equities and commodities futures and options trading will be high. Oil futures and derived financial products with a global turnover value well over $ 30 trillion a year has become a key asset or gambling chip in these trades: including the New York Nymex, London ICE and other major oil markets, daily trades only on crude oil "paper" contracts, excluding refined products, are often above 10 billion barrels - but physical world traded crude oil crossing national frontiers only runs at about 51 million barrels a day.

Certainly since Peak Oil became a respectable subject, by about 2003, trading up crude oil prices is easier than in the 1990s and enables much larger high-low changes of daily or weekly oil prices, on which brokers' and traders' margins, profits and losses depend. The gain or benefit for consumers, and nearly all industry and businesses using oil is of course zero - or negative.

REAL ALTERNATIVES - REAL MANIPULATION
The trading system is claimed by its defenders as generating and sending "price signals" for change in the energy economy, but as in the rest of the present financial system, or circus the system creates and feeds off such massive volatility and sudden price swings, for example 20 percent rises and falls in the space of 10 trading days, that it totally fails in this claimed mission. What it does create is a two-tier system where the casino trading circus operates with speculative frenzy, and the real world energy economy reacts slowly or not at all to the handiwork of traders: extreme change in prices.

This dissociation process is the same in other linked and related trading across the finance space: for example "green energy" trading. The virus of big stake gambling on any "underlying asset" has only one possible result for prices of that asset: the boom-crash syndrome is permanent and what is called "visibility" or forward trend predictability and reliability is compressed to almost zero.

The real alternative, here, is very simple: eliminate paper-based futures-oriented oil trading and restore bilateral country-to-country oil supply dealing.  This preceded the current circus, before the 1990s, and in any case still exists. This trading system can include many complex and subsidiary offset and compensation or barter-type trades, to redeploy a certain number of traders from the present paper oil trading system, when they are "recycled". The key result would be eliminating derived and related financial products. These not only falsify oil prices, but are real dangers for the global finance system.

High prices for oil to a certain extent reflect real world changes: liquid-type "black oil" has become rarer and is being replaced by gas liquid condensates. An ever rising part of world oil supply comes from "secondary and tertiary sources" of natural gas liquids, condensates and reforming, at ever rising costs for extraction and production, and rising environment impact per barrel produced.

Conversely, there is surely a larger resouce base of natural gas than any type of oil, either primary, secondary or teritary. Taking all sources of gas - from presently flared and wasted gas in oil production, through conventional gas production to coalseam gas, shale and fracture gas - this energy resource and supply source is very large. Total resources are perhaps more than 100 years of current annual consumption, while conventional oil reserves are not much above 35 years of present world production. Gas is also  technologically-easy for replacing oil energy in most major applications and is the best, shortest-term and cheapest energy solution.

DEFECTIVE AND ABSENT SIGNALS
Yet we find through "decisional inertia", reinforced by extreme variations of oil prices due to current trading systems, that the number of gas-powered cars on the roads and in the cities of most countries is low, sometimes almost zero. Soon in fact we might find more high-cost gimmick all-electric cars, than low cost gas-fuelled cars. Conversely, gas-fired electric power production is growing fast, simply because gas power plants are cheap and gas is abundant, but first producing electricity from any primary energy source and then using it, with batteries, for individual car transport is thermodynamic madness !

For the advanced industrial countries, called "postindustrial" but consuming and using every known possible type of industrial good and service, we often find that more than 50 percent of their total oil consumption is simply for their car fleets.

Where these are gasoline fuelled - but not diesel fuelled - conversion to gas is easy and cheap. The energy infrastructure changes needed, especially gas-capable filling stations, are neither extreme high cost or too technologically challenging to be feasible. Explosion risks and dangers are to be sure higher than for gasoline and diesel, making it best to start gas road transport conversion with vehicle fleets refuelling at central depots (as proposed by T Boone Pickens).

At present however we face one of the most pernicious facets of the market-dominated and market-obsessed current economic system: it generates the effective belief that if something is cheap it is good for throwing away. For gas, this is extreme. Probable amounts of natural gas that are presently wasted by flaring and venting, worldwide, are as much as 200 billion cubic metres a year, most of it gas associated with oil production. This wasted gas is around one-third of US gas consumption, close to one-half EU 27 gas consumption, or 4 times Chinese gas consumption, in 2009.

By comparison, and because it is presently worth so much more than gas energy, loss of world oil "from well to wheel" is around 1.4 million barrels a day, about one-fifteenth of US oil consumption, around one-tenth of EU 27 oil consumption, or one-sixth of Chinese oil consumption. To be sure, if gas prices increased to parity with oil on an energy basis (rather than oil prices falling to gas-parity), in other words if gas prices at least doubled outside the USA, and quadrupled inside the USA, we would rapidly find an awful lot less gas being thrown away.

Noting here, for believers in Global Warming and admirers of climate change correctness, the climate change impacts of unburnt methane are much higher, volume for volume, than CO2. Conversely, gas-fired electric power plants are not only cheap and able to be fitted with full CCS (carbon capture) at a fraction of the cost for coal-fired plants, but are also low carbon emitters and low polluters per unit kWh produced and sent out. Natural gas, both conventional and unconventional, is the real alternative to unsafe and expensive nuclear power - and to present oil dependence.

THE CATASTROPHE THAT WASNT
While the strict economic impacts of overpricing oil and undepricing gas are themselves not good, including the drawing down and depletion of less-abundant oil before more-abundant gas, other impacts are a lot more pernicious. The current and present energy economy, inlcuding its upstream irrational and volatile pricing system, based on speculation, "locks-in" high demand for oil. Being a more valuable resource than gas, the oil-based economy attracts more investment and financial commitment. Therefore and despite its high price, we have dependence on oil-only or oil-dominant energy technology.

From this base of technology-fix, that is structural oil dependence, price fixing is natural but the sudden price surges and crashes that are part and parcel of this defetive system result in very fast and negative knock-on impacts through the economy. Linked with the partly-related problem of high food prices, we find that high energy prices, and recurring surges in oil prices are especially damaging to the economy.  Unfortunately, we do not do anything about it, and wait for the following oil price crashes.

We cannot expect or reasonably hope the current energy economic system will generate, sustain and channel investment into the best energy choices. The default real world result is well known to us all: rising energy prices in more and more disconnected and unrelated domains - for example declining electricity prices but rising transport fuel and agricultural fuel costs. System-wide energy economic modelling and analysis provides the best tools for rational choices, but at present this rational approach is swamped by financial speculation, government needs for rising tax receipts on energy to palliate the finance and debt crisis, and passing fads of the ruling elites like global warming fear.

In this context Peak Oil is relatively useful as a signal for change. It is not however a catastrophe because alternatives do exist, both on the demand side and supply side. Making this evident needs the elimination and replacement of the present entirely speculative oil price setting and fixing system.

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.


Comments

powerdownkiwi
29 Jun 11, 05:23
you're kidding?

If someone at this level doesn't mention exponential growth,fiat money, and the fact that ALL wealth is dependent on energy (all purchased goods and services need energy to be made/provided, all purchasing power relies on the providing of goods and services to be earned), what chance has the average punter?

We simply ran past the ability of energy supply, to underwrite expected 'wealth'. It happens when you're levered against an ever-more-powered future, which then doesn't happen.

Yes, there are renewable alternatives, and yes, we should adopt them post-haste. They won't, though, go anywhere near maintaining BAU.


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