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74 comments on Greenspan on Oil Dependence

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R W Reactionairy on June 7, 2006 - 10:08pm Permalink | Subthread | Comments top
" For most of the history of oil, its producers and consumers determined its price. Only those who could physically store large quantities of oil had the ability to trade. But important advances in finance have opened the market to a much larger number of participants. There has been a major upsurge in over-the-counter trading of oil futures and other commodity derivatives. Thus, when in the last couple of years it became apparent that the world's oil industry was not investing enough to expand crude-oil production capacity quickly enough to meet rising demand, increasing numbers of hedge funds and other institutional investors began bidding for oil. They accumulated it in substantial net long positions in crude oil futures, largely in the over-the-counter market. These net long futures contracts, in effect, constituted a bet that oil prices would rise. The sellers of those contracts to investors, when all of the offsetting claims are considered, are of necessity the present owners of the billions of barrels of private inventories of oil held throughout the world - namely, the producers and consumers."

Well, at least the boy is consistent. Greenie continues to believe that derivatives magically diminish the total amought of risk in a system. This is for the most part [in techinical terms] "crap".

Derivatives can mitigate risks for individual players, but unless full security is pledged, credit risk is additive to the risk of what would otherwise be an unhedged position. The associated risk of a string of defaults can be staggering. IMO if the truth were known, Greenie would be in the same position as the Frankenstein Monster in the old movies with an army of villagers closing in with pitchforks and torches. In a perfect world ...

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kjmclark on June 8, 2006 - 10:29am Permalink | Subthread | Parent | Comments top
The value of his point appears a few paragraphs later:

The new participants, investors and speculators, to the world's two trillion dollar-a-year oil market are hastening the adjustment process that has become so urgent with the virtual elimination of the world supply buffer. With the demand from the investment community, oil prices have moved up sooner than they would have otherwise. In addition, there has been a large increase in oil inventories. In response to higher prices, producers have increased production dramatically and some consumption has been scaled back. Even though crude oil productive capacity is still inadequate, it too has risen significantly over the past two years in response to price.

Surely we all agree that it is valuable to have prices rise early in the case of oil production peaking? That looks to me like the point of what you were referring to. I'm not sure I see that much evidence that "producers have increased production dramatically" and "crude oil productive capacity ... has risen significantly." as he puts it. While I would agree that the rate of oil consumption increase has at least temporarily declined, I doesn't look as though consumption has been reduced, if that's what is meant by "scaled back."

The only ways for the market to balance are through increased supply or demand destruction. If supply increases are extremely difficult or impossible (or as Greenspan puts it, "Returning to such a level of spare capacity appears wholly out of reach for the foreseeable future, however."), then it seems like anything that hastens demand destruction without destroying economies is a good thing. Investors buying futures and raising prices works just as well as a gas tax.

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fallout on June 8, 2006 - 11:02am Permalink | Subthread | Parent | Comments top
To sum the major point of the speech up to just three words:

-Expect increased volatility-

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flouma on August 18, 2006 - 8:21am Permalink | Subthread | Parent | Comments top
ARU1 ARU2 ARU3 ARU4 ARU5 ARU6 ARU7 ARU8 ARU9 ARU10 ARU11 ARU12 ARU13 ARU14 ARU15 ARU16 ARU17 ARU18 ARU19 ARU20 ARU21 ARU22 ARU23 ARU24 ARU25 ARU26 ARU27 ARU28 ARU29 ARU30 ARU31 ARU32 ARU33 ARU34 ARU35 ARU36 ARU37 ARU38 ARU39 ARU40 ARU41 ARU42 ARU43 ARU44 ARU45 ARU46 ARU47 ARU48 ARU49 ARU50 ARU51 ARU52 ARU53 ARU54 ARU55 ARU56 ARU57 ARU58 ARU59 ARU60 ARU61 ARU62 ARU63 ARU64 ARU65 ARU66 ARU67 ARU68 ARU69 ARU70 ARU71 ARU72 ARU73 ARU74 ARU75 ARU76 ARU77 ARU78 ARU79 ARU80 ARU81 ARU82 ARU83 ARU84 ARU85 ARU86 ARU87 ARU88 ARU89 ARU90 ARU91 ARU92 ARU93 ARU94 ARU95 ARU96 ARU97 ARU98 ARU99 ARU100 ARU101 ARU102 ARU103 ARU104 ARU105 ARU106 ARU107 ARU108 ARU109 ARU110 ARU111 ARU112 ARU113 ARU114 ARU115 ARU116 ARU117 ARU118 ARU119 ARU120 ARU121 ARU122 ARU123 ARU124 ARU125 ARU126 ARU127 ARU128 ARU129 ARU130 ARU131 ARU132 ARU133 ARU134 ARU135 ARU136 ARU137 ARU138 ARU139 ARU140 ARU141 ARU142 ARU143 ARU144 ARU145 ARU146 ARU147 ARU148 ARU149 ARU150 ARU151 ARU152 ARU153 ARU154 ARU155 ARU156 ARU157 ARU158 ARU159 ARU160 ARU161 ARU162 ARU163 ARU164
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frenk26 on November 9, 2006 - 5:07pm Permalink | Subthread | Parent | Comments top
Iagre ehiall   
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jkissing on June 8, 2006 - 1:23pm Permalink | Subthread | Parent | Comments top
We are just seeing markets at work. As more people think we have a problem (exactly what tod is all about) investors (speculators to some) begin to bet on higher oil prices in the future. the act of betting brings the best guess for future prices to the present, which in turn stresses hummer mfrs and rewards prius ones.

So; tod and others talk up po, a growing number of investors listen, some act (like me) - both on account of po talk and also because of the lack of spare capacity, both oil and oil company share prices rise, a few of the smaller companies manage to expand production (too little to affect price significantly, but usefully increasing profits), and the public squeals but slowly, reluctantly, begins to respond to the prod. Actually, the squeeze is quite gradual - we probably wont get to $10/g until 2010 or later. (Not everybody at tod appreciates markets or the hidden hand; such individuals might consider what other action, if any, that society could and would take that would be equally successful in reducing consumption.)

Incidentally, all this came before. In the seventies the world oil price rose 9x, and during the period the fraction of the S&P500 held by energy companies rose from 6% to 30%. This value is so far only up to around 8%. When the public at large begins to believe in po the rise may pick up speed...

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AlanfromBigEasy on June 8, 2006 - 3:51pm Permalink | Subthread | Parent | Comments top
> what other action, if any, that society could and would take that would be equally successful in reducing consumption.

Although I believe in markets, may I suggest the following:

  1. Give any railroad that electrifies a permanent exemption on property taxes for the line electrified.

  2. RRs get tax credits and/or access to tax free 30 year bonds for expansions to RR infrastructure (tracks & rolling stock).

  3. Cities that build Urban Rail get 90% federal matching if they follow the federal process, 75% if they just build it.

  4. Likewise for electric trolley buaes

  5. A new gas tax of 1.5 cents/gallon increase each month (with inflation adjustments) for 20 years ($3.60/gallon) with most of the tax rebated back through reduced payroll taxes.

  6. A modest but growing carbon tax for 20 years.

http://www.lightrailnow.org/features/f_lrt_2006-05a.htm
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deronas on October 21, 2006 - 1:32pm Permalink | Subthread | Parent | Comments top
Hypothetically, if we still had the 10 million barrels a day of spare capacity that existed two decades ago, neither surges in demand nor temporary shutdowns of output from violence, hurricanes or unscheduled maintenance would be having much, if any, impact on price. Returning to such a level of spare capacity appears wholly out of reach for the foreseeable future, however. This is not because there is any shortage of oil in the ground. The problem is that aside from Saudi-Aramco, few, if any, of national oil companies which own most of the world's proved oil reserves are investing enough of their surging cash flow to convert the reserves into crude oil productive capacity. Only Saudi-Aramco appears sufficiently concerned, at least publicly, that high oil prices will reduce the long term demand for oil, which could significantly diminish the value of Saudi Arabia's - or indeed, any country's -oil reserves.

Although outlays on productive capacity are rising, the significant proportion of oil revenues held as financial assets suggests that many governments perceive that the benefits of investing in additional capacity to meet rising world oil demand are limited. Moreover, much oil revenue has been diverted to meet the perceived high-priority needs of rapidly growing populations. Unless those policies, political institutions, and attitudes change, it is difficult to envision a rate of reinvestment by these economies adequate to meet rising world oil demand. Some members of the Organization of Petroleum Exporting Countries (OPEC) have recently announced expansion plans. But how firm such plans are,
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