How Would You Manage Saudi's Reserves?
Posted by Robert Rapier on November 15, 2007 - 11:00am
Topic: Supply/Production
Tags: oil production, oil reserves, saudi arabia [list all tags]
My impression is that we spend a lot of time trying to interpret comments or actions from Saudi Arabia, without attempting to understand the issues from their perspective. I think it is a useful exercise to ask whether their specific actions or comments make sense; 1). From the Saudi perspective, and 2). In the context of the market.
For example, when Saudi said that they were having trouble finding buyers for their crude in the spring of 2006, I won't simply look at the price and dismiss those comments as lies. I do a bit of digging. And when I uncovered that OECD crude inventories were high and rising at the time, that Iran said essentially the same thing at the same time, that any of Saudi's customers could pick up the phone and offer to purchase more crude, yet nobody came out and suggested that they had been unable to secure Saudi crude, then I concluded that those comments were consistent with the evidence available to us. (The final point is significant, because as soon as Saudi started putting Asian refiners on allocation later in the year, a number of Asian refiners leaked that news to the press. Certainly the same would have been true had Saudi falsely announced that they had crude but no buyers).
I have debated this issue multiple times, for example here, and I don't intend to do so again. But the issue still comes up on a regular basis - and often in a derisive manner - and I wanted to share the thought process I went through. (Of course I would add that when they started increasing prices later in 2006, the argument that there were no buyers was obviously no longer true).
Along the same theme, I frequently consider how I would manage Saudi's reserves if I was in the position to do so. I think those who feel Saudi should be pumping all the oil they can at these prices haven't really thought it through from their perspective. So, let's go through that thought experiment, keeping in mind:
1). The primary allegiance is to Saudi Arabia.
2). This depleting resource must serve future generations.
3). OPEC must be on board with the decisions.
My primary objective would be to extract the most money I could from the rest of the world, but not so much as to cause a worldwide recession that would destroy demand. So, how would I achieve this? Very cautiously. Each time oil prices moved into new territory, I would seek to stabilize the price for a while so I could judge the impact on the world economy. As long as the world economy could cope with the price, I would continue to let it creep higher.
How would I push the price go higher? By restricting supply. How would I soothe the markets? By adding incremental supply back a little at a time. What would I do if prices spiked high in a short span of time? Well, I would first wait a bit to make sure the price rise was sustained. After all, I can't react every week to price fluctuations. But if the price rise was sustained – and I had the oil available – I would go ahead and increase production to stop the rise. That would give me a chance to evaluate how the world economy had adjusted to the new price levels.
This is what I would do if I did have the oil. I would have no incentive for ramping production back up quickly and risking a price crash - regardless of the price of oil. My moves would be deliberate and conservative. After all, Saudi is reaping an incredible windfall at current oil prices. But greed is human nature. If I determined that the world can live with $90 oil, I would want to see if the world could stand oil at $120. Wash, rinse, repeat, until I saw the world economy dramatically slowing. That's where I would back off price by trickling in production.
On the other hand, if I was really out of capacity, and my reserves were truly overstated, my behavior would be somewhat different. First, I still don't want to panic the world and cause a super-price spike that quickly causes a recession. So, I would engage in a series of delaying tactics. I would want to maintain the status quo as long as possible, because when the truth comes out I will enjoy a brief windfall as prices spike much higher, likely followed by a worldwide recession and potentially the end of the world as we know it. To stall, I would point to other factors as the reason for the price rise (fear, speculation, the weather, etc.) I might make token increases in production in an attempt to placate the market, but I would mostly look for other scapegoats.
But the jig would be up when world oil inventories started getting pulled down into uncomfortably-low territory, prices were spiking, and I didn't respond with more supply. At that point, the cat is out of the bag. Well, I suppose I might have one more card to play, and that is OPEC. I could let news leak out that Saudi wanted a production increase, but the rest of OPEC outvoted us. After all, Venezuela, Nigeria, and Iran are all on record as saying $100 oil is where they like it. So that could then be my final stalling tactic, but stalling tactics that don't involve putting more oil on the market won't stop the steady price climb.
So, how then do I read Saudi's actions? First, I recognize that they won't necessarily behave as I would. But that's all I have to go with. In that case, there are elements of both possibilities in their actions. Saudi was reportedly the driving force behind the recently announced 500,000 bpd increase. The increase wasn't huge, but this is exactly how I would play it even if I had the reserves and spare capacity, but was trying to avoid crashing prices. (Although if I didn't have spare capacity, I would not have offered to shoulder the bulk of the increase as they reportedly did).
But it also looks like they are engaging in a series of delaying tactics. They could act on prices at this weekend's meeting, but they have already announced that they won't discuss it until their December meeting. They blame speculators, and say there is nothing they can do about prices because the rise isn't being driven by fundamentals. First, speculators are a part of the reason for the price rise. They aren't the whole reason, but those who say they have nothing to do with it are also wrong. But Saudi can't be serious when they say they can't do anything about price spikes due to speculation. If they wanted to crush the speculation, it would be easy. If you have 2 million barrels of spare capacity, show the world. Push production up to 10 million bpd for a while. The price would come crashing down, which would be contrary in the short term to maximizing your revenues, but you would have eliminated the speculation. After all, there would be no more doubt: You can do what you say you can do.
We are certainly very close, IMO, to the truth. While IEA demand projections have been revised downward due to the high prices, they still show a need for more crude than is currently being pumped. Looking forward, inventories are still projected to fall, albeit not as fast as previously projected. But I will note that projections all year long have been for OECD inventories to crash in the near future, and those projections have been mostly incorrect. Inventories have been pulled down recently, but the dire scenarios we heard about all year long were projections for where inventories would be in the future. (See the EIA's projection for OECD stocks on Page 17 here, and then look at the IEA's Oil Market Report to see that what transpired was contrary to those EIA projections).
Those are my thoughts on Saudi production management, and I try to interpret their actions from that perspective. So, how would you manage Saudi production; 1). If you were sitting on top of a 100-year crude reserve; and 2). If you were truly tapped out?
http://science.reddit.com/info/60ns3/comments/
thanks for your support...
Robert- good post
some numbers to consider.. it is amazing how time marches on.
It is not hard to quantify the loss of 1 MMBOPD of capacity since they were making 9.5 MMBOPD.
I certainly don't know where that leaves them... but 130 billion in PDP reserves is a stretch I think.
Since Saleri's dated was presented at CSIS.
Ain Dar Shedgum area of Ghawar
1/1/04- Saleri's Numbers
Cumulative Recovery 26.9 Bbbls
Remaining Reserves 13.9 Bbbls
Annual Production 0.73 Bbbls
Annual Depletion Rate 5.25%
Saleri= "Probably be producing 2 MMBOPD at modest water cuts for decades to come".
Exponential Decline Definition
Np= (qi-qf)*365/D
Np= remaining reserves
qi= initial rate, BOPD
qf= Final rate, BOPD
D= annual percent decline
Give them a qf of 0 (no economic limit)- just to make it fair.
11/13/07- 2004 2005 2006 plus .86 years of 2007 so 3.86 years later
Possibility 1 - Area was maintained at 2 MMBOPD with acceleration projects
Cum Recovery 29.7
Rem Reserves 11.1
Ann Depletion Rate on Remainder 6.6%
Current No work annual exponential decline= 128,000 barrels per day per year.
Possibility 2- Area was allowed to decline at reserve indicated rate
qf=qi*exp(-Dt)
Current production = 2,000,000* exp(-.0525*3.86)= 1,633,128 MMBOPD, Decline= -367,000 BOPD
I think Uthmaniyah (was 2.5 MMBOPD by some accounts) isn't in any better shape.
I also think that the ADS ultimate recovery north of 60% is aggressive
There is also a factor of falling dollar. The price of $60 per barrel have to rise 50% to $90 just to compensate one third loss in value of dollar in past two years.
Second important factor is the mass availability of capital in today's world. Two centuries of industralization and accumuluation of weath in few hands have gave the world a large amount of excess capital that have to be invested somewhere to feed an interest-based growth-dependent economy. First is find way in dot net bubble, then housing bubble and now oil companies.
Third is the instability of middle east since 2003. Even if world had a thousand trillion barrels of oil when the most productive oil region is in political instability and war there would be a significant rise in oil price.
I think the bidding war for oil has not started yet. It would when for america, europe and asia would be bidding against each other, for now they are bidding against african countries. The real peak oil would start after world capacity fall down 5% of its peak and would be clearly visible even to a blind when that reach 10%.
Robert,
Excellent post. I think I would manage Saudi oil in a manner very similar to yours. If I had plenty of oil, I would only increase output when there was clear evidence that global stocks were being depleted to 10 % below the 5 year average. If I had plenty of oil however (say 260 GB of proven reserves), I would start publishing field by field data on oil output and in essence open my books on oil reserves as this would reduce market volatility. If I didn't have as much oil as I claim, and I was at or very close to maximum sustainable output, I would try to hide this for as long as possible knowing that people will be quite upset and the world would likely fall apart pretty quickly. I would do this differently if I thought I could maintain a plateau for 5 years or so, rather than being close to a more rapid(say 4.5 %) decline. In that case, it would be better to let people know the truth so the world could move quickly to reduce dependence on oil (even though 5 years would not be enough time.) If the whole world comes crashing down around them, KSA will not be a wonderful place to be.
Dennis
I would do everything I could to maintain the belief that we have excess production capacity that we aren't using, for whatever plausible reason I could think of. Being the world's only swing producing confers enormous importance on them and the stability of their regime. Without the excess capacity they are important, but they are just another exporter. As you implied, if it is true that they have this excess capacity and want to prove that the high prices are due to speculators and other irrational forces, they would have the ability to prove this at any point in time. Such proof would cement their status as swing producers and be worth much more than the temporary drop in crude prices that would result. At some point they need to "put up or shut up" The status of swing producer is too powerful to confer on a regime simply on their word.
SW
I'm not sure I'm qualified to play this game, not being a greedy bastard out to screw the world.
However, despite the logic laid out here, two things come to mind:
1)I'm not sure I could distinguish your two strategies. It's easily argued that we're seeing both, so I'm not sure of the value of this exercise.
2) Something changed around 2000-2003 that caused the Saudi's to dramatically change "strategies" (quoted because the change may not have been voluntary). Prior to that, they were happy to keep oil in a permanent price range of <$30/barrel. After, they seem to want an ever rising price.
I think the sentiment is basically correct here, but would like to make a comment on both of these points.
Regardless of the Saudi position, they have an interest in adopting a position they may be confused with the other. In other words, if they really do have a great deal of oil production capacity available, then they have every interest maintaining ambiguity about that, to encourage speculators to keep the price high. If they are really running short, they have every interest in maintaining ambiguity about that to keep the global economic system as stable as possible.
The implication is that whatever their position, the management strategy I would adopt would be to try to increase the ambiguity about my true position.
I therefore agree with you that the exercise as outlined is of questionable value from one perspective. However, a slightly different perspective which may be of value is to consider things that you certainly wouldn't do if you were in either of these situations. This is somewhat analogous to falsifying possible hypotheses.
If I had spare capacity and plentiful reserves, I wouldn't let prices stay at explosive levels whilst the world drifts into recession. As the gloabal economy drifts toward recession I'd try to lock into long term contracts, before flooding the world with oil.
It seems reasonable to imagine that around this time, the combined rest of world spare capacity hit, for all intents and purposes, zero. It doesn't seem to have any necessary implication for the specific saudi situation.
Suppose KSA has indeed a lot of oil left.
Would you like the rest of the world to know?
Well it is quite obvious that Saudi wants the world to think that they have enough oil to last for hundreds of years. Dr. Nansen G. Saleri, head of Aramco's reservoir management, says Aramco's reserves are larger than anyone else imagines. He says they have 900 billion barrels of reserves.
See bottom sidebar in this New York Times article for Saleri's estimates:
So Richard, Saudi Arabia obviously wants the world to think they have an enermous amount of oil left. And Saleri's estimate should prove to everyone that they are wildly exaggerating their reserves.
Why are they doing that Richard? I put the question back to you.
Ron Patterson
I was never happy with this argument:
"any of saudis customers could pick up the phone and offer to purchase more crude"
OK Robert- Whats the phone number?
Lets try a little thought experiment ourselves. If its so easy, you`re in the oil business, you must know the number. Tell us or try the following yourself:
Call the number and offer to buy loads more oil. There are only two possibilities:
If the Saudis say "Sorry no, we can`t", you have your answer right there.
If the saudis say "No problem, where do you want it", you say "only kidding" and slam the phone down- no harm done. Either way we will know the true situation.
Of course nobody "just picks up the phone " and calls the saudis for more oil! If you want oil you buy it on the spot market like everybody else. You say "I want 100,000 barrels" and the broker says "I can do that at the current price of xx.xx" If you agree the deal is done.
Of course, every time a deal like that is done,(buy), the price creeps up a little for everybody else. Thats what determines the price.
TB
Telephone: 966-3 872-0115
Fax: 966-3 873-8190
Telex: 801220 A SAO SJ
Cable: ARAMCO DAMMAM
E-mail: webmaster@aramco.com
OK Robert- Whats the phone number?
Believe me, our crude traders are in contact with Aramco constantly. If they need crude, they call. Simple as that.
If you want oil you buy it on the spot market like everybody else.
False. Saudi doesn't sell on the spot market. They have customers. If they go out and say "We have crude, but no buyers" and somebody actually needs crude, they are going to call. And if Saudi says "You know what, we really don't have it" or "Well, what we have is this tarry crap", it is going to leak to the press just like it did when they cut allocations to Asian refiners. A number of them reported this "off the record."
Has anyone ever put together a compelling case that they were actually lying? Shouldn't someone, if they are going to make that charge? I have detailed exactly why I don't think they were lying over that particular incident. Believe me or not, but their claim would have been verified or falsified the next day.
But there I go. I said I wasn't going to debate this again, and there I go. No more from me on that. Think they were lying if you wish. But don't feel compelled, by any means, to actually build a case.
RR-Thanks for responding! Actually a very robust response - and you called my bluff on the spot market thing, obviously you know a lot more than I about it. (and I learnt something).
However, I am not making a case that they are lying. (Notice I said Either way we will know the true situation).Its the logic behind the argument I am questioning.
If someone does make that phone call, you have it that if they "really don`t have it" that information would leak to the press, but if the DO really have it that information would not leak to the press? That is illogical! Surely the information would leak either way.
No need to respond, I understand your reluctance to debate this, But the logic is flawed, without taking sides.
TB
the big hole in your argument is that a few million bbls either way of Saudi production makes that much difference in the short run. And yes, the info either way would bleed into the press. There are just too many people who spend their lives talking to each other re nominations, price formula, etc. You gotta do something to fill the day.
If no Saudi customer wishes to expand their nominations or load at the upper range of their month's allocation, Saudi isn't just going to over produce to knock the price down. Unless they are trying to send a message to the rest of OPEC not to cheat on quotas or to knock out non OPEC investment. The need to do that is over as everyone else is pretty much maxed out and non OPEC can barely keep production stable in the face of field declines. This ain't the 80's anymore.
tennisball,
I like your logic though....
Let's get the same kind of openness going in all energy industries.
Example: I go to dozens of websites of advanced battery companies that claim they build these miracle batteries, 15,000 cycles with no loss of output, half the size and weight of lead acid batteries or ni cad...recharge in minutes, etc, etc....
O.K., where's the phone number, what's the price, what's the minimum order to get them?
So many of them make claims, but what they don't tell you on the pretty web site is that the public cannot buy these batteries, and in fact, some of them have never been sold to an outside customer at all....:-(
If folks say "we have it" let's have them price it, and sell it....and give us the connection to buy it. It is only in the last few decades that enterprises can survive for decades without ever selling a thing!
RC
Oh yes we have oil, but if you want some now it will have to be this heavy sour stuff. the API of imports from KSA has been going up.
I have been thinking that sour oil is behind this "market is well supplied" line that the Saudis have been using. After all, it's not their fault if they're offering crap and no one is buying, right?
I've raised this issue a couple of times here and it never seems to get answered. If they have crummy oil and no one can refine it, then both sides are right:
1. They have oil but no buyers
2. They don't have oil for people who want it.
These high prices are for light sweet crude. What is the spread today between WTI and the worst Saudi tar?
ROTFLMAO. Cheers Robert, you have just made my day! :)
Ron,
Well, I mean: Nobody really knows how much oil KSA has. They claim to have a lot, but nobody is fooled with the trick they pulled back in the '80.
So is it in the interest of KSA to clear up the question how much oil they really have (i.e. have it audited etc)?
I don't think so.
Suppose they really do have all this oil. Then oil would drop back to 20 US$ a barrel
Well then they are behaving like mad men. They want no one to know how much oil they have yet they are screaming to the world, and to the New York Times, "we have 900 billion barrels of reserves!"
And no, oil would not drop to $20 a barrel if people believed that absurd claim. The cornucopians are saying we have over 3 trillion barrels of oil left. The financial news networks have been repeating that line. Yet oil is over $90 a barrel.
It matters not one whit how much oil is in the ground, and it matters even less how much oil people think is in the ground. What matters is how much oil is extracted! That, Richard, is what determins the price of oil, not what people think may be in the ground.
Ron Patterson
I agree with Ron. The conventional wisdom is that the Saudis have hundreds of billions of barrels of oil left. Ron and I are in the tiny minority that disputes this position.
Actor Robert Wuhl has a great HBO program on historical myths and legends. He quotes a great line from the American Western "The man who shot Liberty Valance." To wit, "When the legend becomes fact, print the legend."
Almost everyone has been "printing the legend" about Saudi reserves, until Matt Simmons started questioning the numbers.
Good analysis!! I reached a similar conclusion about "what should be done to mitigate peak oil". I asked myself that question a while back. I figured the worst economic effects of peak oil would occur in the years of realization of peak oil, when the paradigm shifts from oil burning for daily activity to oil burning for necessity. The best course for the world would be to forestall current production in favor of dragging out future production, thereby decreasing the sharpness of the decline immediately following peak. Of course, as you pointed out, this is exactly what Saudi Arabia seems to be doing, not in the name of peak oil but in the name of profits. But nevertheless the end effect is the same: more oil for later when we need it, which is good.
Robert,
I think you've pretty well got it right. I've made the same point before, that we need to look at things from a Saudi perspective.
(vulgar sarcanol alert) My daddy, an oil and gas title attorney always said that perspective was extremely important in everything you do, except oral sex.
The other thing I'd do is keep 'em guessing. The Saudi family has immense reserves of currency in Dollars and Euros plus huge US refining assets, they can't afford to crash the currency. They have a big population who mostly aren't related to them and have no share in the families income except the various subsidies, and many of whom are religeous nuts-Mecca and Medina are Saudi cities-and are prone to fundementalism themselves, the royal family is Wahabi. If the real end of the Gravy Train is in sight, the local natives will become restless. So just like the multinationals and the peak of production, Aramco will wish to keep everything quiet as it give them even more time on the fat hind teat.
Break a leg on your bet! I thought you'd lost it last week, now I'm not so sure.
The oil and gas psychic formerly known as Bob Ebersole
Actually I think your on the right track. We focus on Saudi oil but in reality they manage a complex financial empire that has a broad range of investments and large cash hoard.
Next regardless of how much oil they have I'm pretty sure they are interested in diversifying their economy and probably more important the assets of the royal family.
So if you really want to know whats going on in KSA you follow the money.
So what are they doing ?
Diversifying and moving into upstream refining but we have to see how they plan on handling peak oil from a investment perspective.
This really boils down to how they plan to transition Saudi Arabia itself which is interesting.
Obviously if they really want KSA to continue post peak the would have to throw the doors open to investment from foreign companies. But this opens a whole Pandora box of problems for Saudi's strict religious society and large population of young people. Even if you have not taken Revolution 101 you would be leery of taking these actions a large influx of foreigners and reforming the society so it can really industrialize would eventually lead to the downfall of the Kingdom. So for social reasons it safe to assume they won't be aggressive about diversifying their economy.
Next outside of Saudi Arabia we are fairly certain the rest of the world is in decline or at best can only grow production slowly. Next we know that the economies of China and India are heating up and that the US is heavily reliant on oil and will be for some time. I'm sure they can do the same analysis we have done about transitioning economies off of oil and realize that even if the world suddenly decided that wanted to be less reliant on oil it would take a long time to change and given that the rest of the world is probably declining a ready market will exist for a long time for Saudi oil.
So they are diversifying and we have no reason to believe that they believe the oil markets will collapse.
So again looking at the overall picture what do we see.
Nothing.
They are already well diversified on the financial front so its impossible to interpret any change in investment strategy. I'm sure the Royal family long ago developed fallback strategies to protects its wealth in the case of a coup or external attack. On the oil front they are not ramping up to take on a increasing share of the world oil markets as the rest of the world declines. Given the lead time for projects and projected demand KSA should be ramping up production. Regardless of how much oil KSA has they cannot easily carry the world if they don't start ramping production and more important exports by 1-2 mbd.
But the evidence simply points to the fact that nothing much is really happening. Which says to me whatever the current state of affairs are inside Saudi Arabia they are not coming as a surprise to the royal family and they are not ramping production to handle the obvious shortfalls from the rest of the world and growing demand.
So one of the biggest events in the last 100 years is developing and the world largest oil exporter is effectively doing nothing.
Interesting.
Wait...what? :) It seems like it'd be important in that activity as well.
Go ye forth, practice a little, and come back with a story about your findings. :)
Good, Robert, we need these strategic games. You should add here:
4) Actions taken must not reveal the true position of reserves, production capacities and real motivations
BTW, do we know Saudi Arabian storage capacities? A 100 kb/d increase over 1 month would be 3 mb.
And how about if the Saudis themselves don't know what their reserves are and future production capacities will be? Aramco may have the same problems like Shell had. Unchanged reserve figures over many years suggest no-one could decide on updating them.
You therefore have to consider that they would be playing both games at the same time.
If I were a Saudi Arabia near the limit of production capacity, I would want a tiny portion of production to be secretly pumped into storage that no one knows about. Then I could fake a production increase when needed to prove I have the capacity, and fall back a month later giving some excuse that the increase did not have the desired effect.
What would I do if I were managing Saudi reserves?
[click for a bigger image]
Well, first of all I'd be careful about what I promised. In a world where nobody is quite certain you can be trusted, its important to not over promise hard delivery numbers. That means if you say 12Mbpd by 2012, then you need a way to deliver.
Equally, I'd realise that those reserves were finite and the high quality fields were limited. I'd want to conserve my capability, not waste it on profligate american SUVs. I'd want my lifestyle to continue as long as possible, not to go back to just desert and religion.
So I'd look to haul back on my production as much as possible, conserve my best fields, and at the same time not kill the golden goose by promoting alternatives and losing my position as world swing producer.
What I would do is manage the tail end of production at my best fields (eg Ghawar, Abqaiq) so that its doesn't run out with a whimper and show everyone I was past my best.
Specifically:
With that kind of careful management I could maintain my position and swing capability as a potent force out till 2020. Then it's my son's problem, but in the meantime I've invested in petrochemicals etc. to ensure Saudi Arabia can export more than just raw crude.
The above is my explanation for what's happened, what will happen, and how KSA can claim high capacities when the evidence in reserves looks shaky. I've taken Euan's prediction of KSA as a basis, re-analysing the numbers to show how a surge can be created. My numbers suggest that out at 2012 KSA would have a circa 2-3Mbpd surge capability for 2-3 years. At this timeframe, that kind of rapid onset boost will be worth much more than it is today, where it would only depress the world price and reduce KSA incomes.
You're the only one to bring up a point I consider central but yet to be addressed-if KSA has the reserves they claim, a big fear should be alternative energy getting established. Solar and cheap electricity would be fear number one. The near doubling in price this year is a big no no.
KSA is a special case ... it has a population of 23 million or so, that is growing like 'Topsy', living in the middle of millions of square miles of exceedingly hot sand ... there isn't enough water to drink, let alone grow crops ... without energy for desalination and foreign exchange to buy food they will nearly all die, or have to move somewhere else. This is clearly an unsustainable situation in the long term.
My country comes first. If I was sure that there is a long term future for selling my oil (pretty much the only thing I have to exhange for the things my country needs), then, in order to make the unthinkable end-game as far in the future as possible (so somebody else has to worry about it) I would only export enough oil to balance my trade budget.
I would limit the economic growth of my country and would not build up a huge, risky, pile of foreign IOUs which may never be exchangable for anything useful in the future.
I would obtain short range defensive nuclear weapons to protect myself, my country and my resources from other 'bully-boy' nuclear armed nations that have no intention of giving their bombs up, but who may well want to steal my oil. I would not waste any resources on a 'blue water' navy or armed forces capable of offensive use threatening everybody and anybody around the world.
Xeroid.
Robert, you say:
Well hell, for over two years now Mike Lynch and a lot of others are saying that the funds are the reason for the price rise. The hedge funds and other funds were all long and are, as a result driving up the prices. Of course the speculators would have to be on the opposite side of the funds since for every long there must be a short.
Well, now I suppose the funds are all short and the speculators are driving up the price. Well I don't believe a damn word of it. You can't have it both ways. Either the hedge funds are long and the speculators are short, or vise versa. Either way it is a wash!
The reason prices are so high is because in the last 30 months, since the peak of crude oil, demand has continued to increase and supply has not followed suit. Therefore the price rose until demand equaled supply.
Ron Patterson
I agree with that. The historical analysis of trader change in positions versus changes in spot prices is showing that traders positions do not lead the market and that they are mostly trend followers (see my post).
I think the myth of price manipulation by speculators is poorly supported by the data and has been refuted by most economists.
Hedge funds aren't speculators?
Speek, I certainly did not mean to imply that hedge funds are not speculators. Perhaps I should have chosen my words more carefully. Below is a paragraph on futures which I wrote to post tomorrow.
-------------
The term Hedge Fund is a misnomer and is a historical carry over from the days when hedge funds actually reduced risk. To “hedge” means to reduce risk. Today commodity funds do not hedge, they are high risk funds and the actual hedgers are not funds but producers and corporate consumers.
---------------
As I worte there, to hedge is the opposite of speculation. Speculation is high risk, to hedge means to reduce risk. But there is really no such thing as commodity hedge funds today. I know, they call themselves that but they are not hedge funds at all, they are commodity funds with high priced managers and complicated computer programs that try to take your twenty thousand and make you a million. They are speculators prue and simple and hedge funds in name only.
There may be actual hedge funds in equities (stocks) or bonds, funds that reduce risk rather than increase it. But that is another subject.
Ron Patterson
A key point to keep in mind is that Saudi Arabia is going to show two consecutive years of net export declines. In the following estimates, I assumed a fourth quarter C+C production rate of 9.0 mbpd, which seems somewhat optimistic based on the most recent OPEC report. The higher consumption rate for 2007 is based on reports of shortfalls in natural gas production, requiring more liquids production to be diverted to domestic consumption (Rembrandt estimates that liquids consumption is up at about +9% over 2006).
For the sake of argument, if Saudi Arabia were able to produce 11 mbpd (Total Liquids) indefinitely, at their 2005 to 2006 rate of increase in consumption, they would cease being a net exporter in 2036. This would be an overall long term net export decline rate of about -10%/year (2005 to 2030). Note that net export decline rates tend to accelerate with time.
http://www.theoildrum.com/node/2975?nocomments
Declining Net Oil Exports Versus “Near Record High” Crude