The Oil Drum

Life must be so placid and calm on Planet Forbes.

Ah, good old neoclassical economics. "Higher prices lead to higher supply... what... higher prices haven't led to higher supply? Um... well... interest rates.... hedge funds? I dunno. Somethin'. Supply will jump! Honest! Hey, look at this beautiful bridge, you know that's for sale? Just one dollar, I tell ya."

. . . "an oil industry expert we have known for years". . .

He who shall not be named?

Daniel Yergin Day: July 13, 2006
http://www.energybulletin.net/18111.html

In any case, in a column in Forbes Magazine, published on 11/1/04, Daniel Yergin, in response to a question about the future direction of oil prices, dismissed concerns about oil supplies and asserted that oil prices on 11/1/05 would be at $38 per barrel. Note that oil prices exceeded $60 in the summer of 2005, prior to the hurricanes.

In my opinion, Mr. Yergin serves as an excellent symbol of the major oil company/major oil exporter/energy analyst group. And since oil prices are now trading at close to $76 per barrel--twice Mr. Yergin's prediction--I hereby designate July 13, 2006 as "Daniel Yergin Day," in honor of Mr. Yergin's continued efforts to, in effect, persuade Americans to continue driving large debt financed vehicles, on long commutes to and from large mortgages.

Right, it's those damn hedge funds again. (Referring to the above link: The Petrodollar Bubble Pump.)

Why did the prices of oil and other commodities rise so much? The reason is simple--hedge funds funded indirectly by commodity producers pumped huge amounts of cash into commodities.

The price of oil is up because of hedge funds. The price of corn is up because of hedge funds. Ditto for wheat and every other commodity that is up. But sooner or later all those hedge funds must unload their positions. After all, it is the front month contract that sets the pace. And that contract in oil expires every month. If hedge funds are causing the problem by buying up oil futures contracts, then they must unload those contracts, or roll them over, at or near expiration. Either way that would have the opposite effect. The expiring contract would, on expiration day, plunge.

It is a zero sum game. If buying huge numbers of contracts would cause the price to rise, then selling huge numbers of contracts would cause the price to drop. And it does not matter if you roll them over. That would cause the expiring contract to plunge while causing the next months contract to spike. We have seen no such plunge and and rise in contracts at or near expiration.

Remember, the buying or selling can only have an effect on the price at the moment of transaction. Simply holding a long or short contract has no effect on the market whatsoever.

All this being said, it defies all economic principles as we were taught in economics 101. If commodity prices are driven up artificially then we should see a flood of those commodities hit the market, driving prices right back down. That has not happened. Agricultural prices keep rising despite rising.

This article says we planted more corn last year than any year since WW2 and predicts prices to plummet as a result. Guess what, corn prices are now at an all time high. Prices did drop during the summer but then shot right back up setting new records in December and another record in January.

U.S. farmers plan to grow corn on 90.5 million acres, up 15 percent from 2006, according to an Agriculture Department report issued Friday. That's the most acreage planted with corn since 1944, the last full year of World War II, when 95.5 million acres of corn were planted.

And because each acre produced so much more corn than it did in 1944, we produced last year, by far, more corn than ever before. And still prices kept rising. Damn hedge funds. ;-)

Ron Patterson

So, the producers have been driving up prices by buying their own oil at an ever-increasing prices?

Brilliant idea! I wonder why no one has thought of it before.

Forbes, from November, 2004:

Digital Rules
Capitalism's Amazing Resilience
Rich Karlgaard, 11.01.04, 12:00 AM ET

Excerpt:

. . . where will oil prices be a year from now--$75 a barrel? $100?

Wrong numbers, says Daniel Yergin. Wrong direction, too. Try $38. Yergin knows oil.. . .

. . . Yergin's prediction of cheaper oil prices is noteworthy because he doesn't dispute any of the alarming facts cited in my opening paragraph. Not that he would. The facts came straight from Yergin's own mouth at the recent Forbes Global CEO Conference in Hong Kong. I jotted down Yergin's comments while listening to him speak at a dinner. Then he gave a formal speech the next morning and, fueled this time by highly caffeinated tea, I again took notes, just to be sure. Yergin is pretty clear about his predictions. He says oil demand will rise, yet prices will drop. How can this be?

Answer: capitalism's amazing resiliency. Oil prices rise--oilmen become innovative. They work, they invest, they put their heads to the task, they apply technology, and pretty soon they'll discover how to extract oil profitably from oil sand. Or open wells in deeper water. Or scour the planet for new sources using scanners thousands of miles in space. As Yergin reminds us, oil output is 60% higher today than it was in the 1970s. Not many sages from the 1970s would have bet their reputations on this development. The opposite sentiment prevailed back then; experts said the planet was running out of oil. Wrong.

Yergin says he's always asked when oil will run out for good. He shrugs. He's willing to say the world will need 40% more oil in 2025. Hard work and technology probably will find a way to meet the demand. . .

Yeah.. I was channelling two cartoons as I read this one..

One is a couple rocks, deep underground, with a few drops of oil still clinging to them, comparing daytrading advice, where their conclusion is not to fess up any more of their oil until the price is better.

The other one... 'Imagine you had a nickel for every time you imagined the NOC's had a can-opener..' explains why most of my bumper-stickers are dismal failures. My wife is a very patient woman.

Bob