The Oil Drum | Oil: the Market is the Manipulation

93 comments on Oil: the Market is the Manipulation

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Drake on July 26, 2009 - 9:32pm

Every paragraph has mistakes and most of your points extrapolate hearsay and rumor. What conspiracy theory?: Relying on Goldman-links has become the most common cheap tactic for anyone trying to win populist support for a shallow argument.

Later you go on to say:

No one is in any doubt that this tidal wave of fund money caused a Bubble in oil prices culminating in a “spike” to $147.00 per barrel on 11 July 2008. But there appears to be a complete misconception – particularly in the US - as to how this Bubble occurred, and who was responsible. There is no consensus, and many conflicting theories, as to why it occurred and also why the oil price appears to be held at levels apparently unjustified by supply and demand.

This directly conflicts with a post on this site just two days ago which showed the price of oil had to rise to $147 because that was where marginal supply and demand met in the face of ever advancing demand and supply which could not keep pace.

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ChrisCook on July 27, 2009 - 5:25am

Perhaps you, or the poster you refer to, could point out to me the dramatic changes in physical supply and use of West Texas Intermediate which justified the WTI price being at $147 per barrel on July 8 2008 and under $40 in December?

The management of Semgroup considers that they were a victim of a trading coup, and if that were so, I think you will concede that it had nothing whatever to do with physical market supply and demand in the "real world".

It appears to me that the basis of your antagonism is that you believe that I am some sort of "denialist". Far from it: I believe that Peak Oil is a self evident reality. But it is a reality which we cannot manage with the totally dysfunctional market mechanism we have. If you cast your mind back to the Seven Sisters Big Oil cartel, we didn't see volatility of this order. In fact, we saw virtually no volatility at all. But we did see producer nations receiving virtually none of the fruits of their production.

IMHO global producers, and global consumers should sit down at a Bretton Woods II and agree a fair market mechanism for producing, distributing and above all saving and making best use of a scarce resource while we have it, and THEN investing the proceeds in production of renewable energy and inenergy savings. I have long advocated an "International Energy Clearing Union" and "unitisation" of fuel as mechanisms. IMHO we would also need a formula eg The Wade Formula or mechanism eg a charge on positive and negative energy trade balances for allocating and investing energy.

In such a model the current value-extracting intermediaries will become value-sharing service providers, or they will go out of business. In fact we are already seeing this happen in oil and gas production as sovereign nations take back or retain ownership of their resources and engage Big Oil as contractors.

I have a fascinated admiration for Goldman Sachs as an organisation. I have known and had dealings with many of their people over the years, and have great respect for their ability and work ethic.

Similarly, I think a submarine is a beautiful piece of engineering: but a submarine has the malign purpose of sinking ships and launching nuclear missiles.

The problem with Goldman Sachs - at least in the last 25 years - is that their function as a financial service provider partnership has declined and they have evolved into a transaction-oriented (rather than relationship-oriented) joint stock company with the specific - and IMHO malign - purpose of extracting profit for the benefit of rentier shareholders, as a trading intermediary.

In the same way that submarines do not organise the convoys we should not allow trading intermediaries to control the market mechanism.

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westexas on July 27, 2009 - 11:20am

IMO, average annual oil prices are a better indication of what producers actually receive and what consumers actually pay, and I think that the recent bull market in oil prices started in 1999, after hitting a recent annual low of $14 in 1998:

The overall average annual rate of increase in oil prices was about +20%/year from 1998 to 2008, with 2000 being the fastest year over year rate of increase, not 2008.

And note that the one annual decline in the 10 year 1998-2008 time frame was 2001, following the fastest year over year rate of increase, in 2000.

The second year over year decline in the 11 year 1998-2009 time frame will be in 2009, following the second fastest year over year rate of increase, in 2008.

And Henry Groppe's view, from the most recent ASPO-USA Peak Oil Review:

http://www.energybulletin.net/node/49707

An Alternative View 
(emphasis added)

In contrast with the conflicting and shifting opinions about the immediate prospects for oil prices, Henry Groppe, 83, who has been following the oil markets for over 50 years, firmly believes that oil prices are climbing, and will continue to climb, because of fundamentals. While speculators may force higher peaks and lower troughs, only fundamentals can set the basic trend in motion.

Groppe believes that actual imports have been running 1.25 to 2 million b/d less than reported in official export statistics and that weekly inventory numbers are unreliable. He further believes that worldwide demand is stronger than generally held and that prices will move towards $100 a barrel later this year. Prices above $90 a barrel would take such a heavy toll on the world’s economy that OPEC would be forced to drive down prices by increasing production.

Should Groppe’s analysis prove correct and the world oil markets are in reality much tighter than official reporting holds, then there is clearly far more serious economic trouble just ahead.

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steve from Virginia on July 28, 2009 - 1:42am

I agree with Groppe, I don't think inventory figures are any more accurate than Chinese GDP numbers. The of a piece with Dennis Kneale's and the stock exchanges' attempts to hype the so- called 'recovery'. Any trader in any market has to be aware of the energy cost constraint, even if it is unmentionable.

It's hard to explain away the effect on the world's economies of a 500% rise in price in the one elememt besides credit that is essential to commercial enterprise. Ironically, credit isn't cheap, either.

That is, if you can get it ...

CNN Money sez:

$70 oil menaces budding recovery

As oil prices rise, some say already weak consumer spending is in danger of taking an even harder hit.
Steve Hargreaves, CNNMoney.com staff writer
Last Updated: June 10, 2009: 7:44 AM ET

NEW YORK (CNNMoney.com) -- Two weeks change a lot in the oil markets.

At the end of May CNNMoney.com ran a story asking if $60 oil will kill any economic recovery. 'No," most analysts said - consumers could shoulder $60 crude, and analysts didn't see prices going much higher.

Now oil is touching $70 a barrel. Goldman Sachs recently said it sees crude at $85 by the year's end. With the economy still on life support, oil is drifting dangerously close to being the wet blanket at the recovery's party.

Many say consumer spending - which accounts for over two thirds of the nation's economic activity - takes a big hit when crude hits $100 and gas $3 a gallon. Some say it's more like $125 crude and $4 gas. Others say that during a recession $80 is the breaking point.

You know it's funny, ask any Peak Oil expert and they will say; "after the peak prices will climb ..." Prices have climbed already! Does this mean that the price rise over the past ten years doesn't count? That a bell will ring and THEN prices will REALLY go up?

Anyway, don't look now but Peak Natural Gas is taking place right now.

http://economic-undertow.blogspot.com/2009/07/peak-natural-gas.html

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Drake on July 27, 2009 - 9:06am

You say:

back to the Seven Sisters Big Oil cartel, we didn't see volatility of this order.

This was because oil supply was plentiful. Now it is not and volatility has increased.

In your reply you also refer to a particular company saying that their management blamed a "trading coup" for oil price movements. A lot of companies (and you) are confused as to why oil prices are now so volatile. They and you are lashing out with conspiracy theories. Maybe they and you should read TOD and the post from two days ago which explains the price changes.

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ChrisCook on July 27, 2009 - 9:36am

I read it, and there is fascinating discussion.

Oil prices are IMHO volatile because of:

(a) gearing aka leverage; and

(b) the fact that volatility is in the interests of intermediaries, who own and control the market platform.

A disintermediated market, without gearing, would resolve most, but never all, of the volatility.

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xtran9 on July 27, 2009 - 11:03am

The outlook is crystal clear: we get real structural undersupply of oil markets, like in the period through 2005-2008, cuminating in 147-dollar oil. This time around, Peak Oil oblige, there is no respite unless we have permanent economic recession trimming global demand at least as fast as depletion trims supply or "offer".

My argument for a long time now, aired at a couple of ASPO conferences (rare occasions when I'm allowed out of my "unemployable" box), is a Global Energy Transition Program, with bespoke institutions, with clout, like an International Energy Fund modeled on the IMF
There would also be a beefed up IEA, with permanent oil exporter and oil importer country representation, that sets supplies and prices on a 90-day forward basis. With a little residual market arbitrage to keep Goldman Sachs and similar parasites from getting too apoplectic !

The Energy Transition Fund, focusing worldwide renewable energy and energy saving goals, would be funded by an Energy Levy on the prices set and the oil supplied through the new international Oil & Gas Authority.

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ChrisCook on July 27, 2009 - 12:19pm

I think that the key is for producers and consumers to finance their necessary transitional investments through the "unitisation" of energy. ie the issue of Units redeemable in energy.

Rather than looking at oil, we should look at carbon fuel use and gradually introduce a levy on that, compensating consumers with Units redeemable in energy use. The resulting "Carbon Pool" fund then finances the necessary investment - through loans denominated in energy - in renewable energy and the cheapest energy of all, energy savings or NegaWatts.

I also think that it is global agreements which are necessary, rather than global institutions, which invariably take on a life of their own.

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Keopele on July 27, 2009 - 4:41pm

Price is not a linear function of supply and demand. As demand exceeds supply the price moves exponentially and not in a linear function as many seem to suggest.

Keopele

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Mamba on July 27, 2009 - 11:35am

Relying on Goldman-links has become the most common cheap tactic for anyone trying to win populist support for a shallow argument.

Anything negative anyone says about Goldman Sachs would appear to be justified, judging by today's Kunstler blog.

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lengould on July 27, 2009 - 3:14pm

From the Kunstler blog linked by Mamba:

Readers of this blog know I'm allergic to conspiracy theories. But surveying the scene out there, it is hard to not conclude that Goldman Sachs has become the "front-runner" of a criminal syndicate defrauding US taxpayers.

Yeah, what he said! Problem is, it's NOT JUST the US taxpayer, but taxpayers in every nation. But Canadians for example, can't assemble the clout it takes to discipline it, all we can do is get ever more angry at the stupid system in the USA which allows it.

BTW, in all your discussions of changes in oil prices above, I see no discussion of the dramatically falling $US, eg. $CDN gone from $0.62 to $0.92 since 2000.

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