June 28, 2008
U.S. Energy Policy
Posted by Tom at 12:01 AM | Comments (0) | TrackBack (0)
June 18, 2008
Futures trading 101
As noted many times over the years on this blog (recently here and here), the instinct of most politicians and much of the mainstream media is to embrace simple "villain and victim" morality plays when attempting to explain investment loss. The more nuanced story about the financial decisions that underlie the failed investment strategy doesn't garner enough votes or sell enough newspapers to generate much interest from the pols or muckrakers. That's why we are currently enduring demagoguery regarding speculators and why it's so important that citizens who are not familiar with the function of speculation in markets take a moment to read Mark Perry's primer on the economics of future trading:
In fact, speculators don't determine market forces, they respond to market forces of supply and demand.
Therefore, speculators can't be blamed for high oil prices, because high oil prices are ultimately caused by factors beyond the control of any speculator: rising global demand in places like India and China, and global supply in places like Saudi Arabia, Nigeria and Venezuela. No individual speculator, or any group of speculators has an iota of influence over the demand for gas or oil in Brazil, nor do they have one iota of influence over the amount of oil in Canada or ANWR, or any control over OPEC quotas. Think about it - Exxon Mobil, one of the largest oil producers and private oil companies in the world, has NO control over the world spot price of oil, so how could a small group of speculators?
Read the entire post. Part II is here and an additional post on the same topic is here.
Posted by Tom at 12:01 AM | Comments (0) | TrackBack (0)
April 29, 2008
Fueling food riots
Peter Gordon observed the other day that "politicians are better at creating problems than addressing them. Schools, housing, health care, transportation and others suffer from too much political attention."
Echoing that idea, Clear Thinkers favorite James Hamilton writes about one of the underlying economic reasons for food riots that are occurring in developing nations in some parts of the world:
As a result of ethanol subsidies and mandates, the dollar value of what we ourselves throw away in order to produce fuel in this fashion could be 50% greater than the value of the fuel itself. In other words, we could have more food for the Haitians, more fuel for us, and still have something left over for your other favorite cause, if we were simply to use our existing resources more wisely.
We have adopted this policy not because we want to drive our cars, but because our elected officials perceive a greater reward from generating a windfall for American farmers.
But the food price increases are now biting ordinary Americans as well. That could make those political calculations change, and may present be an opportunity for a nimble politician to demonstrate a bit of real leadership. I notice, for example, that although Senator Barack Obama (D-IL) was among those who voted in favor of the monstrous 2005 Energy Bill that began these mandates, Hillary Clinton (D-NY) and John McCain (R-AZ) were among the 26 senators who bravely voted against it.
Wouldn't it be refreshing if one of them actually tried to make this a campaign issue?
Sigh. Read the entire post.
Posted by Tom at 12:01 AM | Comments (0) | TrackBack (0)
April 20, 2008
The latest big oil discovery
As oil futures hit $115 per barrel late this past week, The Economist ran this article on the questions surrounding the recent announcement regarding the discovery of Brazil's Carioca-Sugar Loaf Field, which could be one of the largest oil discoveries in history. Given the time, expense and risk involved in extracting the oil, the announcement of the discovery didn't affect oil markets much, but The Economist article nevertheless concludes as follows:
The discoveries do suggest that the gloomiest pundits are wrong to predict that the world will soon run out of oil. It is not that there are still lots of huge oil fields out there: the number of mammoth discoveries is declining, Tupi (and perhaps Carioca-Sugar Loaf and Jupiter) notwithstanding. But the new finds do illustrate how the technology with which oil firms hunt for, extract and process fossil fuels is constantly improving. Petrobras’s recent success is only possible thanks to recent advancements in seismic surveys, drilling, and offshore platforms. Other technological developments are allowing a greater proportion of the oil found around the world to be recovered and are even expanding the definition of oil, as firms conjure liquid fuel from the solid tar-sands of Canada, for example, or from coal and natural gas.
As noted recently here, the recent increases in oil prices are making alternative energy sources economically viable. Thus, take note of what former ExxonMobil CEO Lee Raymond noted years ago in response to a question on oil prices:
Interviewer: "Some people think prices will keep going up?"Raymond: "Maybe. I'll bet they'll be lower at some point."
Posted by Tom at 12:01 AM | Comments (0) | TrackBack (0)
April 15, 2008
An eternal optimist
Don't tell Ray Kurzweil that we ought to be all gloomy about the prospects for mankind. This WaPo op-ed reflects that he is downright bullish:
MIT was so advanced in 1965 (the year I entered as a freshman) that it actually had a computer. Housed in its own building, it cost $11 million (in today's dollars) and was shared by all students and faculty. Four decades later, the computer in your cellphone is a million times smaller, a million times less expensive and a thousand times more powerful. That's a billion-fold increase in the amount of computation you can buy per dollar.
Yet as powerful as information technology is today, we will make another billion-fold increase in capability (for the same cost) over the next 25 years. That's because information technology builds on itself -- we are continually using the latest tools to create the next so they grow in capability at an exponential rate. This doesn't just mean snazzier cellphones. It means that change will rock every aspect of our world. The exponential growth in computing speed will unlock a solution to global warming, unmask the secret to longer life and solve myriad other worldly conundrums. [. . .]
Take energy. Today, 70 percent of it comes from fossil fuels, a 19th-century technology. But if we could capture just one ten-thousandth of the sunlight that falls on Earth, we could meet 100 percent of the world's energy needs using this renewable and environmentally friendly source. We can't do that now because solar panels rely on old technology, making them expensive, inefficient, heavy and hard to install. But a new generation of panels based on nanotechnology (which manipulates matter at the level of molecules) is starting to overcome these obstacles. The tipping point at which energy from solar panels will actually be less expensive than fossil fuels is only a few years away. The power we are generating from solar is doubling every two years; at that rate, it will be able to meet all our energy needs within 20 years.
I just thought I'd toss in that third paragraph for those in the oil and gas industry that believe that a period like the mid-to-late 1980's can't happen again. Meanwhile, light, sweet crude oil futures for May delivery settled yesterday at $111.76, a new record, on the New York Mercantile Exchange.
Posted by Tom at 12:01 AM | Comments (0) | TrackBack (0)
January 14, 2008
Myths about oil are hard to dispel
Amidst the demagoguery of a U.S. Presidential campaign, it's rare to find the mainstream media willing to run Robert Bryce's common sense on energy policy and oil prices. For example:
Myth 3: Energy independence will let America choke off the flow of money to nasty countries.Fans of energy independence argue that if the United States stops buying foreign energy, it will deny funds to petro-states such as Iran, Saudi Arabia and Hugo Chavez's Venezuela. But the world marketplace doesn't work like that. Oil is a global commodity. Its price is set globally, not locally. Oil buyers are always seeking the lowest-cost supplier. So any Saudi crude being loaded at the Red Sea port of Yanbu that doesn't get purchased by a refinery in Corpus Christi or Houston will instead wind up in Singapore or Shanghai.
Refer to this article whenever you are listening to the candidates from either party start talking about energy policy. Come to think of it, while considering political choices, you should also keep handy this Bryan Caplan/WaPo op-ed entitled 5 Myths About Our Ballot-Box Behavior.
Posted by Tom at 12:05 AM | Comments (2) | TrackBack (0)
January 6, 2008
"Che" Kennedy, Hugo Chavez’s useful idiot
This Examiner.com article picks up on something that this previous post noted over a year ago -- the economic absurdity of Joe "Che" Kennedy's deal with Venezuelan strongman Hugo Chavez under which Kennedy's non-profit Citizens Oil Corp buys discounted oil from Venequela to provide low-income American customers with a 40 percent discount on a one-time delivery of up to 200 gallons of heating oil. Kennedy rationalizes this program despite the fact that the poorest of Citizen's customers are relatively wealthy in comparison to the 40% of Venezuelans who subsist on about $2 a day. The Examiner concludes its story with the following observation:
Curiously, despite his wealth, Kennedy receives a $400,000 annual salary [from Citizens, which is a non-profit]. Instead of embracing his uncle's [the late John F. Kennedy] courageous anti-communist legacy, he has become just another smarmy celebrity who yammers on about having compassion for the poor from the doorways of multimillion-dollar mansions and private jets, all the while accepting oil stolen by a dictator. Lenin had a name for Western liberals who did this kind of thing – "useful idiots."
Posted by Tom at 12:20 AM | Comments (0) | TrackBack (0)
December 21, 2007
Checking in on the oil patch
I've been meaning to pass along a couple of interesting items regarding oil production and prices.
First, several of the bloggers over at the Oil Drum have launched an intriguing new project -- a Wikipedia project in which they and a number of other contributors are accumulating data on all the major, new oil projects around the world and contributing the data to a single database that can be used to document historical trends and attempt to forecast future trends in oil production. The contributors are focusing on basic data for all of the major projects that would add new oil production capacity, including estimates of the peak flow when such information is available. My compliments to the creators of this excellent information resource.
Meanwhile, this John Cassidy column predicts that the price of oil has peaked for the time being and that prices will begin falling to the $50 a barrel range:
. . . the experts who are predicting the worst, based on geology and geopolitics, are missing the crucial role that economic incentives play in determining the price of crude. The tripling of oil prices since the summer of 2003 has unleashed forces that within the next two or three years will bring oil prices tumbling back down to below $50 a barrel. Looking even further ahead, prices could easily fall to $30 a barrel or even lower. So before you trade in your Cadillac Escalade for a Toyota Prius, think twice: $1.50-a-gallon gas might not be gone forever.
In fact, Clear Thinkers favorite James Hamilton also thinks that oil prices have peaked.
Posted by Tom at 12:07 AM | Comments (0) | TrackBack (0)
December 19, 2007
The pixie dust theory
It has something to do with subsidies for ethanol.
Posted by Tom at 12:00 AM | Comments (0) | TrackBack (0)
November 15, 2007
What goes up, usually comes down
The BBC's Evan Davis provides a short article on how to keep the recent spike in oil prices in perspective:
It's clear that $100 a barrel is very high. Although it's worth saying, it's still not a record.1864 was in fact the most expensive year for oil. It was over $104 in today's money. Notwithstanding that record (and most of us in the media will ignore it when talking of record highs in the next few weeks - we'll be using the high of $104.7 reached in 1980 after the Iranian revolution) we can at least say an impending $100 barrel is getting historically significant.
And Davis provides the following observation about the market for oil that echos that of former Exxon chairman, Lee Raymond:
But the point of volatile market is that it swings both ways.The longer we have higher oil prices, the more we can economise on oil - by switching to smaller cars for example. And the more oil that gets produced – a small excess of supply over demand - and the price can plummet.
The lesson of history, is that when oil prices soar up to record levels, they usually then fall back down.
And here's one final price of oil thought for the day, courtesy of Shai Agassi:
The cost of the average used car in Europe is now cheaper than the cost of gasoline to drive it for a year . . .
Posted by Tom at 12:24 AM | Comments (0) | TrackBack (0)
August 13, 2007
Uh, Oh
If you thought that Bill O'Reilly's ideas about gasoline prices were screwy, Bryan Caplan surveys the debate responses of the Democratic Party presidential candidates on the subject.
I don't know what's more troubling. The candidates' answers or the fact that those inane answers are formulated because they help get the candidates elected to office?
Posted by Tom at 12:00 AM | Comments (0) | TrackBack (0)
June 2, 2007
Edwardsian demagoguery
As if on cue after this post from yesterday, Democratic Presidential candidate John Edwards is engaging in his usual brand of demagogery (earlier examples here):
Democratic presidential hopeful John Edwards says a wave of mergers in the oil industry should be investigated by the Justice Department to see what impact they have had on soaring gasoline prices.During a campaign stop in Silicon Valley Thursday, Edwards planned to berate the oil industry for "anticompetitive actions" and outline an energy plan he says would reduce oil imports "and get us on a path to be virtually petroleum-free within a generation."
"Vertically integrated companies like Exxon Mobil own every step of the production process -- from extraction to refining to sale at the pump, enabling them to foreclose competition," says an outline of Edward's energy plan.
Now, you can peruse the "Economics-Energy Prices" category archive of this blog and find many credible resources that utterly debunk Edwards' theory regarding the cause of rising gasoline prices. But Andrew Morriss, one of Larry Ribstein's colleagues at the University of Illinois College of Law, provides this handy SSRN paper in which he cogently explains that governmental interference with gasoline markets has a far larger impact on gasoline prices than anything Exxon Mobil does:
Rising gasoline prices have brought energy issues back to the forefront of public policy debates. Gasoline markets today are the result of almost a hundred years of conflicting regulatory policies, which have left them dangerously fragmented. In this article, I analyze that regulatory history, highlighting the unintended consequences of regulation that have pushed the United States into a series of loosely connected regional markets rather than a broad, deep national market. This fragmentation leaves the American economy is vulnerable to natural disasters, terrorist attacks, and foreign dictators in ways that it need not be. It also produces higher prices for consumers and reduced innovation by refiners.
TigerHawk understands, too.
Posted by Tom at 12:00 AM | Comments (0) | TrackBack (0)
May 20, 2007
The real price gougers
George Will brilliantly explains the folly of governmental initiatives to control the price of gasoline and, in so doing, exposes the true price gougers:
[House Speaker Nancy] Pelosi announced herself "particularly concerned" that the highest price of gasoline recently was in her San Francisco district -- $3.49. So she endorses HR 1252 to protect consumers from "price gouging," defined, not altogether helpfully, by a blizzard of adjectives and adverbs. Gouging occurs when gasoline prices are "unconscionably" excessive, or sellers raise prices "unreasonably" by taking "unfair" advantage of "unusual" market conditions, or when the price charged represents a "gross" disparity from the price of crude oil, or when the amount charged "grossly" exceeds the price at which gasoline is obtainable in the same area. The bill does not explain how a gouger can gouge when his product is obtainable more cheaply nearby. Actually, Pelosi's constituents are being gouged by people like Pelosi -- by government. While oil companies make about 13 cents on a gallon of gasoline, the federal government makes 18.4 cents (the federal tax) and California's various governments make 40.2 cents (the nation's third-highest gasoline tax). Pelosi's San Francisco collects a local sales tax of 8.5 percent -- higher than the state's average for local sales taxes.
To understand how gasoline prices are set, read this.
Posted by Tom at 12:01 AM | Comments (4) | TrackBack (0)
April 3, 2007
James Hamilton on Saudi oil production
Clear Thinkers favorite James Hamilton is thinking about Saudi Arabia's oil production and that always makes for interesting reading:
Saudi oil production is now down more than 10% from its peak level in 2005; . . . this decline in production has followed an erratic pattern, beginning in October 2005 when oil was selling for $62 and continuing through July 2006 when oil briefly touched $75, making it difficult to see these cutbacks as an effort to stabilize oil prices; . . . the production decline coincided with a doubling in the number of oil rigs employed in Saudi Arabia since 2004 and tripling since 1999.
Has Saudi oil production peaked? Read the entire post. Is Matt Simmons right after all?
Posted by Tom at 4:20 AM | Comments (0) | TrackBack (0)
March 1, 2007
Peak Oil -- Much ado about nothing?
Vaclav Smil is a distinguished professor of economics at the University of Manitoba and, based on this TCS Daily op-ed, doesn't think much of Peak Oilers, including well-known Houston-based Peak Oil advocate, Matt Simmons:
Simmons claims that Saudis have falsified their oil reserve data so much that in reality they have only a fraction of the claimed oil left in the ground, and that their, and the world's, largest oilfield, al-Ghawar, has been so damaged by waterflooding (used for enhanced recovery of oil) that it faces imminent and massive extraction downturn. And yet Saudis will be investing nearly $50 billion between 2007 and 2011 to get this nonexistent oil to the global market. Perhaps they know something that Simmons is not aware of (these days it is, after all, de rigueur to say only bad things about Saudis).
Smil concludes by reminding us of something that is not well understood by the political forces that frequently attempt to heap even more taxes on the energy industry -- that is, that investing in oil and gas exploration is not necessarily the lucrative long-term investment that many believe:
Finally, a practical reminder: If there is an imminent peak of oil extraction, should not then the prospective shortage of that increasingly precious fuel result in relentlessly rising prices and should not buying a barrel of oil and holding onto it be an unbeatable investment? But a barrel of a high-quality crude, say West Texas intermediate, bought at $12.23/b in 1976 as a nest-egg for retirement and sold before the end of 2006 at $60/b would have earned (even when assuming no storage costs) about 1.2% a year, a return vastly inferior to almost any guaranteed investment certificate and truly a miserable gain when compared with virtually any balanced stock market fund. And a freedom-at-55 investor who bought that barrel at 30 years of age in 1980 and sold in 2005 would have realized a nearly forty per cent loss on his precious investment. Being a true believer in imminent peak oil may be fine as a provocative notion but not as a means of securing a comfortable retirement.
Posted by Tom at 4:01 AM | Comments (0) | TrackBack (0)
February 15, 2007
Baby talk on energy?
So, I think it's safe to say that, after this blog post, Cato's Jerry Taylor is not going to be asked to contribute a piece to the Wall Street Journal's ($) next special section on alternative energy:
One could spend a lifetime slamming dross in the news pages of the Wall Street Journal - particularly when it comes to energy. Only the driving need to be more productive with my time keeps me from doing so on a daily basis. But when something as bad as this insert comes along, something must be said.
Taylor is not impressed with Houston-based Peak Oil advocate, Matt Simmons, either:
Moving right along, page two features recommended readings from Matthew Simmons, the most prominent proponent of the idea that the world’s oil fields are about to run dry. This, to put it charitably, is a minority perspective among oil analysts. That the Journal turns to someone like Simmons - and only Simmons - to lay in print the groundwork for readers interested in knowing more about the oil industry speaks volumes. Much more intelligent conversations about oil with Daniel Yergin and Robert Mabro are briefly referenced as on-line supplements.
Then, Taylor takes off on the John Biers article about Houston's leadership in promoting alternative energy initiatives:
Reporter John Biers mails in a vacuous piece titled “Texas’ New Tea” about how Houston is poised to become the center of the renewable energy biz, transforming the former oil town into the international headquarters of Big Green, Inc.. While his article might as well have been written by the city’s Chamber of Commerce, it would be nice to provide some perspective. For example, how much capital is flowing in to Houston to underwrite renewable energy investments versus how much capital is glowing in to Houston to underwrite fossil energy investments? I can guarantee you that the dollars associated with the latter are light years beyond those associated with the former and that rising oil prices are doing far more for the city’s economic health than anything else. He might have also asked how much of that venture capital is being driven by government regulation and subsidies. The answer would be “all of it” - which speaks volumes about how precarious those investments might be.
Here is Taylor's entire piece. Enjoy.
Posted by Tom at 4:11 AM | Comments (0) | TrackBack (0)
January 29, 2007
The ethanol con
While President Bush on one hand made a productive health care finance proposal in his State of Union Address last week, his big push for alternative fuel development was not as well-conceived. As this OpinionJounal op-ed notes, the development of ethanol as an alternative fuel source has been mostly a con job of epic proportions.
[F]ederal and state subsidies for ethanol ran to about $6 billion last year, equivalent to roughly half its wholesale market price. Ethanol gets a 51-cent a gallon domestic subsidy, and there's another 54-cent a gallon tariff applied at the border against imported ethanol. Without those subsidies, hardly anyone would make the stuff, much less buy it--despite recent high oil prices.
Jerry Taylor of the Cato Institute has done a ton of work exposing the ethanol boondoggle, and this recent post links several of his works. The ethanol con is a quintessential example of special interests manipulating market conditions and political rhetoric to capture a windfall that would not otherwise be available. It's also a reminder to all of us to grab our pocketbooks whenever we hear a government official touting the next big government program to develop something at a supposedly cheaper or more stable price than what the markets are providing.
Posted by Tom at 5:58 AM | Comments (1) | TrackBack (0)
January 18, 2007
And about those declining oil markets
Crude oil fell to $50 a barrel earlier this week, the lowest price since early 2005 and a continuation of a steady decline in price since the market hit $80 a barrel last year. Why those greedy oil companies would continue to allow crude oil prices to fall after last year's election (rather than simply before) has not yet been explained by the O'Reilly-type conspiracy theorists, but Clear Thinkers favorite James Hamilton analyzes the data and concludes that there has not been any dramatic shift in the underlying market forces that would explain the decline. Professor Hamilton believes that fundamentals generally drive the price of oil, so he notes the trendy belief that speculators in the oil markets drove last year's price hike:
What about attributing the run-up in oil prices almost to $80 a barrel, and now the latest drop back near $50, entirely to speculation, without any reference to fundamentals? The reason I’ve resisted that hypothesis is that it’s based on the premise that the folks who manage these funds are just throwing their money away.
Thus, Professor Hamilton observes:
Until U.S. and Chinese oil demand are kept in check, and until big production increases are forthcoming, it's hard for me to see how the price could continue to plunge.My advice to would-be speculators remains that fundamentals are ultimately what must drive the market. Anyone who believes otherwise should not expect to hang onto their wealth for long.
Check out the entire post, as well as some of the insightful comments.
Posted by Tom at 5:27 AM | Comments (0) | TrackBack (0)
November 30, 2006
Hugo Chavez's odd charitable venture
This OpinionJournal editorial reviews the rather odd arrangement under which Houston-based energy company Citgo -- which is controlled by the Socialist Venezuelan government of Hugo Chavez -- supplies home heating oil to former Democratic Congressman Joseph P. Kennedy, II's Citizens Energy Corporation at a 40% discount. The nonprofit Citizens passes the savings onto the poor and contends that it helps 400,000 homes in 16 states that would otherwise have trouble heating their homes.
The OpinionJournal piece scours Kennedy for playing nice with Chavez, but the article fails to mention the oddest aspect of this supposed charitable venture. The poorest of the U.S. citizens who will receive the discounted price on the home heating fuel that Citgo sells to Citizens are far wealthier than the poor people of Venezuela, four out of 10 of whom survive on $2 a day or less. How does it make sense for Chavez and Kennedy to sell oil at a 40% discount to people in the U.S. who are far richer than Chavez's constituents in Venezuela? Sort of sounds like taking from the poor to give to the not-as-poor to me.
By the way, as noted in this earlier post, don't worry too much about Chavez cutting off Venezuelan energy supplies to the U.S. We'll be just fine without them.
Posted by Tom at 4:29 AM | Comments (0) | TrackBack (0)
November 9, 2006
Why it's not a good idea to soak the energy companies
When you meet someone who doesn't quite get the correlation between high energy company profits and the capital-intensive nature of oil and gas production, pass along this NY Times article to them:
As oil consumption grows and access to most oil-rich regions becomes increasingly restricted, companies are venturing farther out to sea, drilling deeper than ever in their quest for energy. The next oil frontier — and the next great challenge for oil explorers — lies below 10,000 feet of water, through five miles of hard rock, thick salt and tightly packed sands.“It’s not a place for the timid,” said Paul K. Siegele, the vice president for deepwater exploration at Chevron, which commissioned a survey by the Neptune. “It’s a place where a lot of people have lost their shirts.”
To picture the challenge, imagine flying above New York City at 30,000 feet and aiming a drill tip the size of a coffee can at the pitcher’s mound in Yankee Stadium. Then imagine doing it in the dark, at $100 million a go.
Even after hitting pay dirt, it will take another decade and billions of dollars to transform oil from these ultra-deep reserves into gasoline. Some of the technology to pump the sludge from these depths, at these pressures and temperatures, has not yet been developed; only about a dozen ships can drill wells that deep, and no one knows for sure how much oil is down there.
While most people regard affordable and abundant supplies as an essential element of the nation’s prosperity, few realize how complex and costly the quest has become, even in the nation’s own backyard. At the same time, some experts argue that the industry is nearing the limits of what it can do to maintain a growing supply of fossil fuels.
Amen. Read the entire article.
Posted by Tom at 4:53 AM | Comments (0) | TrackBack (0)
October 27, 2006
Scarcity rents and oil prices
Clear Thinkers favorite James Hamilton is thinking about oil prices again, and that's always a good thing. This time, Professor Hamilton examines the impact that scarcity rents are having on oil prices as the markets increasingly adjust for the risk of resource exhaustion:
My own view is that, for most of the past century, Dave [Cohen']s inference is exactly correct -- the resource exhaustion was judged to be sufficiently far off as to be ignored. However, unlike those whom Dave terms the Cornucopians, I do not infer that the next decade will necessarily be like the previous century. Certainly declining production from U.S. oil reservoirs set in long ago. And if one asks, why are we counting on seemingly geopolitically unreliable sources such as Iraq, Nigeria, Angola, Venezuela, and Russia for future supplies, and transferring vast sums of wealth to countries that are covertly or openly hostile to our interests, the answer appears to me to be, because we have no choice. Resource scarcity in this sense has already been with us for some time, and sooner or later the geological realities that governed U.S. oil production are also going to rule the day for the rest of the world's oil producing countries. My expectation has accordingly been that, although scarcity rents for oil were irrelevant for most of my father's lifetime, they would start to become manifest some time within mine. And I have been very interested in the question of when.
Read the entire post, and then try to resist calling your commodities broker. ;^)
Posted by Tom at 4:47 AM
October 9, 2006
More on that energy price conspiracy
A couple of weeks ago, this post noted the news stories about some pundits were floating the theory that the recent slide in energy prices was a dark conspiracy of powerful political forces that were attempting to ensure the victory of the evil capitalist roaders in the upcoming mid-term elections. Bill O'Reilly was probably pleased with these reports.
Subsequently, a week or so ago, Clear Thinkers favorite James Hamilton shot down a similar report that Goldman Sachs was really behind the price decline.
But absurd conspiracy theories do not die easily in American society. Last Friday, this Washington Post article again channels the conspiracy theory, this time pointing toward a new bogeyman, Saudi Arabia:
According to this theory, the Saudi government is doing Bush a favor by trying to bring down prices before the election. The evidence? Some say the Saudi government has a long-standing relationship with the Bush family. They also cite the 2004 book by author and Washington Post assistant managing editor Bob Woodward, "Plan of Attack," which said that then-Saudi ambassador to the United States, Prince Bandar bin Sultan, promised to keep oil production high enough to moderate fuel prices and bolster the U.S. economy during the presidential election year.
Professor Hamilton dutifully tries to keep up with the latest conspiracy theories:
So let me see if I've got this straight-- the evidence is that (1) Bob Woodward says that somebody told him that the Saudis made a promise in 2004 and (2) the Saudis could have reduced production by even more than they already have, if they really wanted to keep prices from falling. As for (1), the Saudis have made plenty of promises -- publicly, for all the world to see-- that came to nothing. And as for (2), what sort of economic theory is this? That the Saudis have been decreasing production over the last year is indisputable. If an even bigger production cut than the Saudis have already made would have been necessary in order to keep prices from falling, doesn't that prove rather conclusively that the cause of the price drop must be something other than what the Saudis have done?
Meanwhile, following up on a thought from this earlier post, Don Boudreaux over at Cafe Hayek chimes in with the following letter to the editor that responds to an earlier letter by an advocate of the energy price conspiracy:
Dear Editor:Alleging that today's falling gasoline prices result from a fiendish plot to keep the GOP in power, Kenneth Jones is certain that "gasoline prices will go right back up to $2.75-plus after the [November] election" (Letters, October 2).
If Mr. Jones is correct, he can make a financial killing. All he need do is to invest all of his assets going long in gasoline futures (which are today about 30 percent lower than they were in late July). Indeed, he ought even to cash out all the equity in his house, max out on his credit cards, and borrow heavily from his brother-in-law so that he can invest as much as possible in these futures.
He can then contribute his post-election financial bounty to the Democratic National Committee.
Sincerely,
Donald J. Boudreaux
Keeping up with nutty conspiracy theories regarding fluctuation in energy prices is a full-time job.
Posted by Tom at 4:40 AM | Comments (0) | TrackBack (0)
September 25, 2006
Demagoging Amaranth
Following on this earlier cue, NY Times business columnist Gretchen Morgenson contends in this column (Times Select, registration required) that Amaranth Advisors, LLP's loss of $6 billion or so last week on the natural gas trading market is conclusive proof that energy markets are in need of more government regulation:
Many of Amaranth’s monster trades in the natural gas markets were conducted on over-the-counter markets or with so-called voice brokers and so were not on regulators’ radar screens.It is too soon to tell what role Amaranth’s gamble had on natural gas prices. But speculators played a significant role in the astonishing rise in energy prices in recent years.
Such is the conclusion of a compelling Congressional report produced in June by the Senate’s Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs. The 49-page report detailed the explosion in energy speculation on unregulated trading markets and recommended eliminating the so-called Enron loophole that put electronic energy trading off the regulatory reservation.
See how easy that was? Just associate "Enron" with a company that suddenly lost about 2/3rd's of its assets and, presto! -- you have the need for more government regulation of trading markets without any analysis whatsoever of whether such regulation would ultimately be more expensive than the cost of the allowing markets to allocate loss. Indeed, how one earth would it have helped had Amaranth made filings with the CFTC? Does anyone really think that such a requirement would have prompted Amaranth to modify its trading practices?
As noted earlier here and here, allowing investors to make bets in energy trading markets -- although not widely understood by the general public -- is tremendously beneficial in forecasting energy prices. Not only will greater regulation of those markets likely undermine those benefits, Morgenson's dubious assertion that speculation in energy markets has caused an increase in natural gas prices is based upon a Senate report that, as noted earlier here, is a sham that was essentially produced by the regulators to feather their nest.
Although I could go on and on about the irresponsible nature of Morgenson's analysis, but Larry Ribstein's weekly evisceration of Morgenson does it much better than I ever could:
As in any free market, the natural gas market aggregates many right and wrong trader bets into a collective judgment about reality that is usually more accurate than a single mind can come up with. This judgment assists society in allocating resources, thereby making us all better off. We may not like what the market is telling us – i.e., that prices are going up -- but that doesn't mean we should regulate it. If we're going to constrain the operation of these markets we ought to be very sure that this regulation helps them be more accurate.Even if there is a case for regulation (which I doubt), nothing about the problems at Amaranth suggests that such regulation will get us more accurate energy prices. Amaranth made a bad bet and its rich investors suffered. Perhaps Amaranth misled its investors about its trading strategies. But as far as I've seen, there was no manipulation of energy markets.
That doesn't stop Morgenson from linking Amaranth, with absolutely no justification, to BP traders' manipulation of propane prices and, of course, to Enron. Morgenson ends her story by saying that "as last week's implosion of Amaranth shows, Enron's' troubling legacy lives on." Morgenson wants to talk about regulating markets, and Amaranth happens to be the most visible anecdote right now connected with those markets, and so she's damn well going to use it for her purposes, relevant or not.
This is irresponsible. The task of a financial columnist with millions of readers should be to enlighten readers, not mislead them with a magician's sleight of hand (Amaranth = BP/Enron). Sadly, we have come to expect this sort of thing from Morgenson. No doubt Morgenson's column will be fodder for equally disingenuous lawmakers who are working on regulating energy markets as we write, and she will play her part in the manufacture of misguided regulation. In the end, Morgenson will get the attention for her writing she craves, while doing more harm than any of the targets of her weekly indignation.
Posted by Tom at 5:24 AM | Comments (1) | TrackBack (0)
September 20, 2006
A story that Bill O'Reilly would love
Oil prices kept falling yesterday as the October crude contract on the New York Mercantile Exchange dropped $2.14 to settle at $61.66 a barrel, which is the lowest price for a front-month crude contract in six months. A couple of weeks ago, Pejman Yousefzadeh wrote this TCS Daily op-ed in which he observed that, despite such declining prices, the Bill O'Reilly-type claims of manipulation of oil markets continue to persist.
As if on cue, this NewsBusters post reports on a recent installment of the CNN show, "The Situation Room," in which CNN reporter Bill Schneider speculated ominously that the current decrease in energy prices has been timed to help Republicans in the midterm elections:
"The drop in prices may last a couple of months, long enough to get through the November election. Could that be what the oil companies want?"
Schneider's observation was then "buttressed" with the insight of one Tyson Slocum, a "consumer advocate:"
"Eighty-one percent of their money goes to members of the Republican Party. I cannot say for sure whether or not they are influencing prices to assure that outcome, but it is, I think, more than just a coincidence that we're seeing an easing of prices at a time of running up to a very, very important election."
That's a helluva consumer advocate who argues that lower prices for consumers is a dark conspiracy of the Republican Party and big energy companies. Does that mean that the far lower energy prices that existed in the run-up to the 2000 election were the result of an equally dark conspiracy of the Democratic Party and big energy companies?
Posted by Tom at 5:07 AM | Comments (0) | TrackBack (0)
September 11, 2006
The art of predicting energy prices
Oil prices continued a steady slide last week, ending the week at a five-month low as concerns about possible shortages that fueled this summer's rally ebbed. The October crude contract on the New York Mercantile Exchange settled at $66.25, the lowest level for a front-month contract since April 5. The contract has lost more than $11 in the past month. Previous posts on the energy markets are here.
Meanwhile, James Hamilton posted this typically astute analysis of the big discovery in the Gulf of Mexico last week and explains why it may not have as big an effect on energy markets as big discoveries of the past. Also, the Chronicle's David Kaplan provides this interesting article on Houston-based chemical engineer Henry Groppe, who has long been one of the most respected behind-the-scenes experts in the Houston business community for predicting energy prices. As noted in this Resource Investor piece from last year, the 80-year old Groppe is the forerunner of such younger experts as Matt Simmons, who have carved-out careers in advising businesses on risks relating to energy prices.
Finally, this recent Economist article reminds us the silliness of bashing big U.S. oil companies for supposedly controlling energy prices. Turns out that the thirteen largest oil companies in the world are all state-owned and control about 90 percent of the world's oil reserves. The biggest U.S. major -- Exxon Mobil -- is a measly 14th and controls only a fraction of the world's reserves.
Pass that information along to Bill O'Reilly if you have a chance.
Posted by Tom at 7:00 AM | Comments (0) | TrackBack (0)
September 5, 2006
Big news from the oil patch
Chevron Corp. and partners Devon Energy Corp. and Norway's Statoil ASA are expected to announce today (WSJ ($) article here and NYT article here) the first successful oil production from a deep-water region in the Gulf of Mexico called the Jack Field that could become the biggest domestic source of oil since the discovery of Alaska's North Slope over 30 years ago.
Meanwhile, the Wall Street Journal ($) is reporting that Paris-based Compagnie Generale de Geophysique has agreed to acquire Houston-based geophysical seismic company Veritas DGC Inc. for about $3.1 billion in cash and stock.
And Clear Thinkers favorite James Hamilton notes a drop in gasoline prices, which is good news. Or is it?
Posted by Tom at 6:10 AM | Comments (0) | TrackBack (0)
August 31, 2006
Understanding contango in the oil markets
As noted in this earlier post, the recent run-up in energy prices and the lingering "contango" in the crude oil trading markets -- that is, futures contracts for a given product priced substantially higher than that same product for near-term delivery -- has prompted the usual conspiracy claims from demagogues who seek more power through damaging regulation of the beneficial trading markets. As if on cue, the U.S. Senate Permanent Subcommittee on Investigations recently issued a report asserting that traditional supply and demand conditions cannot adequately explain current high oil prices and contending that evil capitalist roaders in the trading markets are to blame for a substantial portion of the lingering high prices.
Thankfully, the blogosphere provides a counterbalance to such demagogic appeals. In this post, University of Houston business professor Craig Pirrong disassembles the Senate report, observing at the outset:
Where to begin? The report is a farrago of facts, factoids, and falsehoods stitched together to arrive at a conclusion that is miles beyond what the evidence actually supports. Moreover, although I concur that manipulation is a potential problem in energy markets–as it is in all commodity and even financial markets–the report does not even make the effort to show that current price levels are the effect of manipulation. Nonetheless, it sternly recommends a variety of new regulatory initiatives to combat manipulation, suggesting (by implication) that manipulation is the cause of high oil prices. This is a flagrant example of bait-and-switch of a variety that I imagine that the Subcommittee members would vigorously condemn if committed by your local used car salesman.The report (and most of the other criticisms of speculation) fails on only two points: logic and evidence. Other than these shortcomings, it’s great.
Read the entire post.
Posted by Tom at 4:41 AM | Comments (0) | TrackBack (0)
August 18, 2006
More on the benefits of oil and gas trading
Following on this post from earlier in the week on the benfits of speculation in the oil and gas commodities markets, Chronicle business columnist Loren Steffy pens this column (related podcast here) along the same lines that includes an interview with Craig Pirrong, the director of energy markets for the Global Energy Management Institute at the University of Houston's C.T. Bauer Business School. As Pirrong notes, the current criticism of speculators in the oil and gas markets is simply the latest salvo in a long and misguided American tradition of scapegoating speculators:
Investors [in oil and gas commodities markets] . . . make bets on what the price of oil will be. If they're right, they make money. If they're wrong, they lose.That, Pirrong says, allows producers to share the risk that comes with volatile prices. Speculators, using derivatives and other financial tools, can offer producers more stable price contracts. The stability makes it easier for oil companies to invest in new production or new technology, he says.
"We'd be worse off if they hadn't come in," Pirrong says.
Historically, though, speculators have been blamed when markets have gone awry. When Congress attempted to regulate agriculture markets in the 1880s and 1890s, speculators were cited as a threat to price stability, Pirrong says. The same was true in the 1920s, when regulation was enacted amid slumping commodity prices that were again blamed on speculators.
"This is just the latest chapter in a very old story," Pirrong says.
Posted by Tom at 6:17 AM | Comments (0) | TrackBack (0)
August 16, 2006
Do as I say? Or as I do?
According to this report, Illinois senator Barack Obama warned citizens at his 50th Town Hall meeting about gas guzzling vehicles and proclaimed that such vehicles are a big part of the blame for the world's higher temperatures. In urging citizens to switch to higher mileage hybrids, Obama observed that "it would save more energy, do more for the environment and create better world security than all the drilling we could do in Alaska."
After the meeting, Obama proceeded to leave in his SUV, a GMC Envoy.
But it's not finished. When Obama's staff saw the news report, they sent the following email to the station that published the report:
A story your station ran seems to imply that my boss Senator Obama was being hypocritical when he said Americans should drive more fuel-efficient vehicles though he was himself traveling in an SUV.The SUV in question, though, is a Flexible Fuel Vehicle that can run on E85, which the Senator fills it with wherever its available (and in fact he's worked very hard to provide tax credits to increase availability and access to e85). I believe in light of these facts the story is misleading and warrants a correction.
Let's get this straight. Don't drive an energy guzzling SUV. But it's o.k. to do so if your SUV can guzzle primarily ethanol, for which the Senator promotes tax breaks because it is uneconomic to produce otherwise, partly because of the energy cost involved in such production.
Something tells me that Senator Obama and his staff should shut up on this particular issue. Hat tip to Steven Hayward.
Posted by Tom at 7:39 AM | Comments (1) | TrackBack (0)
August 14, 2006
So, what's the problem again?
This Norm Alstar/NY Sunday Times article notes a recent analyst report suggesting that a stampede of institutional investors, mainly pension funds, into the commodities futures markets is actually the chief cause of the rise in oil prices, which the report characterizes as “a bubble.” Maybe so, but as James Hamilton noted in regard to the contango situation in such markets awhile back, this is a good thing and not an ominous one as the Times article suggests.
If the speculators turn out to be right that prices will be higher in the future, then they will earn a profit and provide a benefit for consumers. By bidding up the price of oil today, oil inventories rise as owners save for the higher future price and consumers conserve so that more oil is available in case there is a shortfall in the future.
However, if the speculators bet wrong, then they will have bought high and sold low. That results in consumers paying more now for oil products than would be necessary if the future price of oil could be predicted with certainty. But consumers' increased payments for oil products will pale in comparison to the money that the speculators will lose on their bets of higher prices in the future. Consequently, the only reason to be worried about all this is if you are concerned about the speculators losing huge amounts of money when the bubble bursts.
In short, as former Exxon CEO Lee Raymond reminds us about oil prices when he was asked recently whether he thinks that they will continue to go up:
"Maybe. But I'll bet they'll be lower at some point."
Posted by Tom at 5:43 AM | Comments (0) | TrackBack (0)
August 4, 2006
MotherRock's bad bet
This Bloomberg article is reporting that former Nymex president and former El Paso Merchant Energy trading chief J. Robert "Bo" Collins sent investors in his hedge fund MotherRock L.P. a letter yesterday informing them that MotherRock is shutting down after betting big and losing on trades in the volatile natural gas market during June and July.
Collins formed MotherRock in early 2005. At its peak, the fund managed about $430 million in assets and reported net gains of 20% for 2005. Although its energy fund was up slightly as of the end of May, that MotherRock fund lost $230 million as investors fled and the natural gas prices moved contrary to MotherRock's positions. After an unusally high draw in natural gas from storage last week and a a heat wave across much of the country, natural gas prices rose 17% during the week of July 24 and 14% this past Monday. Guess which way MotherRock was betting prices would go?
Posted by Tom at 6:34 AM | Comments (0) | TrackBack (0)
The latest boom
The Wall Street Journal's ($) Ann Davis reports from Houston on the funny money flowing into oil and gas investment opportunities, even those that do not own any oil and gas yet:
Barry Kostiner traded electricity and natural gas for eight years on Wall Street. Last fall, he reinvented himself -- as a Texas oilman.With no assets beyond plans to buy oil and gas fields, he set up shop as Platinum Energy Resources Inc. He had never worked in the oil industry or managed a company. Yet he carried out an initial public offering of stock and within two months persuaded several New York hedge funds to buy a large chunk of the shares, raising $115 million in all. . .
Energy-related endeavors of all kinds are a magnet for cash these days, thanks to the gravity-defying rise of oil prices and the recent boom in investment pools that cater to deep-pocketed institutions and the wealthy. Some energy investments, to be sure, are relatively low-risk and involve industry veterans. But private-equity firms, hedge funds and other professional speculators are also pouring billions into unconventional loans, management teams with limited track records and IPOs on lightly regulated stock markets.[. . .]
The fevered pitch reminds some of the Silicon Valley boom a few years back. "Energy's about as hot right now as tech was in 2000," says Ben Dell, an energy analyst with Sanford C. Bernstein & Co. [. . .]
One popular trend: management teams with virtually no assets other than big and costly ideas.[. . .]Exotic new loan markets are another energy investment trend. Some energy companies that don't yet have positive cash flow are borrowing from hedge funds or others at double-digit interest rates. The loans are sometimes called "second-lien" loans because in the event of trouble the hedge funds have to line up behind more-traditional lenders that have first rights to any collateral.
I began practicing business law during the late 1970's-early 80's boom in the oil and gas business, and cut my teeth in insolvency and reorganization law while unraveling and putting oil and gas deals back together again during the prolonged bust that followed that boom. Although this boom is different in material respects from that earlier run-up in the oil and gas business, that prior experience compels me to listen more to the following advice of former Exxon CEO Lee Raymond from an earlier WSJ interview than the sharpies quoted in the latest WSJ article:
Q: What do you think of [the current boom in the oil and gas business]?A: I can never remember an industry consolidating at high prices. But I can remember an industry consolidating at low prices.
Q: Some people think prices will keep going up.?
A: Maybe. I'll bet they'll be lower at some point.
Let me go back to the last time we went through something like this, which started when the shah of Iran was around. [The shah went into exile in 1979.]
A lot of people don't remember, but we went through a period of relatively high oil prices, which by today's standard would be very high oil prices, that lasted for almost five years. It was at that time that we got into our first stock-buyback program.
As today, we had very strong cash flows. There were a lot of people that were talking about buying other companies. Although we didn't say it directly at that time, we had a view that the price structure could not last -- that it was fundamentally unstable, and that it was just a matter of time. And so we concluded that the cheapest oil we could buy was our own. But because of the stock-buyback program, we were roundly criticized on Wall Street. There were no opportunities. We were liquidating the company. All that kind of stuff.
But the facts are that, behind the scenes -- we were not going to say it publicly, obviously -- we just felt that the price structure couldn't persist. And, come along December of 1985, it just collapsed. Went from $28 to $10 in two weeks. So when people ask today, what are you going to do with the money, my answer is: We're not going to do anything stupid. We're going to manage it like we've managed everything else.
Q: What is Exxon planning to do with all its cash?
A: First of all, we'll sort through it. And secondly, why in the world would we ever tell anybody in advance what we were going to do with it anyway?
Posted by Tom at 5:02 AM | Comments (0) | TrackBack (0)
July 10, 2006
Thinking about those Saudi oil reserves
This Bhushan Bahree-Russell Gold/WSJ ($) article reports on Chevron Corp's pilot project in Saudi Arabia in which it is using its steam injection technique to to loosen up sludge-like heavy-oil reserves in Wafra, the huge field in the so-called neutral zone between Saudi Arabia and Kuwait.
Heavy oil is costlier to produce than light oils, typically contains more contaminants such as metals and sulfur, and is priced lower than light oil to boot. But because of the decreasing supply of easily-produceable light oil, a growing number of refineries around the world are acquiring the special equipment necessary to turn heavy oil into petroleum-based products such as gasoline, jet fuel and heating oil. Inasmuch as most heavy-oil fields in Saudi Arabia are not included in the country's current estimate of 260 billion barrels of recoverable reserves, a successful steam injection initiative in such heavy-oil fields would potentially add billions of barrels to Saudi reserves
Meanwhile, Clear Thinkers favorite James Hamilton explores the effect that a recent reduction in Saudi oil production may be having on speculation over oil prices. Interestingly, the drop in Saudi production has occurred at the same time as the Saudis are aggressively increasing their drilling efforts.
Posted by Tom at 5:03 AM | Comments (0) | TrackBack (0)
June 30, 2006
The increasingly sensitive energy markets
Bill O'Reilly contends that it's all just an energy company conspiracy, but this week's price hike for gasoline and crude oil is actually showing just how sensitive U.S. energy markets have become to disruptions that just a few years ago would have barely registered a blip in those markets.
Gasoline and crude-oil and prices surged after the June 20 spill of 47,000 barrels of oil waste snarled the Calcasieu Ship Channel, a major Louisiana waterway that connects the Port of Lake Charles to the Gulf of Mexico. The stoppage stranded oil barges and tugs that are delivering crude oil to three refineries that together refine about 775,000 barrels of crude oil a day into fuels such as gasoline. The Coast Guard reported yesterday that it might open the channel to limited traffic by this weekend.
Primarily as a result, gasoline futures on the New York Mercantile Exchange have risen by almost 15% over the past week to yesterday's close of $2.29 a gallon, the highest level since the aftermath of last summer's Gulf Coast hurricanes. Meanwhile, August crude-oil futures rose over $1.30 to $73.52 a barrel, which is about $3 higher since the spill and an 11% increase for the current quarter. The spill is merely the latest in a series of supply disruptions over the past year that have increased average U.S. gasoline prices by almost 25% and crude-oil prices by 15% since the beginning of the 2005 hurricane season.
Not only are the US gasoline and crude oil markets tightening because of increased global crude-oil demand and flat production levels, US refineries are already operating at almost 95% of capacity, which is making the US more dependent on gasoline imports. Accordingly, expect short-term gasoline prices to go even higher during this hurricane season and the peak summer vacation season while longer term prices also will likely trend upward because of the limited refinery capacity. Inasmuch as the US currently uses just over 9 million barrels of gasoline a day and US refineries can produce about 8.5 million barrels a day, the balance of the US daily usage is imported and will grow if US demand for gasoline increases.
Just a few years ago, an incident such as the Calcasieu spill would have barely caused a ripple in the gasoline or oil markets that had bountiful supplies and untapped refining capacity. But no more. With little spare global capacity in crude oil and even less untapped refining capacity, any blip on the global oil production or refining radar screen is likely to generate quick price hikes in those markets. Remember that the next time you hear O'Reilly railing against energy companies or US politicians dithering about how to limit energy company profits rather than on how to encourage those companies to increase production of oil and gasoline.
Posted by Tom at 5:03 AM | Comments (0) | TrackBack (0)
June 5, 2006
Remember those high prices for natural gas?
Remember those high natural gas prices of last year and the corresponding calls for more regulation of the oil and gas industry?
Well, after a hurricane season last year when prices skyrocketed to above $15 per British thermal unit and stored supplies were slashed as multiple storms played havoc with Gulf of Mexico production and storage facilities, U.S. supplies of natural gas are now so plentiful that the natural gas industry is running out of places to store it. Thus, despite the prospect of another active hurricane season, natural gas prices are down over 40% this year to $6.62 per BTU and likely will move even lower.
Rather than governmental intervention, the primary reason for the declining prices is the weather. As a result of a relatively mild winter, lower-than-expected demand for heating resulted in more plentiful supplies of natural gas this spring. Accordingly, over half of the estimated four trillion cubic feet of U.S. underground natural gas-storage capacity is already being used, which means that those facilities could be at near full capacity even before the first hurricane hits the U.S. mainland later this summer.
Meanwhile, Bill O'Reilly and attorneys general from several Midwestern states -- who last year condemned the big oil and gas companies and gas traders for manipulating prices and pushing up home-heating bills for all U.S. citizens -- have not yet explained how, with all their market power, those avaricious companies and traders could not prevent the current collapse of natural gas prices.
Posted by Tom at 6:02 AM | Comments (2) | TrackBack (0)