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?

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.

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 marketsñas it is in all commodity and even financial marketsñthe 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, itís great.

Read the entire post.

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.

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.

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 ìa bubble.î 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.”

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.