Capitol Hill Blue Forums Political Issues Finance, the economy & Economics Reducing the cost of Oil

In 1999, a famous American said the following


link

That famous American was no left wing enviro-facist nut case.
It was our own soon to be vice president Dick Cheney.

Consider for just a moment the implication of what the man is saying. He is saying we NEED to find 50 BILLION BARRELS …. Per DAY… of additional production within 10 years of 1999.

If similar dynamics of economics persist we would need to find and ADDED 50 plus billions per day of production by 2020. Plus an added 50 billions plus per day production by 2030.


If one looks at the rate of decline of currently producing oil fields, and then factors in the falling rate of new oil field discovery,
"http://www.berr.gov.uk/files/file28217.pdf"
one reaches the inevitable conclusion that things cannot continue to go in the same direction without a massive supply and demand problem.

A natural question must arise as to whether—given this problem—it might be wise allow drilling in currently environmentally protected areas. But even allowing for the most optimistic production numbers from these resources, we see that these areas cannot provide more than a tiny trickle of the massive new oil production requirements that underly our problem.

Simply put, the USA cannot drill itself out of this problem by opening up the ANWAR and continental shelf protected reserves.

In addition, there are very limited new international oil resources that can be drilled to produce the required new production.

Further, the potential new international reserves are frequently located in inconvenient locations that are either politically unstable (Africa), or politically unfriendly (Russia).

Even when those problems are addressed, many of these reserves have to be shipped out across other countries that have their own political instability (Turkmenistan-Afghanistan)

The United States military is already reconfiguring it’s force structure to allow force projection in these newly important areas of oil production. But at some point it becomes questionable how many areas of the world we can simultaneously militarily control to quench our ever escalating demand for oil.

In short, a strategy based upon producing our way to low oil prices seem destined to ongoing bloody failure over the medium to long term. Which raises the question as to whether there is any alternative.

We are all aware that Jimmy Carter was an incompetent boob; and that conservation can provide no help in addressing this problem.

Still, just for the record, it may be well to remember that
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So as we look at our current (and future) problems, we would do well to remember that increased drilling could only affect the over all oil price/supply situation by a trivial amount. These small results would only be manifest 3-5 years in the future.

Whereas policies to reduce consumption could have a much larger AND more immediate impact.

Since the current boom in oil prices is accompanied by no apparent shortages, it is pretty evident that it is the product of speculation by oil futures traders. The single thing that can change the cost of future contracts is the perception that oil will be available at the delivery date of such a contract at a lower price. (Of course, as the delivery date of such a contract nears the market price gets progressively less speculative.)

The Saudi King just announced that they plan to increase oil production to bring the price down. Simply announcing that will make it so, just like the Saud's previous announcement they would not increase production made the price leap. It's time for the speculators to get out and leave somebody else holding the bag!

In the longer term, Ardy is absolutely correct (except for the little million=>billion transposition error): We need to do everything we can to develop alternatives to oil as our main energy source. It may have already reached the point that its future value is higher as a chemical feed stock and for making lubricants, than for burning in vehicles and power plants.

Pondering.

Shortages.
You are correct that there are no apparent shortages. However fear of shortage can also be a potent price influence. Taking only the most recent example, we have the Israeli air-force conducting practice operations designed to intimidate Iran. If they do that, who knows what might happen. The prudent investment decision is to stock up on oil futures just in case.

And while it is true that there is no immediate shortage of oil, there is also no apparent surplus. And from a risk mitigation perspective, there is more risk of some potential supply disruption than there is risk of an over abundance of oil causing price collapse.

Speculation.
Our attitude toward this topic seems to shift based upon context. When home price speculation drive our equity higher... remarkably few people complain. When stock speculation drives our investment portfolio higher, there is mutual congratulation. Current oil speculation seems less popular for some reason... although I suspect this speculation is not entirely unwelcome in oil exporting countries.

Causes of oil price increases?
One suspects that the cause in not simply speculation. Given the falling value of the dollar, a prudent oil seller might well expect a higher dollar price for his product. Yet do we blame ourselves for our scandalous disregard for the value of our currency?

For innumerable years, human beings have hoarded scarce commodities like gold as a storehouse of value. It seems now that Oil has been added to the list of commodities that may be acquired as a storehouse of value. I can certainly understand if china for example might prefer to hold oil rights (futures) in preference to dollar denominated T-Bills


New Saudi production.
Well yes it may shift market sentiment toward lower prices. But at the moment, everything I read in the press says that it will be a modest increase in production with little impact on prices.
"The Saudi output increase is "going to help a little bit, maybe reduce prices just a little," New Mexico Gov. Bill Richardson, a Democrat and former President Bill Clinton's energy secretary, said on CNN's "Late Edition" program. "It won't be significant."

It remained unclear if Sunday's announcements would have any greater effect.

At least one analyst said he thought they would only spur prices higher."
http://news.yahoo.com/s/ap/20080622/ap_on_bi_ge/Saudi_oil_summit;_ylt=AiJxFKq4zk.9Od76eme0WYes0NUE.

And in the same article I read....

"U.S. Energy Secretary Samuel Bodman, however, said earlier that U.S. officials had found no evidence speculators are driving up prices."


FOr those who are convinced that current Oil prices are an unsustainable bubble, I suggest that you grow rich by shorting the futures contracts.

By the way, I made the same suggestion one year ago and two years ago when posters were convinced that oil prices were surely too high and would fall shortly.

Is it speculation?

Last summer I had a chat with a customer who operates a large custom farming operation. As one can imagine, they require large amounts of diesel fuel just to operate their business. So last summer they installed large underground tanks to store a reserve of fuel for the season. IN addition they started buying oil futures.

I imagine that many other organizations world wide are in similar situations. They are simply trying to hedge a business risk, not make a big profit off oil.

Are they speculators? There is no doubt the such actions have had a cumulative impact on the price of oil.

It would be very interesting to compare the volume of oil contracts for some year to the actual volume of oil delivered in that year. I suspect oil trades hands many times before it is delivered, if you count all the people and institutions that deal in the futures contracts.

Of course there is "speculation." But speculators really do not care if prices go up or down.... they will speculate either direction, The fact that prices have been going up is a result of the fact that there is a large preponderance of people who are speculating that prices oil will go up. This in turn reflects the market perception that there are many risks that would result in price increases and few that would result in price reductions.

The trading volume of oil futures contracts is interesting. I am not sure why it is more interesting that trading volume of stocks.

It is true that few people actually take delivery of a futures contract of any type. But this is inherent the design of the system. Futures contracts are not designed to be a commodity acquisition or sales mechanism. They are designed to be a risk mitigation mechanism. As such, a farmer could sell grain futures to protect himself against price reductions on his expected crop.... and General mills could buy a grain futures contract to protect themselves against price increases on the same crop. Neither side would specifically intend that the futures contract be delivered since the only purpose was risk mitigation. After the risk was mitigated, the farmer's and the miller would be free to buy/sell the actual commodity through their normal trade and delivery infrastructure.

In the case of oil... futures contracts are defined on the basis of a certain grade of Texas produced crude oil "Texas light sweet." This oil would have to be delivered to some pre arranged central location (IE New York City). Most people do not buy or sell Texas light sweet oil in New York City... and so actual futures contract delivery is seldom made. Never the less, the futures contract itself represents a standardized financial vehicle that generally allows people (including you and me) to hedge the financial risks related to oil price fluctuation.

As I say, I agree that there are many people who buy and sell only to make a profit. This is true in most financial markets. And these people have no bias on the direction of prices. In fact, I suspect that if one were to do a survey, you would find that a large percentage of these traders are people who support Israel and who are not necessarily happy to see so much money going into the hands of Iran et al. And I am reasonably certain that if it were possible for them to crash the price of oil, they would do this if only to tweak some people that they are not fond of. But money is money... and these days the money being made in oil speculation is being made on the up side. The speculators are just in it for the ride... but that have no real concern or influence on the direction the ride will take.

Los Angeles Times

Do you think this will have any impact?

FYI: Products from a barel of crude oil

While this is based on 2004 California data, it is nonetheless instructive as to what is produced from a barrel of crude oil.

Listening to the mainstream media discussing solutions to the oil problem is like listening to a convention of crackheads.

"If we can just find MORE crack, we're out of the woods..."

"The price of crack is way too HIGH to sustain our 'economy'."

"Negotiations with area dealers have been moderately successful."

"Those damn liberals won't let us jack up our supply from the stash down the street. If they did we'd be in better shape."

"Alternatives to crack have so far proven unsuccessful and problematic."

Do you think this will have any impact?

I will never happen. Even if Obama gets elected, Obama will never have the pull to get legislation passed to close that loophole.

I do have an issue with blaming the rise on speculators. This "loophole" has been law for 8 years, yet the smartest money makers in the world never took advantage of it? People whose jobs demand that they make millions of dollars a quarter never used this little secret to turn large profits? I don't belive it, it is too simplistic a solution.

Having said that I have to admit I am baffled by the increase in fuel costs. It makes no sense from a supply and demand standpoint, and futures are determined by supply and demand. Somebody or something is pushing the market up. Part of it is the weak US dollar, but that only accounts for a small percentage of the increase. I have heard rumors of Iran buying huge qualtities of oil and storing it in tankers off their coast, still not enough to make a difference. China and India can't account for that much. Maybe the speculators are betting on a ME war, or maybe somebody running out of oil?

The world's politics are varied, but the world's finances are based on supply and demand. If you have no supply, you are the demand and if youare the supply, you profit from the demand. It is the reason why Sudan is stil a country and why the USSSR is now Russia and a bunch of little country/states. George Bush saw it coming and filled the strategic reserve as prices started going up.

America should do everything in her power to get out from under the ME oil mess. Drilling is a good start, it will take ten years to pay dividends, but ten years ago the argument against drilling was it would take too long to see any effect. Refining capacity will have to be improved on a regional basis, with major refineries in every geographic region in America. They are UGLY, and huge and dirty, and did I mention UGLY, but they will drop the price of fuel by 25%. Then, after we have become our own producer, we shut the whole ME OFF. Let them eat oil, drink oil and bath in oil. Then we can minipulate the food market and make them pay through their nose.

Last on my rant is alternative propulsion sourses. If we can eliminate the need for new internal combustion type engines, then we can decrease the need for new oil capacity. In the past we have requested alternatives to oil, I suggest that we demand new forms of propulsion. Get rid of the V8 and replce it with electric/Hydrogen/Oxygen/nuclear/fill in the blank forms of automobile. They must be competitive with todays performance and cannot cost any more to produce. They MUST go from 0 to 60 in less than 15 seconds, why you ask, because they MUST be an alternative and not a sacrifice. The government should provide a reward for the first 5 companies who succeed in the quest within 10 years, let's say $100,000,000 ea put in an interest bearing account, each winner gets one. Nothing motivates like money, even if the winners lose money in the deal, the competition will drive development. At the same time we look for alternative fuel sources, but not like the Carter Mobil One debacle. Two or three labs, working in secret from each other, funded by the US government, doing nothing but experimentation. The greatest minds recruited for the cause, top pay and a budget that is approved in 5 year increments. Show results and you get 5 more years. I know, you are all saying that we could feed the poor and what about the children, but what about the vast majority of America who will benefit from such successes and in the end, the poor and children will benefit also.

We don't need taxes and we don't need threats. We need motivation and inspiration and competition. It will work and the results will bring on a new age! OK, maybe a slightly modified age, but the potential success will be enough. Think of it as another challenge in the "America in Space before the end of the decade" type challenge. Win or lose, it is an approach that will excite America, an idea of hope instead of an idea of failure.