Oil


When oil prices collapsed from $147 a barrel in the summer of 2008 to $35 a barrel in January, American drivers, Congress, government bureaucrats, and the mainstream media refocused on other, more pressing issues, like executive bonuses. Peak oil likely occurred between 2005 and 2009; oil production will now embark on a long slow decline. The world isn’t prepared.

Matt Simmons, energy analyst and author of Twilight in the Desert, recently told Reuters

“We are 3, 6, maybe 9 months away from a price shock… These prices now are dangerously low. The lower prices fall, the less oil will be produced and the greater the chance of an oil spike…. [And] unless oil demand falls by 10 or 15% per annum, which it is not going to do, then we don’t need to wait for oil demand to come back before we have a supply crunch.”

In this scenario, low oil prices will continue to take oil fields out of production and reduce exploration. Once prices recover, companies will have trouble gearing back up due to the credit crunch, resulting in production-increase delays.

— From an Op Ed by James Quinn, at Minyanville.

Iran’s president Mahmoud Ahmadinejad on Tuesday said oil prices are being controlled by ‘invisible hands’ in a ‘fake way’ for political and economic reasons, reported Reuters. Speaking at an OPEC meeting, Ahmadinejad said the price rise is ‘completely fake and imposed’ because it is occurring at a time when ‘the market is full of oil and the growth of consumption is lower than the growth of production.’

And meanwhile, on Wall Street:

Crude oil’s ‘bull run’ may be over following Saudi Arabia’s pledge to increase supplies and the increasing volatility of prices, according to analysts at JP Morgan and Chase. Prices are expected to ‘correct’ over the next few months, the analysts said, noting that spare production capacity may reach 5 million barrels a day by 2010, similar to levels in 2002 to 2003, when oil was $30 a barrel, reported Bloomberg.

Via AMEInfo.  It is interesting to note that both Ahmadinejad and Wall Street analysts see an overheated oil market, but it is hard to imagine two more different orientations on the topic.


 

There are signs that the global demand for oil — one of the real drivers of this overheated oil market — may be showing signs of stabilizing:

OPEC cuts estimate of growth in world oil demand for 2008

High prices and slower economic growth in industrialized and Western countries led the Paris-based International Energy Agency to cut its estimates for demand, but the Organization of Petroleum Exporting Countries put its estimate even lower.

Global oil demand is now projected to grow by 1.35 percent in 2008, compared with the previous estimate of 1.4 percent, according to OPEC’s monthly report for May.

Because of its projected slowdown in demand, OPEC has repeatedly refused to increase production.

“World oil demand growth in 2008 is forecast at 1.2 million barrels per day to average 86.95 million barrels per day, representing a minor downward revision from last month,” the report said.

While demand in industrialized countries has dropped since the beginning of the year, demand in developing countries has continued to grow as their economies grow and they build supply reserves, though demand in China was interrupted this week because of the earthquake.

OPEC said that the warm winter was part of the reason for the slow demand early in the year and, with winter ending in the Northern Hemisphere, “Oil demand growth will follow a slow consumption cycle in the second quarter,” the group said.

Via UPI.  A more important dynamic is on the horizon, perhaps — that is, once the Olympics in Beijing are over, the Chinese economy may experience a bit of a cooling-off period.

All I’m saying is, people, if you are investing — think twice about jumping into oil now, just when everyone is making predictions about $300 oil.

TANNERSVILLE, PENNSYLVANIA – The following is a partial transcript of a brief conversation on the American economy between independent presidential candidate Quay Fortuna and a reporter from a regional travel magazine that took place on March 25, 2008.

Question: You’re running for president?

Fortuna: Yes, that’s right.

Q: What are you doing here then?

F: Good question. There’s a primary coming up here in Pennsylvania, of course, but since I’m not running as a Democrat or a Republican, that’s not really a reason for me to be here. To tell you the truth, while the Democrats are still shooting at themselves, it’s hard to get any attention at all, so I’ve been laying low. I’m really just here to get a little last minute skiing in.

*****

Q. I take it you are against the war in Iraq. Do you think the war is the cause of our current economic downturn?

F: I think it’s obvious that it’s one of the causes. When you look at just oil prices, for example, they were staying pretty low after we invaded Afghanistan. They were around $17 a barrel immediately after the invasion began, and they settled around the mid-twenties. Then we invaded Iraq in March 2003, and by January 2004, when it looked like things weren’t going so well, we were up in the thirties. By the time of ‘bloody Fallujah’ in 2005, prices had climbed to the fifties.

Now, it’s not all about the disruption in the Iraqi oil supply – in fact, it’s not all about supply – but the instability of Iraq, a newly-empowered Iran, the re-emergence of Iranian-backed Hezbollah in the summer of 2006, all of these things certainly wreaked havoc on the confidence of commodity traders. And currently, of course, we’re up around $100 a barrel, on the back of rising demand in China and India. So, some experts have been saying that about $35 a barrel of that price hike from 2003 to the present is due directly to the impact of the Iraq war. And that’s hitting us where we live.

Q: You can’t blame the war for the sub-prime crisis, though, can you?

F: Actually, yes, it’s related. And you don’t have to take my word for it. A Nobel Prize-winning economist named Joseph Stiglitz has drawn a very distinct connection between the two. He points out that funding a $3 trillion war over the past five years has created a massive financial drain on the economy, which caused the Federal Reserve, early on – beginning with Greenspan even – to ease the availability of credit by lowering interest rates. I think, and the way Stiglitz says it, the Fed encouraged lenders to give loans to “anybody this side of a life support system.” So the usual credit standards fell by the wayside – and why not? There was so much money to be made through lending, and a market developed around it. And it seemed to make sense at the time to essentially invest all these dollars in real estate, since real estate, so we all thought, doesn’t ever decline in value. So this, of course, led to real estate speculation and a boom in housing prices, and also an overall consumption boom. But it was all pretty artificial, because at the same time, as a nation we were borrowing money from China like it was going out of style to fund the war.

Q: But the sub-prime crisis was caused by banks and their predatory lending practices.

F: Certainly some low-life lenders were guilty of entrapping unsophisticated borrowers and just basically killing them with impossible interest rate hikes, and they should be prosecuted and hung out to dry for it – but that wasn’t the cause of the sub-prime crisis. The cause was a relaxation of lending standards that flowed from the “free money” environment created by the Fed, compounded by the de-localization of mortgage activity – the fact that mortgage portfolios became the subject of speculation that could be bought and sold to investment banks on Wall Street meant that lenders who wrote “iffy” mortgages no longer felt any responsibility for whether they were good or bad. There are plenty of people who borrowed money who shouldn’t have been permitted to do so, and the result is that loans are going bad, buyers of loan portfolios are stuck with a lot of bad paper, margin loans get called, and then you get Bear Stearns going down the tubes.

Q: You sound like you support the government bailing out big Wall Street banks. What about all the homeowners who are losing their homes?

F: Wait, those are two different questions there. And they’re not at all simple ones. I think the Fed did a good deed by extending credit to J.P. Morgan in order to buy Bear Stearns – but that was ultimately all about J.P. Morgan making a shrewd business decision to buy a fundamentally good investment house, a good franchise, that had badly overextended itself. Not everyone should be so lucky. And I think that Wall Street learned a valuable lesson from the sub-prime crisis – you’ve got to hold the mortgage banks accountable for what they do when you transact business with them in this way.

With regard to homeowners – not being able to pay the mortgage has a lot of causes in this country these days … it’s not just about patently unsustainable teaser rates, but about the lack of decent jobs, spiraling fuel costs, jittery banks …

As I said before, the first, most important, most fundamental thing that needs to happen in order to improve some of these things is for the U.S. to stop draining the American economy by spending $50 billion that we don’t have every three months to support a war in Iraq.

Next, while the Fed is going out of its way to make money available through lower interest rates – which is the right approach, despite the fact that lower interest rates created the boom and bust, because the worst thing you could do now would be to fold up the tent – but, unfortunately there aren’t enough community-oriented banks, down close in the trenches, to facilitate the kinds of curative refinancings that need to take place to keep marginal homeowners in their homes. The knee-jerk reaction of most commercial banks is to toughen lending standards to the point where they’re practically impossible.

There needs to be a happy medium. What we need to do ultimately is to stimulate a return of genuine community lending in this country, in which local banks loan money to local people, keep the paper locally, and exercise a sense of community stewardship, so that they can, in effect, manage their customers through the rough patches. We need banks that are like the ones our grandparents did business with. And I don’t want to over-regulate and force commercial banks to become good community citizens; I want to encourage good community citizenship from existing banks through a variety of incentives.

And that’s not just a matter of keeping people in their homes, but in the longer term it is about keeping the fabric of our communities knitted together, to solve the problem of the chronically “unbanked” in this country, and to encourage local, sustainable economic activity.

*******

Q: What do you think of President Bush’s stimulus package?

F: It’s a little bit silly, really. $1200 per working couple. That’s barely a mortgage payment for some people. My biggest problem with it, though, is that there is no guarantee that the money circulates in the way that the government wants it to circulate. $1200 that quickly goes to an electronics manufacturer in Korea or to oil producers in the Middle East, means that the hoped-for stimulation within our own economy comes to an all-too-abrupt end. If it’s going to have any meaningful impact at all, it has to keep circulating within our own economy.

My own proposal would be to give the $1200 in scrip, almost like a separate form of currency, that can only be monetized in actual dollars under certain circumstances – if it is deposited irrevocably into a six-month savings vehicle of some kind, for example, to encourage savings. Or, ultimately, if it is spent and not saved, it can be monetized only by an American depositor at some point during the chain of potential exchanges — and wherever it goes, its use and exchange is tax-exempt until some date in the future. The idea would be to encourage the circulation of the scrip within domestic channels, creating sustainable exchange activities that keep community economies humming – but under no circumstances would the scrip have any value through foreign exchange. It would not come to rest until it does so in American hands, within an American account. If you did something like that, then perhaps $1200 per couple would begin to have a significant impact on the economy.

********

Q: What about regulation? Would you suggest restricting the activities of banks in light of the subprime crisis?

F: Well, as I said, I believe that Wall Street has learned a lesson about buying mortgage portfolios, and that they will develop new customs and practices to avoid the kind of crisis that Bear Stearns just suffered in the future. The low-lifes will have to find something else to sell to Wall Street.

As to the behavior of those low-life mortgage lenders, I believe that they represent a classic example of the many ways in which corporate America takes advantage of lax federal regulatory oversight to gouge hard-working families in this country. It’s not just low teaser rates with hidden interest rate bumps – it’s also about excessive ATM fees and inexplicable charges on your checking account statement, cell-phone contracts that have hidden charges and no ability to terminate, hidden fees in your cable bill and your utility bills, extortionate penalties for missing a payment by one day, and so on and so forth. “You, too, can get the Internet for only $19.99 per month,” the ads will say, but you’d better check the fine print. The average person ultimately has no idea what anything costs anymore, because corporations have developed hundreds of ways of masking the ways in which they can charge you.

So-called free market exponents, like the guys over at the American Enterprise Institute, argue that regulation of these activities is fundamentally anti-capitalist. Free market capitalism only works the way it’s supposed to, however, when there is a good flow of information. The “invisible hand” that Adam Smith told us all about – that force by which, if each consumer is allowed to freely choose what to buy and each producer is allowed to choose freely what to sell and how to produce it, the market will settle on prices that are beneficial to the all individual members of a community – is really impossible when you don’t give the consumer a full of set of cards to play with. The sub-prime crisis and the damage it has done to certain sectors of our economy is only one example of how the “invisible hand” has been tied up by the lack of disclosure regulation, by the lack of consumer protection regulation. So, in order to restore free market capitalism to its optimum strength, we need to reactivate the Federal Trade Commission and level the playing field again between consumers, on the one hand, and corporations, on the other.

**************

Q: How is the skiing at Camelback?

F: Not so hot.

Iran plans to privatise 47 firms in its energy sector worth $90bn and set up a holding company for these assets which it will list on four international exchanges, a National Iranian Oil Company (NIOC) executive said, reported Reuters. The plan would see the oil and gas companies put under an umbrella group to attract foreign investment, Hojatollah Ghanimi-Fard, director of international affairs at NIOC, told MEED. He said the firms would also be listed in Tehran by 2014.

Via AMEInfo. What do we want to bet that the NYSE won’t be one of the “international exchanges”?

Iran is the world’s fourth-largest producer of oil. But its government imposed gasoline rationing last year in hopes of trimming extensive government subsidies. That has created a booming black market across the country — feeding Iranians’ discontent with the economic policies of hardline President Mahmoud Ahmadinejad.

In the capital Tehran and other cities, the black market thrives around gasoline stations and mostly at night as drivers looking to buy fuel approach others who have high gasoline quotas, such as taxis or vans.

But in this city on the Persian Gulf, the boulevard officially named Pasdaran Avenue after Iran’s elite Revolutionary Guards operates as an open-air black market in broad daylight. Its new nickname is meant as a sneer by Iranians, bitter at the irony that their country, a leading member of the world oil cartel OPEC, has resorted to rationing.

“Every taxi driver and anyone who needs gas knows where OPEC Street is,” said Jabbar Dehqani, a 27-year-old with a stand of gasoline jugs on the roadside. “I’m happy — the number of my customers is increasing day by day.”

Iran produces 4.2 million barrels of crude oil each day and sells 2.5 million barrels of it to other countries, making it OPEC’s second-largest producer. But because the country lacks adequate refineries, it must spend more than $3 billion a year to import gasoline for domestic consumption.

There are more than 7 million private cars in Iran eligible for the subsidized gasoline, which the government makes available in limited quantities under the fuel rationing system.

The new system began in May with a 25 percent hike in the subsidized price of gas, from roughly 30 cents a gallon to 38 cents a gallon. Then in June came the actual rationing, aimed at reducing demand and thus easing government subsidies that cost billions each year.

Full article here.

Peak oil, the point in time at which the maximum global petroleum production rate is reached, will arrive sooner than most observers expect and bring about an economic crisis that will be much greater than the one that is currently taking place in the world markets, according to author David Strahan. Speaking at the World Future Energy Summit in Abu Dhabi, Strahan said peak oil may arrive as early as 2017, but no later than 2020. He noted that oil production is falling in 60 of the world’s 98 oil producing countries, and that aggregate oil production in the OECD peaked in 1997 and has been in decline ever since. Once peak oil is reached, prices for petroleum could double as other sources of energy will not be sufficient to meet demand, thus bring about an economic crisis, he claims.

Via AMEInfo.

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