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That Slippery, Oily Slope?
Jeremy Warner of the Telegraph reports, The uncertainty over oil is a slippery slope:
The last time the oil price lost touch with gravity, which it threatens to again with the price of Brent crude now well north of $100 a barrel, it helped tip the world economy into the deepest recession since the 1930s.
Is history about to repeat itself? Much depends on developments in the Middle East, but things are once more looking perilous.
By adding to energy costs, the effect of high oil prices is to reduce the amount of money for spending on other things, thereby undermining aggregate demand in the wider economy. Eventually a tipping point is reached where confidence collapses. Given what happened as recently as 2008, you would expect OPEC to be acting quickly to prevent any further explosive increase in prices.
The wave of popular protest across North Africa and beyond has put that assumption in doubt. What happens to the world economy is not exactly a priority right now for the autocrats who dominate OPEC. Their focus is instead on survival.
The big producer, Saudi Arabia, looks particularly vulnerable to further contagion in the region.
With nervousness turning to panic among key producers, this is not an environment conducive to the sort of prompt decision-making necessary to prevent the oil price running out of control again.
If the latest instability in the Middle East wasn’t enough excitement for the Energy Institute’s traditionally lively annual conference in London this week, there’s also the unprecedented divergence in benchmark oil prices to ponder.
Go back to the origins of multinational oil in the 1950s and 1960s, and it was big oil companies such as Shell and BP that set the price, with the emphasis very much on the needs of consumer nations they serviced. By the 1970s, OPEC had usurped that role. As a consumer, you either paid up or went without.
The mid-1980s saw the adoption of a more market-related system, with OPEC turning the taps on and off in an attempt to keep prices in a supposedly mutually beneficial range.
Big producers such as Saudi Arabia still sell on their own terms, but they do so by reference to a small number of benchmark prices, supposedly established by arm’s length international trading in oil.
The extent to which these benchmarks are a true reflection of the balance of supply and demand in the world economy is a matter of conjecture. The suspicion is that they owe as much to manipulation, anomaly and speculation as underlying fundamentals.
Like stock and bond markets, oil has become “financialised”. These days, it appears as much the playground of hedge funds, hoarders and financial investors as genuine users and producers. When the oil price took flight three years ago, the Financial Services Authority (FSA) dismissed claims of undue speculative influence as largely nonsense, and on the basis of “the market is always right” dogma of the time, put the phenomenon down mainly to supply constraints against a backdrop of fast-growing demand.
Not for the first time, the FSA was being naive. Price discovery in oil is at best untransparant and inexact, and at worst subject to substantial distortion. The reason this is of such vital importance is because oil plays such a big role in economic activity. To allow oil markets to become subject to the same speculative excesses as sub-prime mortgages would be disastrous. Producer and consumer behaviour are crucially determined by what the price says; when the pricing signal is wrong, economic activity will be affected in highly undesirable ways.
An unduly elevated price will eventually destroy demand, which in turn will undermine sustainable investment in new capacity to meet future demand growth. These cycles are a major influence on the ups and downs of the broader business environment.
A study by Bassam Fattouh of the Oxford Institute for Energy Studies – An Anatomy of the Crude Oil Pricing System – finds the benchmarks that determine world energy prices to be wanting in a number of important respects.
One look at the difference between the two main benchmarks – Brent and West Texas Intermediate (WTI) – immediately tells you there’s something wrong. Historically, WTI has traded at a small premium to Brent, but over the past year, a near record discount of some $15 a barrel has opened up. This in part reflects ample supply in the US Midwest (WTI is an American benchmark) and an equally pronounced squeeze on supplies of Brent. Brent is a waterborne crude, while WTI is a landlocked American benchmark, so the difference might be attributed to the
US economy still being down in the dumps while Asia is booming.
But what do the now quite small quantities of oil still coming out of the North Sea have to do with Asia? The answer is virtually nothing, and yet Brent is used in some shape or form to determine prices for approximately 70pc of internationally traded oil. Markets with very low volumes of production are being used to price ones with very high production elsewhere in the world.
The traditional benchmarks might have more credibility if they were at least solidly grounded in the physically traded product, but they are not. In fact, oil markets are characterised by a complex structure of interlinked spot, physical forwards, futures, options and derivative markets, all of which feed into the benchmark price. The paper market is arguably as important in driving the price as the physical one.
Add to that the fact that no one really knows what’s going on in the world’s fastest growing oil market, China, and all the ingredients are there for a mispricing disaster.
The conclusion drawn by Mr Fattouh is that new benchmarks may be needed to reflect the emergence of Asia as the main source of growth in demand for oil. Perhaps unfortunately, we seem most unlikely to get one. As monopoly, state-owned suppliers that won’t auction their oil, the main OPEC producers are even less capable of generating credible price discovery benchmarks than Brent.
Of course, these musings may soon be largely irrelevant. It may be true that whatever the regime, the oil will keep flowing, but with Pandora’s Box now well and truly opened across great swathes of the Middle East, there’s no knowing where it will end. Short-term supply, future pricing, ownership and preferred trading partners – all these things are again up in the air.
Back in 2005, I attended a conference on commodities in London and was amazed at how much money pensions were shoving into so-called "commodity indexes" (even if they were made up of 76% oil futures). It's ridiculous to think that there is no speculation going on in oil markets. Go back to read Michael Masters' excellent testimony to the Committee on Homeland Security and Governmental Affairs. It's all happening again except this time we also have geopolitical eruptions spurring on further speculation.
The price of oil makes me nervous for one simple reason: if it shoots up, it can easily destabilize the fragile recovery taking place right now. And here is something else to ponder: higher oil price increases deflationary pressures:
...while jumps in the oil price cause inflation to rise at the headline level, it also has an adverse impact on economic activity, reducing demand which naturally serves as a deflationary force. This happens in a number of ways as higher fuel costs hamper a firm's production, which in turn forces it to lay off workers while also reducing wage pressures.
Analysts at UBS believe a $10 hike in the oil price would push up European inflation by 0.2% over one year and 0.1% over two years. They do not believe further oil prices would necessarily translate into significant inflation because of the countering deflationary forces.
According to the investment bank's simulations a jump in oil prices pushes up the energy component of the inflation index but depresses core inflation, which excludes volatile food and energy prices.
Analysis from the bank shows that a 10% increase in crude reduces core inflation by 0.1% a year after with the deflationary effects of oil shocks seem to take longer to disappear with projected core inflation still well below the non-shock level. This is because the shock is estimated to reduce economic activity for more than two years. In a extreme case scenario where the price of oil rises by as much as $50 core inflation subsequently drops by 0.25%.
For this reason UBS does not expect European central banks to be knee-jerked into action if the oil prices continue to rise amid the Middle East tensions.
'An eventual oil shock would hit the EU economy in an environment of low inflation expectations and wage deflation,' UBS says. 'For this reason we think the ECB would not be too worried about second-round effects, and would therefore not be forced to hike rates earlier.'
So while the oil shock may not result in central bankers becoming overly hawkish it could in fact have an opposite deflationary impact and reduce the need for an aggressive tightening campaign on rates.
Whether this could drag the global economy back into recession remains to be seen.
I'm not so sure the ECB (aka the Bundesbank) really cares about anything else except for what's going on in Germany. It wouldn't surprise me if they do start hiking rates, killing the periphery economies and adding further fuel to deflationary forces. I hope I'm wrong but they never cease to amaze me.
As for the global economy, it still runs on oil. If oil prices shoot up, expect more riots, more instability, and more volatility in financial markets. The way things are going, we might be back to a time where everything is correlated to oil. This unstable environment is great for arms manufacturers, but it will wreak havoc on the global economy. Hedge accordingly.
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Leo, don't try to confuse this argument with the seperate argument about the state; you just certified yourself as a bought and sold fool. I am thinking near term? You want to take a longer term view? Just look at the inflation rate since that Keynes fraud sold his concepts to academia and the DC idiots. The dollar may be worth 3% of what it was then. How is that for your longer view? Devalue the currency so the dolts don't recognize it. Sheer brillance as long as it works. It no longer does for those not absorbed with american idol.
It's how Leo manages to say almost nothing at all that keeps me wondering why I still read him. #§<k. I wish I knew how the price of Oil is manipulated - nonetheless, this is going to push up the price of maintaining foreign wars. Then the destabilisation of the Middle East and the economic effects from a contracting China, it's going to lead to some finger-pointing in Europe - since the banks there are now beyond insolvent, as well as beyond bailed-out; the government is the only investor in those financial markets. Nevermind the Riots, what will happen to NATO as European finances unravel?
Well, we know what a bunch of incompetent crooks sit in government, I'm watching to see if the same wallflowers run the military, I'm betting they are.
The article didn't say anything. Mumbo-jumbo. He should be a politician
"Fragile recovery" as Leo calls it - this is all anyone needs to know where Leo's beliefs stand. Leo "Krugman Asskiss" Kolivakis.
Leo sees the falling home prices and sales, rising unemployment and foresclosures, reckless public debt, debt monetization, financial fraud, market manipulation, global protest and revolt and inflation...all part of this "recovery."
Leo will stand before a tornado and tell people he sees rainbows.
Love you doomsayers who are equally adept at cherry-picking economic indicators to make your gloomy case for armageddon. Unless you've been living under a rock, the US economy is recovering and has been recovering over the last ten months, albeit at a tepid pace. The frustrating thing is jobs. It's another jobless recovery, but even there, things are looking somewhat better going forward.
Id loooove someone to stand up before a group of educated 99 ers and utter the phrase "jobless recovery". It would be like a mini Libya right here in the states.
No, the frustrating thing is for otherwise intelligent people to claim there is an economic recovery while federal deficit spending averages 10% of GDP for three years and counting. Even Keynes would roll his eyes at that one.
HAH!!! Nobody picks "economic indicator" better than you right Leo? Or should we say ignores them?
All you need to hear is one kleptocrat say "green shoots" to get bullish. Why even read actual data when you can just be a permabull right?
And if the "recovery" is so great I guess free money to banks is no longer needed and the Fed is champing at the bit to raise interest rates any day now.
Huge public pension IOUs force drastic changes Bill comes due for hundreds of agencies with underfunded systemshttp://www.marketwatch.com/story/pension-wake-up-call-hits-public-agenci...
"It's another jobless recovery" That quote just put you in the class of HarryWanger. There's no such thing as a jobless recovery. And more importantly, economic recoveries aren't fueled by government spending but actual productivity.
Therefore, this "jobless recovery" is just a government-funded credit-card binge to fool people like you that the economy and the stock market is healthy again.
Tepid growth my arse. Take away all the trillions the gov't spent on the US taxpayers' behalf and we'll see how much recovery there really is.
Last I looked, the US economy still ranks among the economies with the highest productivity growth rate in the developed world. The term 'jobless recovery' means exactly that GDP going up with less people working. It wasn't used in a normative sense. The problem is new industries cannot create jobs fast enough to replace those lost in the old, traditional manufacturing industries.
Yes "new industries" like investment banking and pension management - and to count govt spending as GDP is a joke
There it is, we have a winner. Neither of these "industries" are creating real value-added assets. The financial sector remains a CANCER that the broader sectors of the economy can no longer sustain and the government remains the hired goon that continues to steal whatever the cancer wants. Eventually, we deal with the collapse/deflation (call it what you like) and see proper compensation returned to those in the economy that actually create things of real value. Whether or not the U.S. economy is still on top or if the dollar is still the world's reserve currency when this shift occurs is another question.
Can cancers be criminals? Can we apply radiation and chemicals?
Yup look at that recovery
Case Shiller Confirms Housing Double Dip Accelerated, 20-City Composite At Lowest Since June 2009
But his portfolio "rooks Mah-vah-lous"
OMG you didn't say "jobless recovery" did you - fucking tool
Yep - if something is ficticious the only thing that strikes me as fragile is the capability to cover it up.
If peak oil is assumed to be correct for the sake of this argument, then the system breaks down as prices rise with falling oil supply but still present demand till this declines and the citizens of the various nations come to realize that the global economy is in serious trouble along with their lives in all aspects. Societal chaos would necessitate a more authoritarian government and rationing of the declining oil resource. It may also involve a struggle between nations for the remaining oil supplies. In this situation, there may be a degree of fear and panic. Maybe this is what is happening now only brought forward before the oil really starts to decline. Looking back over the last 10 - 15 years, we've had a dot com boom and collapse, a property boom and collapse, an oil shock, then a soft commodities boom with private debt taken onto the public books and the subsequent risk of sovereign debt default, insolvent bank fraudulent bailouts, crooked behaviour gone unpunished, and now the threat of regime overthrow across the Middle East, along with wars on terrorism, huge US deficits, a reserve currency under threat, a new arrangement now being mooted by the IMF (SDR) a european system under such strain that it threatens to shatter. It takes a crisis to force through new arrangements. We had one with 9/11 through the Patriot Act which has all the basic features of the Enabling Act brought in by Hitler in Nazi Germany when the Reichstag burned down rather mysteriously, and then the GFC enhanced the powers of the Fed, whose policies incidentally brought about the various crises in the first place (with the exception of course of 9/11). Maybe the current trouble in the Middle East is just a pretext for control of the oil there by the US. Afghanistan was invaded on fighting terrorism grounds and this has proven to be a failure so far. Iraq was invaded on the specious grounds of weapons of mass destruction which were never found, a fact conveniently forgotten. The whole shebang is a bit suspicious for just spontaneous eruption over the last 15 or so years.
I have no doubt that in a rationing situation, oligarchs will get a generous supply to operate their megayachts and personal airplanes. The rest of us better get a horse or donkey.
Donkey - that way you'll have a place for all of your stuff when you're homeless
Peak energy is BS.
Come with some facts, not faith based hope....
Better yet 8 figure Flak
You come up with which part of the sky is falling and why.
If you really are the "investor" you purport to be, you should get off your sorry ass and visit a few rigs. Your grandchildren will still be using oil and gas.
Don't be a fucking Luddite.
Yes BR, you're just one letter off what you claim.
You were wrong in the 1970s and you are wrong now. Come back in 35 years and explain to us where all the new oil, gas and hydrogen came from, and why in 2045 we are finally running out. You'll still be wrong.
Hydrogen? Now we know you are full of shit bikeman. You still need low potential electrons to generate hydrogen gas. In other words, hydrogen is NOT an energy source, but rather energy currency. You need to put energy in to make the hydrogen. Robbing from peter to pay paul is not a solution. Who cares WHEN all the fossil-based fuels end, you are admitting that they will end. Then what? See my comments regarding energy and nitrogen fixation. Educate yourself. None of the newer technologies developed so far (when fossil fuels are gone) or solar-based technologies can support the kind of energy consumption we have now. They may not even feed us. Thermodynamics is a bitch. It is good to be an optimist, but your survival depends on reality and it always will.
Still no facts... your act is wearing thin.
here's a fact ...every 40 years when the oil price peaks pricks like you come out and shout 'Peak Oil' ...you're a genetic hyper-delusional virus that multiplies as the oil price goes up. Unfortunately it's only every 40 years while the other 39 you have to spend under a wet rock with other bugs ...oil is coming out of our ears worldwide, we're stuffed with hydrocarbons worldwide for 1,000 years ...so don't you panic, get back under your rock, the sunshine (and reality) really doesn't suit you
No, I only come out when you twits spout nonsense. Did you answer the question I posed above?
you had a response to the "facts" you wanted in the other thread a week ago... America has oil and coal reserves coming out of its ears ...every continent has now found oil, even Antarctica but once again Govts are strangling its exploitation, a parasitical corruption of Big Oil and Big Govt interests that suites both lefties and right wingers..
...the only issue with oil is as a 40 year veteran oilman wrote recently Government meddling in the free market
What? Your spew on Green River? Do you even know what oil is? Have you ever looked at US crude production? I mean, there are some smart people out there who argue that we have 10 years to go before we tip over, but at least they can defend their thesis. You are merely rambling incoherently.
I for one believe that we will have all the oil we need forever and the price will always remain stable and not cause catastrophic shocks to the global economy. Now excuse me while I go feed my rainbow shitting unicorn some kool-aid.
Thank god we subsidized inferior solar technology. What a great idea for governments to provide incentive not to develop better PV. Why spend on R&D when we can spend on financial public relations?
I hoped you bankrolled it folks. In five years we will have the ghosts of malfeasance in solar cluttering the rooftops of the gullible.
Add up all the global government incentives and subsidies to what was spent on "climate scientists" and AWG research. Imagine if all that cash (borrowed by the way) were spent on solar R&D instead where would we be?
Nothing personal Leo but this racket was as criminal as subprime.
solar power the way to go. I got these solar powered trees. They are the best bang for your buck even though they are not subsidized. I plant them where it rains. they suck CO2 out of the air, Animals fucking love them, unlike solar panels vegetation can grow under them. sure with out subsidizes these solar powered trees take 15 years to turn a profit. but if those nasty solar panels were with out subsidies they take 20 years to break even assuming none of them break. if a solar panel breaks early, that's it. it is useless. But if one of my solar powered trees breaks early, I still get to convert it into fuel or paper or what ever the hell I want. some of my solar powered trees even produce FOOD. I know it sound unbelievable you say. I can here you thinking it. your thinking: "one little seed can produce fruit and reduce CO2 and animals love them. It just not possible!!!"
but its true! Not only that, but if you plant them on your property they increase the value of your house(make sure you get the right one.) if you get a solar powered tree that grows tall they can shade your house in the summer and reduce your cooling bill! watch in amazement as your solar tree sways in the direction of the wind with out batteries.
The future is solar... Solar Powered Tree (r)(tm)!!!!
P.S. If your worried about your new Solar Powered Tree (r)(tm) failing. I'm the CEO of a company where for a small monthly fee(less then $50 a month for most homeowners) I will insure your new Solar Tree(not your house or other property, Just the tree). and if lighting strikes it. I will personally come out and plant a new seedling. or you can upgrade to platinum and get a new baby Solar Tree planted instead.
@foof
Well said! You might also add that the solar powered trees have their own built-in energy storage system so they continue to operate even on cloudy days.
nice post. Forest gardens are how we did it and how we'll do it again.
Look at planting cherry trees, your best return.
+24/7/365
Just ask Trav7777; peak oil is a myth like global warming. The shift to the natural gas shale fracturing technology fields' production will greatly extend the life of the known oil fields.
You are sadly misguided... Horizontal drilling in oil fields does not extend the life, it increases the production rate, which is then followed by a steeper decline...
Given your avatar, you run the risk of setting your hair on fire...be careful
Gas from shale formations. The world has already passed by your bogus paradigm.
Go read the link I provided below and get back to me.... BTW, I manage a lot money in the oil-gas sector, I do not invest based on hope.
no you don't invest based on "hope" ..you invest based on hype
Give me a call when you have 8 figures under management....
give me a call when any country in the World has an oil shortage ...100 years of unbroken supply and cheap oil with the odd 40 year spike when clueless loons like you creep out from under their rockszzzzZ
Dont try flawed sophisms with me... you are out of your league.
Stop wasting your time with this kid. He is a troll, shilling propaganda. Life will take care of him for us.
It's a quiet day.... I don't mind dealing with a few trolls. Already some are learning that posting nonsense about energy issues here at the Hedge will not go unchallenged. There is a solid core of aware people here, each with their own style. It is a start...Welcome to the club.
I joined to learn more about market manipulation and how to better position my portfolio. If you dig around and do your homework, this site is priceless. To be quite honest I keep wondering when it will get shut down.
It is the premiere site of its type... I have been following it almost from day one (registered about a year ago), Tyler et al do have a flair for the dramatic but they do provide cutting edge info. Did you ever look into the energy infrastructure MLPs? There is also a nitrrogen fertlizer MLP that I like, TNH.