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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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That is his hair.
very nice
"will greatly extend the life of the known oil fields"
Gas is being found all over the place: old fields, new fields, even in Europe.
Leo...back here quoting garbage again busy shitting inside the minds of those slow enough to believe such drivel.
Leo probably voted for Hope & Change which helped create what is going on plus the coming insolvency of the USA.
I'm Canadian and was hoping for change when Obama won. Unfortunately, the US political scene is beyond hope...a cacophony of right vs left bs which skirts all important issues by dividing the population up. It really is hopeless.
Black gold, bitchez! This is why the veracity of Peak Oil theory is largely irrelevant. Because the shocks that would be related to constrained production could easily masquerade as shocks of other types--political, social etc. in which case we would never know of a dwindling CAPACITY, but rather simply experience a constrained supply. This is like the argument that oil regenerates--perhaps it does, but it clearly does not regenerate at a rate that supplies the USA, Eurozone, and China with cheap oil indefinitely. Experientially, from most of our perspectives, its all the same in both cases.
Peak oil is BS. Peak energy is an even bigger lie.
at least your future career shows promise. Freudian slip?
The ignorance you display is astounding.... Can you explain to me that on an energy basis, not a volumetric basis, why world liquid energy supplies have not increased in 5 years?
You know a lot of worthless trivia. Historically the energy supply has matched demand, and it always will.
Nice semantics fucktard, I thought we were staying focused on oil. Energy takes a lot of forms. Ultimately, the ONLY energy source remains the sun and it too will go out eventually.
LoPhysics
Naturally, we will wait patiently as the sun goes out...
Why hasn't energy supply of liquids not increased in 5 years? The demand is certainly there
Well, I am waiting...
My supposed useless trivia is far more valuable than your puerile posturings
how about this bike repair guy...
peak easily extracted oil has already come and gone......or maybe off shore drilling is easier than on shore drilling?
even if oil is abiotic, its not regenerating at anywhere near the rate we use it up
we simply would not drill for it in harsh conditions if we did not need to
you are approaching peak BS
"easily extracted oil"?
Do you think man's ability to find and retrieve oil has improved since Titusville? What are you suggesting "Peak Engineering"? We've kept up with demand for 55 years after that bought and paid for professor published his study.
Oil, gas and whatever else is needed will be available when it is needed.
"Peak Oil" has never had anything to do with available resources in the ground. "Peak Oil" is a manufactured crisis.
Like pretty much everything else on the planet.
Maybe you could explain why net world oil exports have not increased in 5 years and are falling.
I guess growth in net world exports would be somewhat limited by gravity.l
Flakmuppet
What you, Leo Kockupalotis and Trav777 knows about oil could be written on the head of a pin. Another bunch of leftie hysterics with your 'Peak Everything' ignorance
Regards your claimed "net exports not increased in 5 years" has ANYONE in the WORLD got an oil SHORTAGE? ..anyone running out or are the number of countries pumping oil, sitting on oil and finding oil increasing year on year? Don't let reality prick you pricks hyper-bubble
Leo Kockupalotis
A shrill 6 year old? Isn't that you personified?? Were you brought up on Al Gore school propaganda films?
Every one of your pitiful articles i've read to date is drowning in socialist ignorance, particularly the absolutely delusional Dept of the Environment you peddled the other day. They're the biggest clown show in Britain, a perfect match for the biggest clown in Canada
Go play in the gold and libertarian wanker threads... You are out of your league. Every post you submit only makes you to be a bigger fool than the previous.
you're out from under your rock again, go back under it for another 39 years until next time Oil prices spike... the "Peak Oil' 40 year cycle loony virus, you're as predictable as the arrival of Winter
You have not answered one question with solid fact. What religious or financial firm are you shilling for already. Just give it up already. What, the X-box broken?
Are you really that thick? Price controls use, I can assure you that there is definately a shortage of $20 oil...for that matter there is a serious shortage of $85 oil...
World oil discoveries peaked in the 1960's....
Hey Flak
Oil may or may not be tight, but The Bullshit just grows and grows.
oil discovery peaks and troughs according to the price of oil... hence Britian doubled the number of exploration licenses in North Sea when it peaked in 2008... it also makes no sense to hunt for oil if Saudi can stick a straw in the sand and suck it out for $1.50 a barrel ....but many countries have still sort their own supply, including Brazil who last year found the 2nd largest oil field in history, the Falkland Islands have just had major discoveries, Israel has just found a huge gas field offshore (the list goes on) ...the fact remains oil is found around the globe by more countries every year. They will only choose to exploit it if oil prices remain high.. they won't because there's too much of the stuff (ie. competition)
I wonder how many shut in wells they have in Alaska and they run around whining about oil shortages. Its like diamonds. They say that diamonds are in short supply. Well sure they are when Oppenheimer , Rothschild little buddies, run the show over in South Africa at De Beers, and makes sure there is a shortage of them to prop up the price.
Well, if they are shut in, they'll be opening em soon as the TAP is getting close to the lower limit in flow where it can operate... Now, you don't really think that Alaskan wells are shut in, do you? Remember, diamonds for jewellery have artificial demand, not so for oil...
Well the same people control the oil market just like they control the diamonds market. You do know who owns most of the oil in Alaska don't you? Does BP ring a bell? Who owns BP? The Queen? I think not. Rothschilds own BP just like they own De Beers. Is in in their best interest to promote the oil shortage lie? Oh, I am willing to bet that is so. There is enough oil on the north slope to keep this nation bathing in oil for over 200 years, yet by listening the oil people talk , they act like it is running out tomorrow. I am not buying it.Sorry. Just like George Carlin said on one of his videos. They own it all and now they are coming for your retirement and they are going to get that too. Oh by the way, what was it the CEO, (the gentile white bread goffer, shabbas goy ) said several months ago when he was down in Louisianna ? Oh we here at BP care about the little people. Ha ha ha .
Yup like George said "Its just a big club and we aint in it".
They also own the banks, the banks control the media and politics/governments. (Elections are alot like professional wrestling). Oil info comes from companies they control, and/or through government they control, foundations they control, etc. Thus all info we have on oil (and many other things) is what they allow us. So we get peak oil whenever they decide, and meanwhile we pay through the nose.
From here, peak oil or not, it looks like they have decided to thin the herd abit.
You are clearly blowing smoke out of your ass...
North Sea peaked in 2000,
Tupi is a nice find, but it is nowhere near the second biggest oil find in history.
You still have not provided any evidence contrary to the fact that discoveries peaked in the 1960s
We have produced more oil than discovered every year since ~1980
+1 .....we're swimming in spin and drowning in lies here in the West... and progressives (Marxists) like Leo Kockupalotis are pump-priming the hysterics to provide the 'solution' which involves his beloved State regulatory and price controls... don't take any pensions advise from this dick, he wants to pour into green energy (it's already bankrupt Spain, Leos idea of a sound long term investment!!!)
There is nothing to worry about, my friends. Our President is monitoring the situation closely. He will read all the right things from Teleprompter..
Here we go again. < sarcasm on > Sure buddy, oil is regenerating faster than humans are using it. In fact, we can make hundreds of billions of people and be just fine. There are no thermodynamic or physical laws governing anything, let alone biochemical cycles that must continue to turn in order for life to continue in it's present form. < sarcasm off >
Is there junk science out there? YES, funded mostly by religious zealots who see their control over folks slipping. This is why educating yourself and understanding the basics of math AND science remain so important. If you don't you will be fooled by junk science and propaganda. I have been in agriculture for almost thirty years, my brother is in oil and gas. The cost for obtaining oil and gas is not getting cheaper as the "easy" stuff has already been tapped. The earth is finite, period. Despite what some congressmen have actually said, the laws of thermodynamics are not changing (why they are called "laws" now) and will always win in the end. Lot of coal and natural gas to burn still, but the cost of recovery, and refinement will continue to go up and the return on investment will go down and then what. Man-made nitrogen fixation (via Habor-Bosch) requires a lot of energy and is the underlying reason for the population expansion since its discovery. As long as energy costs remain cheap, fertilizer is cheap. Energy costs go up, fertilizer costs go up and so do food costs. NO powerful energy source, NO fertilizer. Sure there are bacteria that "fix" nitrogen, but they do it slowly (because of the energy required - damn thermodynamics), even when living symbiotically with legumes (sorry, crop rotation won't feed the world). When we have no energy to run the Habor-Bosch process, the population goes back to sub-billion in a hurry. It really is that simple folks.
Uhh... I'll start believing in string theory once you prove to me that you can physically be in 2 places at the same time.
The energy needed to keep people fed and mobile on this planet is tiny indeed, relative to the energy in the Universe.
Focus your energy on solutions, but first Clearly Define The Problem.
Are we running out of Oil ? Yeah, if you live to be 200 years old.
Leo Kockupalotis????
rough crowd.....
You think it's a lie that oil is a commodity and that all the easily recoverable oil will be replaced in ooohhhh lets see, the next few million years.
Oil's pretty damn important and there's only so much EASILY EXTRACTABLE oil available.
It's like fishing, you may find the right spot where all the fish hang out, but if you over fish the area the population of fish dwindles. That’s not the only problem though. You started fishing for yourself, now you're fishing for your family and feeding four more mouths. That’s when there becomes a problem, it would be called "peak fishing in your little neck of the woods"
It not about oil disappearing, it's about EROEI -Energy Returned On Energy Invested. Those pipelines in the ME may run full, but when they don't people worry, especially the Monster truck drivers in my neighborhood. It's funny to watch them switch their tires out on their lifted trucks.
There is fuck of a lot more oil in the world at the $75-$100 price than the oil companies would like you to know.
The argument that oil is "finite" is a bullshit argument. All commodities can be labled "finite".
The question is what is available at what price over what period of time ? Political chicanery notwithstanding.
Oil will be around for quite a few more generations yet.
I will bet on Human Ingenuity everytime.
Malthus and Chicken Little are wrong.
Stick to arguing your metaphysical political bullshit, with oil and energy you are way in over your head. Do Trav and I (among others) need to take you behind the woodshed again?
Sorry Flakmeister,
Junked you in error, my apologies (assuming your comment wasn't directed at Leo).
DavidC
You can un-junk by hitting the "junk" again...
no offense taken...and as if I am worried about being junked :)
The name is Leo Kolivakis and learn to respect it. You sound like a 6 year old child...
Peak oilers believe that natural gas comes from dinosaur farts.
Your ignorance is showing....don't embarrass yourself
Sorry, but after the first historical "peak oil" scare, some of us are sceptical about government-approved fear-based bullshit.
Being sceptical is one thing, being ignorant is another. Read a book, talk to some scientists, learn some math.
Of course, when someone else has an equally valid counterpoint, call them ignorant.
Better yet, let's call them... Deniers.... sigh....
I still prefer the Witch test:
Of ya floats yers a witch.
If ya drowns yer not.
If science was based on democracy and majority opinion the sun would still be going around the earth.