Oldreliable,
I apologize for not posting back sooner; some unexpected and tragic events recently occured that I had to deal with, but please do not think I am not enjoying this conversation. Anyway:
Actually, I believe speculation has played a huge role in the run-up in crude and crude futures have played a significant role. Remember that the single most important function of a futures market is price discovery. In this role, at its simplest, speculators and producers come together in a market facilitated by market-makers ('locals' in commodity jargon) to 'discover' a market-clearing price for their commodity. As the energy futures complex grew in depth and depth and liquidity throughout the eighties and nineties, producers learned that it could be relied upon for a liquid market in which to hedge the price risk of their committments, while speculators began to discern and learn to trade the fundamentals and technicals of the crude market. This large public order flow is a locals dream, giving them commercial and speculator order flow to trade against.
You're correct, but I think you're saying something a little different than I'm saying. My point was that, absent those other factors, both political and geological, the process of speculation would not have driven the prices up to the levels they are today. Or, to state my claim differently, speculation has not
unreasonably driven up the price.
It certainly has not taken rocket science to become cognizant of the price-impacting factors that you have enumerated. Coupled with continuing ME tensions, any and all of which contribute to some degree to the risk to future disruptions in production in the region, and you have a market in which opinions are easily come by. Coupled with an easy way (in the form of deep and liquid markets) to express that opinion, it becomes a natural attraction for speculators. Reminds me very much of bond futures from the late '70s thru the early '80s.
I think it's more than just ME tensions, though clearly that's part of it, as are the damage done (and the promise of more damage done) by hurricanes in the gulf. The underlying issue is that we're coming to realize that we're probably pumping about the maximum amount of oil we will ever pump. We may edge up close to 90 mbpd, but I'll be very suprised if we break that. How long we'll hold at that level I don't know, but the news doesn't look good.
No, I wouldn't. The problem is still twofold: (1) position limits that are too small relative to the averaqe daily trading volume and open interest, and (2) the effectiveness of regulatory surveillance.
Keeping in mind that I'm continuing a scenario that I don't think has happened, suppose I am someone in the Bush administration with ties to big oil, and I, along with a consortium of my friends, decide to try to manipulate the market. Singly, none of my friends could buy enough to do much to drive up prices, but combined, and dipping into a fund supplied by one or more large banks, it could be done. So long as no connection between any of my friends could be shown, and so long as I maybe pull a few strings on their behalf, it could work.
To be clear, I'm simply continuing this part of the discussion because I think that's what a lot of people believe is going on. I wasn't too cognizant, prior to this discussion, of the specific daily limits imposed by NYMEX, but in any case I think that over time and as long as the game were played carefully, that could be circumvented. I think the real problem is going to come up when you consider that NYMEX is not the only exchange that would have to be dealt with, and the CFTC wouldn't be the only regulatory agency ultimately to become interested.
The converse is of course also true: should our speculators 20,000 contracts prove unable to sway the market price for more than a temporary blip, and the price falls back to a level below that of the speculator's purchase price, then he is required to post additional margin. In years gone by, more than one speculator went bust because even though he was eventually correct in his market assessment, but lacked the resources to stay with his position until he was proven prescient. This is where the deep pockets that you write of would come into play - but that also demonstrates how important it is for the operator to be correct on the fundamentals and technicals intrinsic to the market (so that he is taking positions in sympathy with the underlying fundamentals and technicals, rather than against them), and how extremely difficult it is to simply 'muscle' the market in his direction for any length of time regardless of the underlying fundamentals.
Yes, and it's my position that ultimately it would be too difficult, even for the oil majors.
Enron is probably not a good example here, as their difficulties sprang more from OTC markets than exchange-traded markets, as evidenced by their need to move stuff to SPVs.
I meant the Enron example as a general indication that regulations can be circumvented with enough political pull, enough creativity, and enough wherewithal.
As you can see, there is just huge financial leverage in futures contracts! A relatively modest amount of cash can control relatively huge amounts of product!
Indeed.
I think we all have come to recognize the possiblity of steadily increasing energy costs coupled with and caused by continuing depletion alongside steadily increasing demand. So, my question is, to what extent do you think US foreign policy, particularly with respect to the ME, is driven by these considerations?
I think this is a very complex issue, and I preface my remarks by saying that it's impossible to know with any certainty what is really happening. So what follows is what I suspect is true, but cannot prove:
I think our foreign policy is driven primarily by energy concerns at this point, and has been for some while. The Middle East is not the only source of oil in the world, but Southwest Asia is certainly the single most oil-endowed region in the world. We now know that non-OPEC oil production is in terminal decline (actually, it may be that OPEC is also in decline now...they're off their target and previous production for the third month in a row), and I haven't read any optimistic pieces about the potential for new discoveries in rather a long time; the growing consensus seems to be that there aren't going to be any more mega-fields left to find. What we're going to run into are smaller pockets that yield a heavier crude that will be higher in sulfur and therefore harder to refine. These will also be in more inhospitable or hard-to-reach regions (arctic, deep-water), increasing the cost of getting the oil out of the ground even prior to getting it to a refinery.
Mexico's mega-giant field, Cantarell, is now past peak and the initial numbers for the type I decline there look abysmal--maybe as high as 12% but it's really too early to tell. Venezuela, though endowed with significant resources in oil, is also on sour terms with the U.S. right now, and has established closer ties to the BRIC (Brazil, Russia, India, China) nations. Canada's tar sands are going into development full tilt, but aside from environmental concerns, it appears that they will never get more than 10 mbpd into production, and that's a decade away or more. Unsubsidized, the cost of a barrel of crude from the tar sands is over $100.00 U.S. The other problem is that in order to get oil from the tar sands at all, they have to use natural gas both as a heating source and as a catalyst. Natural gas isn't as easy to ship as oil and is past peak in North America.
Russia has quite a lot of oil yet to be pumped, but they're going to stop exporting by 2010; their oil will be used to build their country. That's a huge problem for us that so far no one is yet discussing.
Essentially, the ME is the only area of the world with significant enough supplies left for us to really worry over. Now, there is something that needs saying about that as well. In 1983 (IIRC) OPEC changed its rules about how much oil its member countries could pump-the new quotas were based on stated reserves. In the two years after that decision, the stated reserves of the OPEC countries jumped dramatically, in a couple cases trebling from previous numbers. The stated reserves were up to the member countries to determine; there was no 3rd party audit of any of it (actually, I think the UAE did get an audit but the results were kept secret). It was recently announced that Kuwait's reserves may be only a third of what they've been saying--the Kuwaitis original confirmed and then denied that story so it's difficult to say.
It does seem rather suspicious that almost immediately subsequent to our discovery that the FSU 'stans didn't have as much oil as we thought, we ended up in two wars in the ME, one in a country that controls 80% of the current pipeline capacity to China, another that has the second largest total reserves and the single best maintained reserves on the planet. There is quite a lot of recent history that tends to indicate that the wars we are engaged in were planned or at least hoped for. There was quite a lot that came out in European newspapers even prior to 9/11 that indicated we were in a lead-up to war.
The issue now, however, is that we've not been very successful at doing what we'd hoped. We know that oil is absolutely critical to the economy, and that the economy is absolutely critical to maintain life as we know it. How we keep the oil flowing is all-important at this point, as is the equally powerful but counter-dicting point that it won't last forever no matter what we do.
