This long term structural setting, deriving from the scarcity of this commodity and growing geopolitical risks (including those of navigation through strategic straits), has been aggravated, in recent years, by what was dubbed "financialization" of the crude futures market, with the entering of financial speculators nicknamed "Wall Street refiners" buying and selling "paper barrels", prompting an additional disturbance in the market, with sometimes "wild" oscillations.
For an alternative view, see (none other than) Luis de Sousa's December 2008 diary Oil prices below 40 dollars per barrel
One of my first dives into the Peak Oil world was with Kenneth Deffeyes' book Beyond Oil. In it the Princeton Professor explains how resources' prices go through chaotic periods in face of scarce supply. Without knowing it, he derived an expression to explain movements like spot Natural Gas prices in the US after 2002, that was equivalent to the Queueing Theory. This made immediate sense to me, after studying this theory in my formative years at the University ... The Queueing Theory shows also another important thing: if the load on the system goes above a certain threshold it becomes impossible to predict queue lengths or waiting times, the system goes into chaos. Going back to the supermarket, imagine that for some reason the flow of costumers increases severalfold over its normal rhythm (e.g. Black Friday in the US). At first, lengthy queues form at each POS, waiting periods then go beyond costumers' patience and they simply start quitting the queue and leaving the supermarket without shopping. The dissatisfaction is such that costumers quit entering the supermarket altogether and the manager is eventually forced to close down some POS. But this is Black Friday, the avalanche of costumers eventually returns and it starts all over again. During this chaotic period a random sample of queue length at any given POS can result in any possible number and becomes effectively impossible to predict. ... Another important aspect to my understanding of this issue was presented by Carlos Cramez and Jean Laherrère in 2006 at the seminar that kicked off ASPO-Portugal. They showed a chart with oil prices as the number of working hours in the US and France and concluded that to return to 1980's levels, the last oil crisis, prices would have to reach something like 125$ per barrel (in 2006 dollars). This number stuck to my mind, and I assumed this would be about the level at which the "boom" would turn around into "bust". ... My mental model of oil prices evolving with scarce supply and expanding monetary mass.
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The Queueing Theory shows also another important thing: if the load on the system goes above a certain threshold it becomes impossible to predict queue lengths or waiting times, the system goes into chaos. Going back to the supermarket, imagine that for some reason the flow of costumers increases severalfold over its normal rhythm (e.g. Black Friday in the US). At first, lengthy queues form at each POS, waiting periods then go beyond costumers' patience and they simply start quitting the queue and leaving the supermarket without shopping. The dissatisfaction is such that costumers quit entering the supermarket altogether and the manager is eventually forced to close down some POS. But this is Black Friday, the avalanche of costumers eventually returns and it starts all over again. During this chaotic period a random sample of queue length at any given POS can result in any possible number and becomes effectively impossible to predict.
Another important aspect to my understanding of this issue was presented by Carlos Cramez and Jean Laherrère in 2006 at the seminar that kicked off ASPO-Portugal. They showed a chart with oil prices as the number of working hours in the US and France and concluded that to return to 1980's levels, the last oil crisis, prices would have to reach something like 125$ per barrel (in 2006 dollars). This number stuck to my mind, and I assumed this would be about the level at which the "boom" would turn around into "bust".
See also ATinNM's regular comments about Feigenbaum's period-doubling cascade to chaos in the logistic model...
http://www.leinweb.com/snackbar/wator/
The faster they reproduce the wilder it gets and you can even prompt total extinction. Vencit omnia veritas.
if the load on the system goes above a certain threshold it becomes impossible to predict queue lengths or waiting times, the system goes into chaos
Absolutely, and I can confirm this in my own field (software performance)
Nevertheless, the speculator is there. He is surfing on scarcity; he can't create scarcity, but he can sure as hell profit from it, and push prices up.
This is well-documented both for oil and for food. No doubt the smart money is currently taking positions on next year's wheat supply. It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
The bulk of the money in the market is therefore not speculative by this definition. It consists of funds - ETFs - whose aim is not to make profit but rather to avoid loss.
These investors are 'hedging inflation' by are getting out of dollars (at the zero bound) and exchanging dollar risk for energy risk, which is the precise opposite of a producer hedging production (or simply monetising oil in the ground), and who is offloading energy risk in favour of dollar risk.
These funds are 'long only', hate volatility, and are routinely pillaged by the market professional intermediaries.
Producers are able to keep the price high - at the 'upper bound' of demand destruction, and therefore this is exactly what they are doing. Producers will ALWAYS do this when they can eg copper,tin, cocoa, coffee markets and so on.
The only solution is to reconfigure this completely dysfunctional market by cutting out the middlemen. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
