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Countdown to $100 oil (33) - Below zero

by Jerome a Paris
Thu Oct 5th, 2006 at 10:38:08 AM EST

A few indirectly linked headlines from today, straddling economic and energy news (sources below the fold).

for the first time in at least 90 years, the United States is now paying noticeably more to foreign creditors than it receives from its investments abroad.

After trading at an average of 26p a therm through September, the spot price for gas delivered immediately fell to -5p during the course of the day, meaning traders are paying to get rid of it.

So far nothing has been formalised but Opec members have agreed they need to take at least 1m barrels - at least 4 per cent - out of the oversupplied world oil market.

Deeper and Deeper (NYTimes editorial)
For the first time during President Bush's tenure, the government's interest bill is expected to rise in 2006, from $184 billion in 2005 to $220 billion this year, up nearly 20 percent. That increase -- $36 billion -- makes interest the fastest-growing component of federal spending, and continued brisk growth is likely. According to projections by Congress's budget office, the interest bill will grow to $249 billion in 2007, and $270 billion in 2008.

Bayern Munich has an excellent (Rescued) diary on this topic (The Republican-led Borrowing Orgy) which explains in very clear terms how US foreign debt has increased, and why foreign creditors have been happy to keep on lending increasing amounts of money.

But the result is stark: ever increasing debt (including if you adjust for inflation, as in the graph below):

And yet, until this year, despite having a increasingly negative net position (i.e. having borrowed more from other countries than lent to them), the USA still had a positive financial income:

This came from the fact that US money overseas is usually invested in productive assets (factories, affiliates, etc...) which provide good returns, whereas a lot of the money invested by foreigners in the USA is in the form or low-paying Treasuries.

But as the NY Times editorial notes, that period is coming to an end and, with rising interest rates, the "switch" to negative financial income is going to be quite abrupt.

This matters to the Countdown diaries because that debt has increasingly been used in the past couple years to pay for oil:

America's wealth has been drained to pay for precious oil which is used in vast volumes with no awareness of how precious and costly it actually is.

:: ::

Gas traders start giving it away (BBC)
A glut of natural gas supplies in Britain has seen prices collapse and left traders having to pay for it to be taken off their hands.
Wholesale gas prices for immediate delivery turned negative on Tuesday as supplies surged in from the new Langeled pipeline from Norway.
Britain's gas storage capacity is 96% full so firms need to offload supplies.

After hitting more than 100p/therm (the equivalent of $240/boe) last winter, natural gas prices are now negative! While some of you will no doubt use such numbers to make fun of my Countdown to $100 oil diaries, this episode underliens a point that I have been making repeatedly: energy is not a business like others. Electricity is extremely hard to store, and natural gas is hardly better. The whole sector is an infrastructure business, and it needs to be able to be flexible enough to tolerate wild variations between peaks and troughs. It needs short term balancing nechanisms, it needs long term storage capacity, and it needs enough spare capacity to face all situations - in order never to have supplies interrupted, something that neither citizens nor the economy tolerate well.

Market mechanisms can supply that, provided that there is decent regulation AND that prices are allowed to fluctuate wildly, i.e. including to extremely high peaks (10 or 1,000 times higher than average prices) or to very low (including negative) levels. But such wild variations are unpalatable politically and thus politicians have never pushed liberalisation to its full logic, which includes high prices to get marginal supplies to kick in and marginal demand (by those that can least afford it, i.e. usually the poorest households) to be given up. and we end up with partial, and faulty, liberalisation.

So long as politicians are not willing to justify extravagantly high prices at times and the occasional negative prices, energy markets will be a huge hypocritical mess.

:: ::

Financial Times
"Opec is going to defend a price floor for its oil of $50-$55 a barrel," said one Opec official. The price of Opec's crude oil on Wednesday fell to $55.27 while Brent oil futures traded in London slipped 33 cents to $58 a barrel, 26 per cent below their July peak.
Prices have fallen as demand in the US has waned and the likelihood of a supply shortage caused by Iran's stand-off with the west has diminished.
Saudi Arabia, Opec's most important member, is unhappy with the move towards voluntary cuts, but at the same time the kingdom has already quietly cut its production by 200,000 barrels a day over the past two months.

Oil prices jump after Opec cuts output
Oil prices rallied on Thursday after the Organisation of the Petroleum Exporting Countries announced it would cut output by at least 1m barrels as soon as possible.
All Opec countries were to take part in the production cuts, with Saudi Arabia, the world's top exporter, reducing its output by 300,000bpd. The production cuts are the first since April 2004.

People have been crowing about the lower oil prices and (see my comment above) mocking my Countdown diaries. But one interesting thing in the past 2 years is that everybody appears to agree on the fact that OPEC had become irrelevant and toothless, and unable to influence the oil prices.

But the fact is, they are unable to bring oil prices down, because that would have required pushing production up, which they are evidently unable to do. They remain, however, perfectly capable of pushing prices up, by reducing production, as they have decided to do today.

And in fact, the ratchet is going up. 5 years ago, they came up with the $22-28 band for oil prices. Then they stated that prices should not return below $40; then below $50, and now they are effectively sayign that $60 is their new floor (for Brent or WTI - their own basket of prices is a few dollars below due to quality differences or transport costs).

:: ::

Negative financial income

Negative natgas prices

Negative production change for OPEC

There are a lot of news below zero...

:: ::

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Countdown to $100 oil (33) - Below zero | 7 comments (7 topical, 0 editorial, 0 hidden)

Crossposted on dKos (4.00 / 3)

http://www.dailykos.com/story/2006/10/5/10342/4536

for your support.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Thu Oct 5th, 2006 at 10:49:40 AM EST

Re: Crossposted on dKos (none / 0)

I just heard on the radio that the monthly cost of the Iraq catastrophe is 8 billion dollars a month. How long can that be sustained? (if it is true)

You can't be me, I'm taken

by Sven Triloqvist on Thu Oct 5th, 2006 at 12:06:32 PM EST
[ Parent ]

Re: Crossposted on dKos (none / 0)

Not quite that much, depending on how you count it, but it's certainly in the billions.

Where's your motherf*%&ing flag pin?

by Drew J Jones (blahblahblah@blahblahblah.com) on Fri Oct 6th, 2006 at 03:08:17 PM EST
[ Parent ]

appropriations (none / 0)

from the NYT (26 Sept.)

looks like $300M per day, or $8bn per month.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Fri Oct 6th, 2006 at 04:13:28 PM EST
[ Parent ]

$100 is a matter of time (4.00 / 2)

you just got a little ahead of the curve. still a major hiccup in Saudi and we could be there tomorrow.

but

But the fact is, they are unable to bring oil prices down, because that would have required pushing production up, which they are evidently unable to do. They remain, however, perfectly capable of pushing prices up, by reducing production, as they have decided to do today

isn't entirely correct. In shoulder periods like now, they can easily knock prices down. Right now Saudi is playing swing producer again. They are delivering what their customers nominate for and no more. So producing 9.1 MMBD as compared to 9.5 after katrina. Nigeria and Venz may be posturing with trivial cuts to jawbone the market up a bit, but their actions amount to nothing beyond a confidence boost for the bulls.

http://www.stuff.co.nz/stuff/0,2106,3803416a6026,00.html

If the Saudis came out tomorrow and said "we think the basket should be $50 and will sell spot to all comers" you'd seen crude drop $5 in a heartbeat. Current basket is $54.50 ish per their website.

With all the political issues, Saudi can't get it down to $10 like 10 years ago because there are huge piles of money in hedge funds prepared to take the other side of the bet. And no question, the amount of surplus capacity is down to sweet FA (which is why those piles of money will take the bet).

The key now is winter. if it's mild, look out below. If cold and the stockpiles of heating oil are consumed, we stay firm. This question won't be answered before Dec 15 though.

by HiD on Thu Oct 5th, 2006 at 11:07:33 PM EST

Re: Countdown to $100 oil (33) - Below zero (none / 0)

Great diary as always!

This wonderful fall in oil prices have sent me scrambling looking for some energy mutual funds. Would you guys be any interested in giving them a quick look and comment?

I mean, Jérôme's a banker. ;)

And by the way, when do we check our bets? January 1st 2007?

And then we have the very interesting question of when do oil prices stop falling and start climbing again?

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid (arvid.hallen at gmail.com) on Thu Oct 5th, 2006 at 08:00:35 PM EST

Re: Countdown to $100 oil (33) - Below zero (none / 0)

How to scare a bumblebee

Ad astra per aspera

by In Wales (inwales aaat eurotrib.com) on Sun Oct 8th, 2006 at 12:23:30 PM EST

Countdown to $100 oil (33) - Below zero | 7 comments (7 topical, 0 editorial, 0 hidden)

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