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European gas buyers unwilling to pay for security of supply

by Jerome a Paris Mon Oct 26th, 2009 at 06:04:32 AM EST

Even as we've been going through years of hand-wringing about security of supply, and about how Russia was an unreliable gas supplier, it comes out the European gas buyers are themselves increasingly refusing to pay the price that underpins the security of their Russian supplies, and are breaking their contractual obligations towards Gazprom, making Europe, erm, a less reliable customer... something that's likely to come and bite us in the near future:

European Energy Firms Fall Short in Gazprom Purchases

European energy companies, faced with weakening demand and plentiful lower-cost fuel supplies, have bought far less natural gas from Russia's OAO Gazprom this year than they are obliged to under long-term contracts -- setting the scene for a potentially damaging showdown with Moscow.

The reason for this is that long term gas supply contracts have their prices linked to that of oil, and the price of oil is now significantly higher than the price for the equivalent volume of gas on the spot markets, thanks mainly to currently very weak demand for gas in Europe, courtesy of the economic crash.

But the whole point of these long term contracts is to guarantee both supply for the buyers, and demand for the sellers. In fact, their very name ("take-or-pay," ie buyers have to pay even if they don't take delivery of the gas) suggests that it is security of demand which is the more important of the two. European buyers apparently unwilling that price is a major new development, and a very worrying one.

Of course, they will argue that they are in a competitive market, and cannot let their competitors undercut them with cheap gas procured on the spot market. In the goold old days, when they were domestic monopolies, the higher cost of supply could be passed on, in coordination with national authorities, to customers via regulated tariffs, but these don't exist. It is not unreasonable for the now deregulated players that entered into these contracts for national security reasons to be compensated for that effort. But of course there are no mechanisms to do so.

Take-or-pay contracts are a vestige of the early days of the gas industry when liquid spot markets didn't exist and producers needed long-term deals with stable prices to underpin vast investments in new gas fields.

The WSJ article blithely suggests that such long term contracts are no longer necessary, and that private markets and spot prices will spur the requisite upfront investment by companies like Gazprom. They might want to take a look at how ExxonMobil, Shell and others developed the Qatari gas industry: on the back of long term take-or-pay contracts for significant portions of the production. Even if Russia were somehow to authorize foreign investment in its gas fields, and exports of that gas by Western oil majors, the contracts would still look very similar to those currently signed with Gazprom.

The issue here is the short term gap between oil-based and gas-based spot prices, which make the Russian (and Algerian, and Norwegian) contracts uncompetitive today. But the European buyers did not complain too loudly when oil price increases in 2002-2008 were passed on to them only with a lag of several months, ie when the differential was in their favor.

So we bump against the intrinsic short termist behavior required of private firms in a deregulated market, which makes a joke of the supposed preoccupations of our governments with security of supply. Long term contracts ARE the best answer to security of supply worries, and they have worked in this industry for 40 years - and they are being trashed by the industry today, because it damages their profits this quarter.

It doesn't seem to matter that we get demonstration after demonstration that deregulated markets do not fulfill the most basic objectives of a sane energy policy (unless you count the profits of energy companies, traders and the banks supporting their speculative endeavors as the only such objectives) - the only lesson our pundits and propagandists "get" from such crises is to call for yet more deregulation.

Go figure.


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of course, is whether the European buyers will actually pay for the gas they chose not to have delivered this year, as their contracts require.

I expect that they will - they can deduct the funds paid this year for undelivered gas from payments in the coming years for volumes above their minimal obligations then.

So is this only about changing the price formulas (away from oil prices towards spot-based formulas), or is it some attempt to weaken the "take-or-pay" clauses? It's not clear to me yet, and I'm pretty sure that different players in this story (including those reporting it) have different agendas here.

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

by Jerome a Paris (etg@eurotrib.com) on Sun Oct 25th, 2009 at 08:49:59 AM EST
A TOP states that the deliveries have to be taken within a certain period, or if not paid for. Saying you will pay but want a credit for future over deliveries would normally require an additional investment in capcity to make those over deiveries available.

One of the whole points baout TOP is that gives a degree of certainty that allows the optimal sizing of investment, which results in a lower price to the purchasing party.

by senilebiker on Mon Oct 26th, 2009 at 09:12:24 AM EST
[ Parent ]
it would work, because Russia has both the pipelines and the production capacity. Russia nexports have always been limited by Western Europe voluntarily constraining its exports from Russia and not by infrastructure constraints. Remember that the Soviet Union used to deliver 120bcm/y of gas to Ukraine, and now it delivers only 50-60bcm/y - and more pipes to the West have been built since.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Oct 26th, 2009 at 09:37:48 AM EST
[ Parent ]
you lose all the leverage power.

If Russia want s to futher develop its Irkutz fields it will need to build a additional piping and compression capacity. If they give ground now, then the buyers will sign a contract with a shrug of their shoulders and "who cares?"

by senilebiker on Mon Oct 26th, 2009 at 09:42:54 AM EST
[ Parent ]
Russia is certainly not giving up on TOP - indeed, I suspect this story came up (before the end of the year when shortfalls will actually be measured) because Gazprom IS making noise, and using current numbers to underline the potential for a "lack of reliability" accusation towards its customers...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Oct 26th, 2009 at 10:19:09 AM EST
[ Parent ]
by senilebiker on Mon Oct 26th, 2009 at 09:50:26 AM EST
[ Parent ]
in response to a meta diary of mine yesterray.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Oct 26th, 2009 at 10:17:12 AM EST
[ Parent ]
Some of my best friends are Parisiens.
by senilebiker on Mon Oct 26th, 2009 at 10:32:19 AM EST
[ Parent ]
I think what you document demonstrates firstly the inadequacy of our deeply dysfunctional intermediated markets operating 'for profit' and secondly the inadequacy of money created as debt.

Tesco and many other retailers create points which they will redeem in payment for goods etc. UK retailers also club together and redeem quasi currency 'points' eg the staggeringly worthless Nectar points. Boots the Chemist is noted for the best scheme in the UK in terms of value.

Airlines are prepared to accept Air Miles in payment for air travel.

Why then, should not an association of gas producers  - a Gas OPEC - agree to mutually accept in payment for gas Units which they issue? These would be issued to members of an association of gas users, which would be another stakeholder member in the gas Clearing Union. The Units would be redeemable in payment for gas supplied through what is essentially a global virtual Gas 'Pool'.

Just to be clear, since you were under a misapprehension the last time we discussed this, Units - unlike forwards/futures contracts - give no right to delivery.

So Qatargas might issue a few billion Units and sell them to (say) the Chinese or Japanese as an alternative to T Bills, and they could use the proceeds to repay the interest-bearing debt in fiat money they have incurred, replacing it with an energy debt.

Qatargas gets rid of the interest burden: against that, they lose the upside on the value of gas sold forward but also protect against the downside. ie its a hedge - 100% margined, and undated. It also happens to be a Sharia'h compliant financing mechanism at a fundamental level, as opposed to the sophistry described as "Islamic" finance, but almost invariably an Islamic veneer on an unIslamic reality.

For Unit purchasers it is a hedge against gas price inflation. It would be a perfect investment for those people currently investing in natural gas through Exchange Traded Funds (ETFs) which invest in gas through futures contracts, and are royally screwed by the trading community generally, and the investment banks in particular.

For investors though, the Unit price will be underpinned by gas consumers, who would buy Units and use them instead of fiat currency should the Unit price fall sufficiently below the physical 'spot' market price. Long term supply contracts may then evolve into long term supply partnership arrangements between infrastructure service providers.

'Unitisation' completely changes the financing mechanism and divorces the securing of price from the securing of supply. There will still be a need for a rolling pool of development credit, and the services of experts like your good self for project appraisal etc, but once projects are complete, they would be refinanced by  long term investors in Units in search of an alternative to the dollar.

So IMHO the sooner a gas clearing union is created, and unitisation implemented, the better for all of us.

Consuming nations may then agree to apply 'carbon levies' to crank up the physical market price, thereby cutting back use. Units would be issued as an energy dividend which consumers may use in payment, but would be more likely to save, if they could, and exchange for other value, like rent, food, and goods.

In particular the staggering wastage and subsidies by producer nations could be eliminated by raising physical gas prices to global market levels and compensating citizens with Units which theycould use or save. The proceeds which result would then finance direct 'energy loan' investment in renewable energy and energy savings.

Who needs deficit-based carbon credits other than the middlemen who brought us the Credit Crunch?

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Oct 26th, 2009 at 08:09:45 AM EST
And look where those brought us.

Long Term Top contracts allow the both parties the certainty to make investments based on a guaranteed cost for one side and revenue stream for the other. In the Oil and Gas and Chemical Industries, it is a standard procedure which works to the benefit of both buyer and seller.

When one party unilaterally fails to meet its obligation - either to supply or to purchase, both parties end up losing. A Prime example of this is when El Paso LNG  Co reneged on its TOP's with Algeria's Sonatrach in 1980 due to a linkage between the LNG price and Oil. The result is that El Paso had to write off $900 mm of tankers, and went into Chapter 11, and ended up being bought by Rail road company Burlington Northern, and Sonatrach had at that the time the world's largest LNG plant working at under 50% capacity.

The reason was not because they entered into a TOP, but that the guys who negotiated did a piss poor job of understanding the dynamics and risks of their markets.

by senilebiker on Mon Oct 26th, 2009 at 09:06:54 AM EST
[ Parent ]
Is an Air Mile a derivative? Or Tesco Clubcard points? Maybe, maybe not.

But the point is that you are looking, as is Jerome I suspect, for complexity that is not there. A Unit redeemable in payment for gas supplied is so simple it's almost embarrassing. It is entirely agnostic as to the supply, provided the supplier is a member of the clearing union.

See my answer to Jerome. Sure, we need a clearing system: this would be an International Energy Clearing Union. Exchanges of energy-as-currency (ie Units) would take place on credit terms, with debit balances subject to a mutual guarantee and supported by both those with positive and negative energy balances.

We will still have supply agreements, and we will still have a physical market price which varies with supply and demand for gas.

But Units are not about supply, but payment in respect of the agreed transaction.

Unitisation is capable of changing energy financing totally.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Oct 26th, 2009 at 01:19:49 PM EST
[ Parent ]
An air mile isn't a derivative. It's a scrip.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Oct 26th, 2009 at 02:07:51 PM EST
[ Parent ]
Scrip is technically a paper credit object as  understand it.

Electronic scrip, based upon the use value of:

(a) location - replacing mortgages; and

(b) energy;

is what is needed, and would circulate on a WIR style credit clearing / accounting system, within a suitable framework of trust.

 

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Oct 26th, 2009 at 03:15:46 PM EST
[ Parent ]
But Units are not about supply, but payment in respect of the agreed transaction.

This is what caused the so called sub prime crisis.

by senilebiker on Mon Oct 26th, 2009 at 05:06:23 PM EST
[ Parent ]
Once you start  trading them they are.

For example - for every 100 airmiles that , say only 80 are redeemed. But since you are short of cash, you decide to trade your liability for 75cts on the dollar, and in this way you strengthen your balance sheet - you remove $1 dollar of debt for 75cts payment,

The buyer, is betting that he can reduce that 80% to below 75%, or alternatively can push back the payout so that the discounted value is less than the face value

Then lets say the buyer also picks up Lufthansa Miles'n more, Emirates Skymiles, Delta whatever, and then bundles them all into a package, which he splits four ways into four separate securities, each of which he sells on the market.

And what you have is a classic derivatives market.

by senilebiker on Mon Oct 26th, 2009 at 05:17:43 PM EST
[ Parent ]
I wouldn't call it a derivative, but it is an undated unit redeemable in air fares. Therefore it embodies credit and it can behave as money. The only obstacle is that it is a named instrument, not a bearer instrument. But if you make them tradeable it becomes closer to being money.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Mon Oct 26th, 2009 at 05:29:05 PM EST
[ Parent ]
gas is not liquid like oil. When your unit of trade is the LNG tanker and its $50 million of natural gas, there will never be complete liquidity in the market.

And the fact is, what you propose already exists in current contracts: LNG tankers can be diverted to other markets, if the spot price is more favorable than the pre-agreed formula under the long term contract, with a pre-agreed profit sharing mechanism between the parties. No need for your units to do that.

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

by Jerome a Paris (etg@eurotrib.com) on Mon Oct 26th, 2009 at 09:42:36 AM EST
[ Parent ]
and requires a significant investment  in liquefaction capacity.

For those countries that are geographically and geopolitically distant from their markets, LNG is the only way to go. But if you have direct land access as Russia does with the EU, then pipelines are cheaper and more reliable.

The gas market is analogous with the electricity market, where an end supplying utility needs a palette of supply sources, and profits are maximised by playing with the sources, and marginal costs. However like electricity, there is a baseline demand which has to be met everyday, and some kind of stability of cost and supply is neccessary for this base.

by senilebiker on Mon Oct 26th, 2009 at 09:49:09 AM EST
[ Parent ]
if it was you who told me that during their trip overseas LNG tankers can sometimes switch from "owner" six times before they dock at their final destination (and that the final destination also may change en route).
by Nomad on Mon Oct 26th, 2009 at 09:59:36 AM EST
[ Parent ]
I doubt that LNG tankers change hands so often, because it's usually a big and complex transaction each time, with parallel transactions elsewhere as part of the process (swaps for an other source of gas elsewhere).

Oil tankers change hands often; LNG, none or once would be my bet. But maybe I'm wrong.

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

by Jerome a Paris (etg@eurotrib.com) on Mon Oct 26th, 2009 at 10:16:36 AM EST
[ Parent ]
More probable that either I, or my source, was confusing gas with oil tankers.
by Nomad on Mon Oct 26th, 2009 at 11:27:35 AM EST
[ Parent ]
I think that there is the odd LNG cargo which changes hands in transit, but it's probably pretty unusual.  

Transactions in oil cargoes are much more common, but a couple of times would probably be the most, since the logistics of taking over the charter and diverting a tanker in transit are pretty horrendous.

A tanker operating as floating storage for a cargo is a different matter, but even so, multiple sales would be pretty rare.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Oct 26th, 2009 at 01:25:11 PM EST
[ Parent ]
I think you are looking for complexity which is not there.

The tanker load of LNG requires to be paid for.

You may pay with 50 million fiat Fed dollars, or in x million Units which this producer, or any other producer member in the gas clearing union, issued earlier in exchange for something of value to them, and which you bought because it was advantageous to do so.

Sure you'd need a framework of trust, and a custodian, and maybe provisions into a default fund. But that's not rocket science - just clearing of energy debit balances and credit balances without an unnecessary central counterparty aka single point of failure.

If you can understand Air Miles, then it surprises me that you do not understand Units.

Kilo Watt Cards are an example of a proof of concept created by someone in the US just to show that it works in practice.

Deficit-based money created as debt, and a market operated with intermediaries "for profit" are the problem - not the solution.

Producers get interest-free loans denominated in energy. Consumers like China and Japan, and investors wishing to hedge energy inflation would buy the Units in preference to T Bills paying 0%.

Hey Presto. You've got the beginnings of a global reserve currency, plus an energy standard for pricing of global transactions.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Oct 26th, 2009 at 01:01:11 PM EST
[ Parent ]
and I see how you need more than the advertised rate for the dates that are more interesting to you - if they are available at all; and I see how I now need to pay fuel surcharges on top of airmiles to actually get a plane ticket, and I see how the rules change along the way and suddenly some kinds of plane tickets no longer get the same quota of airmiles.

Why be stuck with a unit that's less liquid and less practical than the real stuff?

The only reason airlines give airmiles is to be able to give them to the passengers rather than to their employers who pay for the plane tickets. If they gave money, it would not go to the "right" hands (ie those that are able to choice of airline, ie people who get to spend someone else's money to travel and will influence that decision in ways that can be advantageous to them). I'm not sure that's really what you have in mind: airmiles are principal/agent arbitrage instruments...

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

by Jerome a Paris (etg@eurotrib.com) on Mon Oct 26th, 2009 at 06:03:21 PM EST
[ Parent ]
You illustrate perfectly the problems of market failure, rather than unit failure.

I would suggest that if the gas producers - led by Russia, Iran and Qatar - were to announce they (or their pet companies) were issuing such Units, and would honour redemptions of each others' Units, then China, Japan,and others would pretty quickly be dipping their toe in the water and buying them.....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Oct 26th, 2009 at 06:27:21 PM EST
[ Parent ]
would you want to have units controlled (and subject to manipulation) by Russia or Qatar when you can use something demonstrably better?

Russia has a history of currency manipulation, confiscation and destruction. The others are no better.

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

by Jerome a Paris (etg@eurotrib.com) on Mon Oct 26th, 2009 at 06:35:12 PM EST
[ Parent ]
Units in issue would necessarily be transparent. So everyone would be able to see - assisted and managed by service providers - how outstanding balances compared with reserves and production levels. It's certainly possible to manipulate supply and the physical market price, but how - other than default - could Units be manipulated?

Balances in Units would be positive and negative, as with any other global currency, and the clearing union would require a framework of trust. Here, I recommend a Guarantee Society approach, not a central counterparty.

So holders of positive balances and holders of negative balances would both pay a guarantee charge in relation to the mutual guarantee into a default pool held by a credible custodian - possibly Swiss.

The analogy with Keynes' Bancor and International Clearing union is close, the difference being that there would be no central issuer, and the currency Unit would be redeemable for the intrinsic energy value of gas.

Russia, Qatar and Iran would all have far too much to gain from such an approach - compared to the financial costs and restrictions of the current system - than to fuck it up.

I note you are frequently at pains to point out how reliable Russia has been in supplying gas over the last 40 years. I doubt whether they would default in the way you appear to think, but we would require a framework of trust just in case they were tempted. As Stalin said: Trust, but Validate.

And if the three biggest producers are in, everyone would be in, I suggest.

China and Russia are already looking to settle bilaterally in Renmimbi and Roubles. We all know that the minute the rates diverge one way or another too painfully, one or the other will default.

Unitisation transcends that, and China would be only too pleased to be able to pay any other gas supplier with the Units they have bought from Russia subject to a globally valid guarantee.

I noticed that EDF and Gazprom have just agreed a transatlantic gas swap. Unitisation within a clearing union would make the risk management of that transaction much easier. Sterling and dollars would be priced in gas, not vice versa.

The existing dysfunctional markets are travesties. The financial market is falling down around our ears, and the energy markets are shamelessly manipulated by trading intermediaries to the detriment of producers and consumers alike.

And yet you claim these are demonstrably better than a simple neutral, transparent and globally valid Unit redeemable in payment for gas?

You surprise me.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Oct 26th, 2009 at 07:52:15 PM EST
[ Parent ]

how - other than default - could Units be manipulated?

default is a very real risk. And it's just a small subset of the "political manipulation" ensemble. It's a big enough risk to make an absolute certainty that your units will never fly.

My job as a project finance banker is not to lend money - most of my clients in the energy sector have more money than the banks. It is to take political risk.


subject to a globally valid guarantee.

Who can credibly provide that? I mean, other than the US (in which case, your "unit" will be called the "dollar") or maybe the Europeans (in which case, your "unit" will be called the "euro")

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

by Jerome a Paris (etg@eurotrib.com) on Tue Oct 27th, 2009 at 06:35:32 AM EST
[ Parent ]
"default is a very real risk."

But is it not a very real risk with debt denominated in currency as well?
True, oil producing countries are not the most trusted of governments. But, let's say Germany creates units redeemable for its wind turbines production, would the fear of default be that strong?*

Although, of course, a central bank can always decide to print more money than it expected to, whereas Germany can't decide to produce more electricity -so the risk of default is probably greater with a redeemable unit.

"in which case, your "unit" will be called the "dollar""

Is that so necessarily? Is the point not to back the unit to something useful that cannot be devalued easily? Would USA directly price their goods in the unit if it existed?

Couldn't the guarantee be provided jointly by USA and the EU? Of course, the next question is would they want to (since that would stabilise the exchange rate somewhat, not necessarily what governments really want).

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Tue Oct 27th, 2009 at 09:31:53 AM EST
[ Parent ]

"default is a very real risk."
But is it not a very real risk with debt denominated in currency as well?

The point is that it is a separate, additional, source of default.

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

by Jerome a Paris (etg@eurotrib.com) on Tue Oct 27th, 2009 at 04:16:45 PM EST
[ Parent ]
So you could manage political risk with debt finance but not with unitisation? Quite a feat, since in fact, because there is no interest burden in unitisation the obligation is less. Conventional debt finance is clearly MORE likely to default.

What's so difficult about (say) an International Gas Trade Association whose members - sell-side and buy-side - enter into a mutual guarantee agreement, and back it up with provisions into a default fund in respect of trade balances?

As you say, its the end users who have the assets to back the guarantee - not the banks.

You prove my point that banks should move aside and become service providers in respect of the undated direct peer to peer credit which exists between the Unit issuers and Unit holders.

It's in banks' own interests to move to service provision - don't you understand that? The only capital requirement they then have is that necessary for operating costs.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Oct 27th, 2009 at 11:38:39 AM EST
[ Parent ]
you add a extra layer of risk with your structure - in addition to the operational risk of gas production and transport, and political risk linked to your supplier, you add the political risk of your units being degraded by that supplier (close to the same risk, but not quite) or by the other backers of the unit.


So you could manage political risk with debt finance but not with unitisation? Quite a feat, since in fact, because there is no interest burden in unitisation the obligation is less. Conventional debt finance is clearly MORE likely to default.

No, it's less likely to default, because it takes no risk on the unit validity. If you don't want to take price risk (on gas or interest rates), you can negotiate fixed prices / fixed interest rates very easily.

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

by Jerome a Paris (etg@eurotrib.com) on Tue Oct 27th, 2009 at 04:21:08 PM EST
[ Parent ]
I have always been quite clear - for maybe 8 years now - that the next (internet) generation of markets will have a holistic global market architecture configured around transaction and title registries. Indeed I said as much to the UK Treasury Select Committee last year when I gave evidence.

The political risk of default by Unit issuers will be addressed through the Clearing Union/Guarantee Society mechanism. ie a globally applicable interactive/consensual framework agreement, not some monolithic centralised quasi Central Bank issuing global fiat currency ex nihilo.

The backing for the mutual guarantee would not come from the limited balance sheets of credit intermediaries - or a single point of failure counterparty probably owned by them (and from which they would in all probability walk away in extremis). It is based upon the balance sheets of end user producers and consumers collectively, which you said yourself is where the financial substance is.

This mutual guarantee would be supported by a guarantee payment/provision collected from both the sell side and buy side (ie analogous to Keynes' Gesellian Bancor proposal), and held by a custodian.

Risk management, access to data/transparency, dipsute resolution etc and the equivalent of monetary policy - ie Unit issue compared to supply capacity - would be carried out by service providers.

It is necessary to view my proposal for energy unitisation in the correct context, and that is the International Energy Clearing Union I have advocated for several years.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Oct 27th, 2009 at 05:31:32 PM EST
[ Parent ]
that would work, but good luck with getting everybody to give up sovereignty to such an entity.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Oct 27th, 2009 at 05:56:35 PM EST
[ Parent ]
....it's an agreement.

There's no sovereignty given up, any more than there is under - say - the BOLERO contractual platform for transfers of title of goods in transit.

BOLERO is a very interesting beast in relation to international trade finance, with which you may or may not be familiar.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Oct 27th, 2009 at 09:36:58 PM EST
[ Parent ]
The ability to buy undated "units" of natural gas would offer an additional way to hedge against currency volatility as well. Just about now I would be very interested in such a capability, looking, as I am, at the prospects of the dollar declining wrt other currencies by 50% or more over the next few years, or possibly sooner.  The value of these units would, of course, fluctuate with weather and the level of economic activity, but with a window of several years in which to sell the units, that could be timed to some extent.

Would flows of money into such unit investments be likely to show the same correlations with unit price as flows of retirement fund money into oil futures showed over the last two years?  

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Oct 26th, 2009 at 03:58:53 PM EST
[ Parent ]
ARGeezer:
Would flows of money into such unit investments be likely to show the same correlations with unit price as flows of retirement fund money into oil futures showed over the last two years?  

This interview sets out my views on the role of ETFs in the energy markets.

I would argue that a combination of direct transactions between producers and consumers in the physical gas market with the use of Units for investment and payment would combine to cure the problems of the current dysfunctional market.

In particular, investors need no longer get shafted by intermediaries the way they do now, because transaction costs are massively reduced, and they would potentially have the choice of using Units in payment for gas supplied if there are no investors bidding at an acceptable price.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Oct 26th, 2009 at 08:50:37 PM EST
[ Parent ]
It is precisely the risk from predatory intermediaries that keep me out of such markets. I have full confidence that those markets will be manipulated to the benefit of the intermediaries and the detriment of the investors.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Oct 27th, 2009 at 05:21:04 PM EST
[ Parent ]
The energy markets - particularly the physical/OTC market aptly named the Brent Complex - are now IMHO little less than systemic pillage.

Galbraith's 'Bezzle' comes to mind -an economic loss where the losers do not know that they are losing....well actually, they do, but they can't work out quite how....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Oct 27th, 2009 at 05:39:42 PM EST
[ Parent ]


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