Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Your basic premise that oil markets have been supplier controlled is an obvious fact, but most of the rest of this is an ivory tower conclusion hunting for facts to back it up.

First, the Seven Sisters controlled the crude market for yonks.  But they kept the price stable at $4/bbl ish which was low enough such that the producing nations were screwed more than the consumer.  Life was easy as they built refineries like crazy and made good money providing cheap energy to all comers.

After OPEC found it's power in the 70's they have kept oil prices (roughly) where they wanted them ever since.  The price downwaves we've had since the last price shock/peak were solely due to Saudi forcing the rest of the crew to adhere to quotas.  They indeed have kept prices lowish to prevent too much investment in alternative sources which is what turned the price spike in 1978-82 into a rout when demand dropped at the same time production ramped up.

The trouble with your theory is that you ignore the real physical world where demand has steadily increased since 1985 such that we're now at 84 MMBD.  Meanwhile the supply projects that swamped the market in the 80s have declined naturally.  The OPECers (ex Saudi) now have quotas that represent their entire production.  Cheating is no longer possible therefore.  And Saudi has ramped up their production such that all the projects done in the 1975-85 period are running pretty much full bore.  China and India are poised to demand even more as they come into the modern world threatening a supply shortage.  New projects are coming on line elsewhere, but not enough to beat the normal decline during this low price period from 1985-2001.

So there is no more surplus.  Instead of a world with 10 MMBD surplus or more up it's sleeve in case of a problem, we have a relatively balanced situation.  Add that to BUSHCO idiots inflaming the Middle East, turmoil in Nigeria, turmoil in Venezuela and minor turmoil in Mexico and you have a situation where what used to be a small event capacitywise is critical.  Even in the old days a Nigerian revolution was good for a 20% price spike.  It's just no one much noticed $16-->$19 on crude at the pump.

The oil majors are no longer price setters on crude.  They are price takers from OPEC.  While Saudi might wish to keep Bush in power, I don't see them ramping up production.  They've been giving the mkt whatever it wanted all year hence a steady $1/month contango.  We're just heading into the low demand period, fall, and that has brought us back on price to where we were in March/April -- $68 ish WTI.
Find me the conspiracy without hand waving arguments.

Also the idea that :

Supplier Controlled Markets may have suppliers who partake in the practice I call patent shelving. Patent shelving is to do the research and development to find innovative alternatives, patent them, and then not put them into production

is tin hattery of the first order

To believe this you must believe:

  1.  Exxon would rather have the profits of <10% of the oil market instead of the profits a new technology that allows them corner a much larger energy market  and reap the high profits that could bring.  Oilco management likes the money a lot more than the oil.
  2.  That only the big oilcos have access to this new innovative technology and that GE, Silicon valley, ABB Japan Inc or any other technology group could not invent said technology or are working in concert with big oil without getting any obvious payment.
  3.  That countries like China, who've been able to penetrate and steal secret nuclear technology cannot do the same to get this magic energy technology.Add Israel, France, Japan, Germany, Korea and others to the list of smart, aggressive countries that are short oil and spend big %'s of their GDP on imported energy.

They're all rolling over for big oil??  
Best be a double layer tin hat.  

Your understanding of the mogas market in the US is very poor.  First, the oil majors don't run the NYMEX where the bulk of wholesale price for the entire country is set.  Other areas trade as diffs to the NYMEX +/- 3 to 10 cts, with the USWC being the least linked.

Wall Street, physical traders, importers such as Venz rule the NYMEX = NY market.  They could not give a crap about how much Exxon makes.  On DK another poster pointed out the biggest US Independant refiner Valero doesn't even have an upstream biz to protect.  They are smart,aggressive speculators compared the no hopers at Chevron, Exxon and Shell and have far more to say about mogas prices on the Merc.

Mogas has indeed dropped dramatically in the last 30 days.  From about $2.20 on the NYMEX to about $1.70 so roughly 25% at the wholesale level.  Greater than your 16% which is skewed by the relatively fixed tax, marketing, transportation and dealer cost/profits.  This is pretty extreme in the energy markets but not uncommon.  In fact the nat gas price collapsing this spring from $15/MMSCF to $6 today is a 60% drop.

The causes of both can just as easily be explained by normal behaviour in a supplier dominated market.

First, as an aside, the role of speculators has increased on futures/forwards markets.  Hedge funds are keenly interested these days in taking some exposure to commods as they do not correlate with stocks.  And can be inverse.  Helps smooth their performance.  Regular folk can play via the GSCI or other instruments.

This has resulted in the back end futures actually dragging up the front in some ways.  Reversion to the old mean is no longer likely as 10 year out paper is no longer at the old mean.  It's at $50+.

What's going on today then?

The mogas market positioned itself for a repeat of last year's hurricane season.  If you remember, the initial projections were for nearly as many and nearly as many severe hurricanes.  Traders filled tanks, refiners ran hard and speculators bought futures for August/Sept in a big way.  People played from the long side from the most part.

What actually happened?  The #1 rule of markets took hold-- "the market moves in the direction that screws the most players"  A more polite version is that once conventional wisdom is factored into the market, the odds are you move the opposite direction.

Demand was high but stable to last year so inventories held up.  We had no severe refinery disruptions.  Hurricane season has been a big nothing so far.  There is plenty of gas in tank

So as a speculator that bought mogas up to a $15/bbl crack over crude, what do you do now?  Mogas season is over.  Demand will slide.  You will have to pay a fortune to roll Sept futures into Oct as that market was backward for a number of reasons -- demand, quality, fear factor.  Sept went off the board last thurs but any rolling/liquidation started sooner.

The length had to puke.  And puke they've done.  Mogas cracks have collapsed to $1.70/gal = $71.5/bbl vs $68.5 crude or $3/bbl.  That's about where you would find them back in the glut refining days of the 90's this time of year.  Refiners will keep running as heat is much more profitable, but this will put a damper on their ardor.

So there you have it.  No great mystery or star chamber conspiracy.  

Do I think Oilcos are well behaved, honorable corporate citizens?  Of course not.  But they don't have the power to make oil prices wave to fix elections like this tin hat diary proposes.

by HiD on Thu Sep 7th, 2006 at 04:34:30 AM EST

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