Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
I'm sure Jerome and ChrisCook will have more informed ideas than me.

however I remember reading a series of articles about the price of oil frm the chicago Tribune that suggested that the "real" price of oil to the US economy was something like twice the actual recouped price at the pump. Which suggests to me that the direct costs of securing energy supplies has never been factored into the price and so shouldn't be now.

However, an interesting way is to ask how much additional cost the US is paying compared to europe. In 2002 the price of oil in dollars and euros was actually the same, 25. Since then the price in euros has tripled to 75, but the price in dollars has increased over SIX times. So I suggest that this would imply that at least half of the price rise at thep ump is a  direct consequence, even if it is only discerned by the fall of the dollar

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Sat Jul 12th, 2008 at 11:03:01 AM EST
That is a wonderful way to describe this in terms of the foreign exchange, simple and to the point: elegant. Thank you.

Blogging regularly at Get Energy Smart. NOW!!!
by a siegel (siegeadATgmailIGNORETHISdotPLEASEcom) on Sat Jul 12th, 2008 at 11:22:27 AM EST
[ Parent ]
However, one might argue that the crumbling of the $ had little to do with Vietraq. The enormity of the sums dumped into the desert sands is staggering, yes, but my distinct impression is that it utterly pales in comparison to what the Bushies have been doing on the home front.

Of course, one might then point out that the war in Vietraq was likely a vital part of the scare-people-into-voting-for-us strategy very obviously employed in 2002, 2004 and 2006.

Ultimately, my own WAG would be "very little." Demand was (and to some extent still is) exploding (see India, China, SUV) and supply couldn't keep up even if Iran and Iraq were pumping at the fastest rate physically possible. Something Has To Give, and of all the major powers of the world today, the US is structurally the most vulnerable to oil price shocks, I think.

So the war in Vietraq and Bush's Ponzi-economics may or may not have been proximate causes (and certainly played a role in the devaluation of the $), but ultimately, the pain would hit the US anyway. Maybe Bush has fast-forwarded the process by a couple of years, maybe he has increased the pain by a couple of tens of percent. But ultimately, my bottle of beer says "Peak Oil is a rock-meet-hard-place scenario, and any country that insists on suburbanisation and SUVs is gonna find itself between the two."

In part, this stems from a view that Bush is a symptom, not the disease. The fundamental structural weaknesses I talk about go back at least to Nixon, and until and unless they are excised from your body politic, you'll be able to choose not between a party that governs From The People, By The People, Of the People and one that does not, but between one that does not and one that does not and gloats about it.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jul 12th, 2008 at 02:46:36 PM EST
[ Parent ]
A President, like Consciousness (the president of the state of mind), is always 'after the fact' that the entire government (and everything that feeds in and out of it) has already acted upon. Just like the CNS.

It is not possible to run a hierarchic organization from the top, on the basis of a one page daily summary of every issue - unless, there is complete reliability of the bottom up analysis of the metrics at every level of the organization.

And when government is staffed by people chosen for their ideology, it is the result of a long process. The Supreme Court is also a 'long game'. However a single appointment to the SC, should a vacancy appear, can have more far-reaching consequences than the election of any president.

You can't be me, I'm taken

by Sven Triloqvist on Sat Jul 12th, 2008 at 03:31:31 PM EST
[ Parent ]
Demand was (and to some extent still is) exploding (see India, China, SUV)

In fact, some of the fastest increases are with the oil producers themselves.

It's an interesting spiral.

Oil prices go up.

Producers get rich.

Producers' energy consumption increases as they spend their wealth for consumption and for development.

They export less.

Prices go up more.

...and so on...

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

by ChrisCook (cojockathotmaildotcom) on Sat Jul 12th, 2008 at 03:38:12 PM EST
[ Parent ]
And money continues to move into the energy futures markets.  It is hard to believe that this large increase in money, even from pension funds, is bringing the price of oil down. More dollars chasing the same amount of oil futures. Repeal of the "Enron exemption" and a significant tightening of margin requirements by the SEC would show what effect these investment flows have had.  Don't hold you breath.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jul 12th, 2008 at 08:47:02 PM EST
[ Parent ]
And money continues to move into the energy futures markets.

I'm not in the 'speculation is a major component of the price rise' camp, but a little here and a little there and pretty soon the billions are noticable.

Granted, this is a number for all commodities, but I can't find the breakout for oil alone.

In the last five years, investments in index funds tied to commodities grew to US$260 billion from US$13 billion.
Pension funds deny speculation on oil

This one is more to the point - that there is serious money taking a bit of profit here and there, as contracts open and close, money that wasn't in the market several years ago, money that is influencing the game through loopholes similar to those that sucked billions from the pockets of California electricity rate payers. The pension companies, in other documents (in the same article above) say that they only have 2-4 % of their assets in this kind of speculation and that the return goes to the little guy's retirement funds. [Tobacco, Blood Diamonds, War Toys profits - where was it that I heard these arguments before?]

Energy Speculation Causes Fuel Price Inflation
June 22, 2008 | Progressive Democrats of America [does this include North and South, one wonders?-ed]

Commodity Index Investment vs. Spot Prices

In the popular press the explanation given most often for rising oil prices is the increased demand for oil from China. According to the DOE, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920 million barrels. Over the same five-year period, Index Speculators demand for petroleum futures has increased by 848 million barrels. The increase in demand from Index Speculators is almost equal to the increase in demand from China!

Commodity Index Purchases Last 5 Years

Index Speculators have now stockpiled, via the futures market, the equivalent of 1.1 billion barrels of petroleum, effectively adding eight times as much oil to their own stockpile as the United States has added to the Strategic Petroleum Reserve over the last five years.

Index Speculator Demand Characteristics

Demand for futures contracts can only come from two sources: Physical Commodity Consumers and Speculators. Speculators include the Traditional Speculators who have always existed in the market, as well as Index Speculators. Five years ago, Index Speculators were a tiny fraction of the commodities futures markets. Today, in many commodities futures markets, they are the single largest force. The huge growth in their demand has gone virtually undetected by classically-trained economists who almost never analyze demand in futures markets.

Index Speculator demand is distinctly different from Traditional Speculator demand; it arises purely from portfolio allocation decisions. When an Institutional Investor decides to allocate 2% to commodities futures, for example, they come to the market with a set amount of money. They are not concerned with the price per unit; they will buy as many futures contracts as they need, at whatever price is necessary, until all of their money has been "put to work." Their insensitivity to price multiplies their impact on commodity markets.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Sun Jul 13th, 2008 at 05:09:16 AM EST
[ Parent ]
To equate demand for financial bets on commodities with demand for the commodity itself is a fundamental misconception of how these markets work.

If there is a problem in the oil market - and I for one would not rule it out - it certainly does not manifest itself on the futures market, which is the market tail, not the dog.

This snippet from a recent Henry Liu piece is getting to the heart of it, I think

But now... oil in the ground can be more valuable than oil above ground because
it can serve as a monetizable asset of rising value through asset-backed securities (ABS)
in the wild, wild world of structured finance (derivatives).

So while there is incentive to find more oil reserves to enlarge the asset base, there is
little incentive to pump it out of the ground merely to keep prices low...

If there is a bubble it has been created through the relationship between oil producers and investment bankers.

To the extent that speculative money has made geared forward purchases of oil then the market is exposed to  a rapid downturn.

I have been invited to give evidence to the UK Parliament's Treasury Select Committee next Tuesday (15th) morning (09.45 hrs), alongside a couple of academics (one is Leo Drollas, an oil specialist) and the chief Shell economist.

As far as I know, I'm the only one of the four whose core competence is market regulation.

I guess our role is to give the Committee the ammunition to then ask pertinent questions of the people from ICE Futures Europe (formerly known as IPE, and of which I was once Director of Compliance and Market Supervision), and a couple of people from the FSA.

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

by ChrisCook (cojockathotmaildotcom) on Sun Jul 13th, 2008 at 05:40:04 AM EST
[ Parent ]
Desperate times when they ask someone who actually knows something about the problem.  Is Leo Drollas a willing participant?  Shell vs. BP?

To the extent that speculative money has made geared forward purchases of oil then the market is exposed to  a rapid downturn.

This is another reason for concern about pension fund investment in commodities futures.  Yet I have been reading about it in Barons and elsewhere for five or six months.  I worry that this is partly pressure to show returns on the portfolio.  But even if it is a good bet, it seems to be a bad idea from a regulatory policy viewpoint.

I don't believe that speculation is driving the overall trend in prices, but I don't see how it can help.  I seriously doubt it would be happening absent a perception of a long term shortfall.  A put is a relatively cheap "investment."  Managers who know what their doing, (NOT ME), may have  already made more money on volatility they would lose by having to sell their puts or let them expire unexercised.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 13th, 2008 at 11:47:02 AM EST
[ Parent ]
A put is a relatively cheap "investment."

Should be "puts and calls" are..

My mind is stuck on puts and "leaps" because of the condition of the stock market, but fear freezes action.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 13th, 2008 at 12:15:57 PM EST
[ Parent ]
To equate demand for financial bets on commodities with demand for the commodity itself is a fundamental misconception of how these markets work.

This is really a key point that's been completely ignored in the press, with the exception of Krugman, ever since the "Speculators R Da Devil" horseshit started pouring in.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Mon Jul 14th, 2008 at 03:58:28 AM EST
[ Parent ]
... spot market, then its just a small impact to the degree that real buyers have hedged in forward markets.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sun Jul 13th, 2008 at 06:07:01 PM EST
[ Parent ]
True, but:

1. Iraq has oil - a lot of oil.

Iraq: Oil and Economy

Iraq's Oil Reserves: Untapped Potential
While its proven oil reserves of 112 billion barrels ranks Iraq second in the work behind Saudi Arabia, EIA estimates that up to 90-percent of the county remains unexplored due to years of wars and sanctions. Unexplored regions of Iraq could yield an additional 100 billion barrels. Iraq's oil production costs are among the lowest in the world. However, only about 2,000 wells have been drilled in Iraq, compared to about 1 million wells in Texas alone.

That's only a few years. But consider where gas prices were a few years ago. That's a good first approximation of the difference that would have been possible without sanctions and two insane wars. There are all kinds of maybes hanging off that - e.g. an Iraq/Iran war could have pushed prices up even further, without US involvement. But assuming relatively stability, I'd guess that putting Iraqi oil on the market at full extraction levels would slash the price by at least a third.

  1. The Iran factor. I'm not sure if people are buying just in case, or not buying because it makes no difference. But prices go up every time sabres are rattled. Without Iraq, there would be no credible threat to Iran, so we could lose maybe 20% off the current price just from the Iran factor - which is being played up by both parties, because Iran always profits when prices increase.

  2. Speculation is the great unknown. There's as much evidence for political manipulation as there is for profiteering, but I don't think the difference is going to be more than another 20% or so.

Adding those together gives a no-Iraq price of $2 or less.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat Jul 12th, 2008 at 07:04:16 PM EST
[ Parent ]
  1. Iraqi oil production now is slightly above pre-war levels (stable since December). Under the status quo, then, supply would not have increased much due to continued sanctions against the regime.

  2. As possible counterpoints: With no war in Iraq, the US would have far greater capacity to mount a war against Iran. The American public would also have learned fewer lessons about the limits of US military power.

I think the major factor you'd have while holding as many conditions constant as possible would be the risk premium in the market related to Iraqi production, and the decline of the dollar. The Iraq war has cost around 540 billion US dollars, to date (ticker 1, ticker 2). The foregone revenue of Bush' tax cuts, by comparison, would be around 1.6 trillion US dollars (cbpp, rough projection on my part).

So, the war has clearly been significant in terms of its requirements for the money press.

by nanne (zwaerdenmaecker@gmail.com) on Sat Jul 12th, 2008 at 08:03:19 PM EST
[ Parent ]
I was assuming free flow without sanctions. A cynic might wonder if the point of limiting Iraqi access to the oil market through sanctions was as much about keeping prices high as punishing Saddam. The Saudis and the Bush family used to have close links, and probably still do, although I suspect the Bin Ladens and other Saudis have always been smart enough to see Clan Bush as useful idiots.

Either way, I doubt the Saudis are desperately unhappy about current price levels. But they were clearly unhappy about sharing power with an independent like Saddam.

I think an all-out invasion of Iran was always going to be less likely than an attack on Iraq, so I'm not convinced that Iran was ever a realistic alternative.

But I think it's worrying that people are arguing as if these wars were inevitable. Perhaps they were eventually, and acceptance of a Gore win in 2000 would only have postponed them. But the alternative was - and is - a crash Green development program, which wouldn't just lower gas prices but make them much less relevant to everyone. Gore might or might not have achieved that in a term. But we'd certainly be much closer to it than we are now.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat Jul 12th, 2008 at 08:21:58 PM EST
[ Parent ]
... is not the total cost of the war compared to the total cost of all damage done by Bushonomics, but the cost of the war on the external account.

Waging a war overseas means that the government, which rules the roost in terms of commanding and/or creating dollars to be directed as it bids, is in effect deliberately increasing the import share of the economy, to pay for all manner of service renders and goods provided in support of the war effort.

Indeed, given NATO staging for some of the operation, that operates on both side of the €/US$ FXR, since Europe is one of the exporters of those goods and services.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Jul 12th, 2008 at 08:47:34 PM EST
[ Parent ]
just a couple other thoughts to add into the mix...

The reality of the cost of the Iraq war must include the future costs of obligations created by that war. The biggest must be the cost of health care for the people returning from the mentally and physically toxic environment. Add another trillion to todays's ongoing tally of war costs.

After a great deal of search and analysis, I have figured out that the US military uses (sorry for using a technical term) 1.75 shitloads of oil every year, and the price is going up astronomically. Any figures that one searches on and finds are never completely inclusive, since military contractors and US contributions to NATO and other factors are not included. (Some statistics say it is 1.5 to 2% of US consumption, even without the exterior add-ons.) Suffice to say that it alone is the major consumer of oil products on the planet.

Marketplace | Oil makes U.S. military shift priorities

Scott Jagow: Oil companies and countries have one single big customer, and that is the U.S. military. And the U.S. military's bill this year will be a lot higher. Here's Jeremy Hobson.

Jeremy Hobson: A pentagon spokesman says the cost hike will mean an extra $400 million a month, and that commanders will have to quote "reprioritize" daily support activities.

Michael Klare is a professor at Hampshire College who's written extensively on the military's use of oil:

    Michael Klare: The military is coming late to an appreciation of their vulnerability to reliance on petroleum.

Just think of all the planes, ships, humvees and helicopters. So what's likely to be sacrificed to make up for soaring costs?

    Klare: Some of the new generation of weapons that they would like, instead of high hundreds, they're going to get few hundreds.

Well, at least we can see that they are being serious about their responsibilities. At a million dollars a crack for a 'smart' bomb (half are below average IQ), if they only get a few hundred instead of several hundred...like what a cost savings~!

My suggestion: Peak Military Responds to Peak Oil: Closing 800 of the 801 foreign bases (keeping one in England for the marching band that plays with the Queen's Guard), dropping back the fleet to 2 (one little one for each coast), and choosing to keep only one of the following: Pentagon, NSA or CIA.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Sun Jul 13th, 2008 at 05:08:49 AM EST
[ Parent ]
I love your formulation of the difference between Republicans and Democrats.  I've been using a different but compatible one:

The US elites practice Aztec Capitalism.  Periodically, the Market God (Huizliopotchtli) demands mass human sacrifice, and the Fed responds by engineering unemployment (and the attendant disease and suicide).  At this point, a debate breaks out among the elites.

The Dems and liberals argue for adminstering anesthesia before marching the poor and the dark-skinned proles up to the sacrificial slabs, e.g. unemployment assistance, minimal health care, additional funds for education.  They are compassionate and prudent.  And they believe that anesthesia will make the sacrifices and the sacrifice system smoother and more sustainable.

The Repubs respond with alarm and, recently, derision.      The Market God is heartless towards Losers, so anesthesia is unnecessary and perhaps offensive to him - quite risky as the sacrifice might be less effective.  Besides, it eliminates some of the fun.  Remember, Aquinas famously argued in Summa Theologica that one of the pleasures of the Saints in Heaven was watching the torment of the damned in Hell.

No one seriously questions the need for cruelty - only whether it should be patent or not.

by cambridgemac on Sun Jul 13th, 2008 at 12:47:24 PM EST
[ Parent ]


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