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Countdown to $100 oil (53) - Saudis happy with $100 oil

by Jerome a Paris Tue Nov 13th, 2007 at 04:45:32 AM EST

In an interview with the Financial Times, the Saudi oil minister, Ali Naimi, admits to his powerlessness in today's market:

We have nothing to do [with] where the price is today.

(...)

We work very hard and consciously to be sure that whatever actions we take that we are responsible do not dampen economic growth

(...)

We are today not producing all our capacity because it is not needed. The demand is not there, the customers are not there.

So, he's claiming that oil prices today are not a threat to overall growth, that they are not caused by a lack of supply in the market, and that Saudi Arabia would be willing to step in with more production if needed (in this separate article, the FT notes that he mentions available capacity of 11.3mb/d vs 9mb/d current production). In fact, he specifically blames speculators and rebuffs the IEA, pointing that scaremongering pushes prices up and helps some make money.

These pessimists about the adequacy of supply and adequacy of reserves in the future, I think they are doing a lot of damage to the stability on the market.

And logically, he specifically states that OPEC has no intention to discuss any production increases at their coming Summit, being satisfied with the overall market balance, and available stocks.

The question is - is this credible, or is he trying to find excuses for not being able to increase production? Saudi Arabia has always been worried, to a much larger extent than other OPEC members, by the risk of a slowdown of the global economy, and has had an explicit policy to bring in capacity in order to avoid price levels that would encourage the development of alternative fuels and energy savings. Indeed, the minister repeats these goals in the interview, but states that current prices are not a threat to the economy.

So - either he's trying to hide his country' inability to increase volumes, or he's right, and he's confident that such prices are indeed not sufficient to cut demand for oil. Either way, oil prices are not going down...


An article that summarises the interview: Saudi oil minister rejects Opec raise

:: ::

Earlier Countdown diaries:
Countdown to $100 oil (52) - buying protection
Countdown to $100 oil (51) - we'll never see 100mbd
Countdown to $100 oil (50) - it's no longer 'oil', it's 'liquids'
Countdown to $100 oil (49) - peak oil and libertarians
Countdown to $100 oil (48) - 85, 86, 87, 88, ...
Countdown to $100 oil (47) - Malthus, Mein Kampf and ostriches
Countdown to $100 oil (46) - what's a dollar worth?
Countdown to $100 oil (45) - time to bet again (eurotrib)
Countdown to $100 oil (45) - time to bet again (DailyKos)
Countdown to $100 oil (44) - oil industry admits it cannot save us
Countdown to $100 oil (43) - IEA boss denies and confirms peak oil in same breath
Countdown to $100 oil (42) - IEA predicts shortages within 5 years
Countdown to $100 oil (41) - oil more expensive than it appears
Countdown to $100 oil (40) - Undulating plateau
Countdown to $100 oil (39) - BigOil running out of oil
Countdown to $100 oil (38) - Who gets Champagne edition
Countdown to $100 oil (37) - OPEC says peak oil (and $100 oil) is near
Countdown to $100 oil (36) - Free game! win champagne! no risk! (eurotrib)
Countdown to $100 oil (36) - Free game! win champagne! no risk! (DailyKos)
Countdown to $100 oil (35) - peak oil: the last skeptics capitulate (CERA)
Countdown to $100 oil (34) - Oil major CEO calls for demand reduction
Countdown to $100 oil (33) - Below zero
Countdown to $100 oil (32) - peak oil is, like, so over. Not!
Countdown to $100 oil (31) - $15 oil? The cornucopians are fighting back
Countdown to $100 oil (30) - senior politico fears looming oil wars
Countdown to $100 oil (29) - Alaska joins axis of evil (unreliable oil suppliers)
Countdown to $100 oil (28) - New records suggest more to come
Countdown to $100 oil (27) - 'Mission Accomplished' - High oil prices are here to stay
Countdown to $100 oil (26) - Time to bet again (eurotrib)
Countdown to $100 oil (26) - Time to bet again (dKos)
Countdown to $100 oil (25) - Iran vows that oil prices will not go down
Countdown to $100 oil (24) - What markets are telling us about future energy prices
Countdown to $100 oil (23) - Running out of natural gas in North America
Countdown to 100$ oil (22) - gas shortages in the UK - 240$/boe
Countdown to $100 oil (21A) - The 4 biggest oil fields in the world are in decline *
Countdown to 100$ oil (21bis) - long term vs short term worries (dKos)
Countdown to 100$ oil (21) - 8-page extravaganza in the Independent: 'we're doomed'
Countdown to 100$ oil (20) - Meteor Blades is Da Man in 2005
Countdown to 100$ oil (19) - Your bets for 2006 (Eurotrib)
Countdown to 100$ oil (19) - Your bets for 2006 (DailyKos)
Countdown to 100$ oil (18) - OPEC happy with oil above 50$
Countdown to 100$ oil (17) - Does it matter politically? A naked appeal for your support
Countdown to 100$ oil (16) - We'll know on Monday
Countdown to 100$ oil (15) - the impact on your electricity bill
Countdown to 100$ oil (14) - Greenspan acknoweldges peak oil
Countdown to 100$ oil (13) - Katrina strikes / refinery crisis
Countdown to 100$ oil (12) - Al-Qaeda, oil and Asian financial centers
Countdown to 100$ oil (11) - it's Greenspan's fault!
Countdown to 100$ oil (10) - Simmons says 300$ soon - and more
Countdown to 100$ oil (9) - I am taking bets (eurotrib)
Countdown to 100$ oil (9) - I am taking bets (dKos)
Countdown to 100$ oil (8) - just raw data
Countdown to 100$ oil (7) - a smart solution: the bike
Countdown to 100$ oil (6) - and the loser is ... Africa
Countdown to 100$ oil (5) - OPEC inexorably raises floor price
Countdown to 100$ oil (4) - WSJ wingnuts vs China
Countdown to 100$ oil (3) - industry is beginning to suffer
Countdown to 100$ oil (2) - the views of the elites on peak oil
Countdown to 100$ oil (1) (eurotrib)
Countdown to 100$ oil (1) (dKos)
* added to the series after the fact

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Does anyone know what proportion of world oil supply is what might be termed "free float"?

ie available for trading, and not tied up in contracts that do not permit re-sale?

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

by ChrisCook (cojockathotmaildotcom) on Tue Nov 13th, 2007 at 05:15:14 AM EST
HiD would be in a better position to reply than me, but enough would be my answer. This is one of the most liquid markets around. Cargoes can change hands many, many times when they are on the open sea, and can also fairly easily be rerouted. Netbacks from the main centers (Rotterdam and a few others) are easy to calculate.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Nov 13th, 2007 at 05:23:31 AM EST
[ Parent ]
I'm not sure that "enough" is now the case.

Certainly the decline in Brent crude oil production led eventually to the Brent 15 day market becoming an accident waiting to happen, and there was a squeeze practically every other month as the number of cargoes available for trading declined and the  depth of pockets necessary for squeezes fell.

In the end, a few years ago, someone killed the goose that laid the golden egg with a particularly egregious example of a squeeze and the industry responded by including (from memory) Forties and Osebjerg quality alongside Brent.

But the problem is bound to recur.

I suspect that the sheer weight of hedge fund money, and other speculative proprietary buying, may well be causing "Free Float" oil to become increasingly disconnected from the rest of the market who use Brent and WTI as benchmarks.

As you say, HiD is best qualified to comment.

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

by ChrisCook (cojockathotmaildotcom) on Tue Nov 13th, 2007 at 08:32:21 AM EST
[ Parent ]
that's not what el pais reprots today.. preciesly...

http://www.elpais.com/articulo/economia/alto/precio/petroleo/empieza/recortar/demanda/elpepueco/2007 1113elpepueco_6/Tes

"The high price for oil starts cutting off demand".

IEA predicsts it......a lower increase in the demand than they expected...

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Tue Nov 13th, 2007 at 05:23:35 AM EST
Some clown over at the WSJ suggests to sell the US Strategic Reserve:


Sell the Petroleum Reserve

the U.S. government is sitting on a large reserve of oil, the Strategic Petroleum Reserve (SPR), which now holds about 700 million barrels of oil. This is enough oil to provide about 10% of daily U.S. oil consumption for a year. And if the U.S. government got smart about selling the oil -- a big if -- it would make money for the Treasury and help consumers by bringing oil prices down. Moreover, the government could make even more money, with minimal risk to the economy, by selling the SPR oil altogether.

Imagine, for example, that the U.S. government began today to sell two million barrels a day and make up for the loss by buying today the same amount in the December 2008 futures market at $87.60. If it earned the spot price of $96.32 on each barrel and had a $1 per-barrel transactions cost, it would make $7.72 a barrel. The government would make daily profits of $15.44 million. If the differential in prices persisted, the feds would make $5.6 billion a year. This is chicken feed to the federal government but it would allow the feds to cut some tax that yields $5.6 billion. If the hated Alternative Minimum Tax is not reformed this calendar year, for example, it will capture about 20 million new victims. Reverse arbitrage would give these new victims an average relief of $280.

(...)

Assuming, as seems reasonable, a highly inelastic world demand for oil of about 0.2, this 2.4% increase would bring oil prices down by 12%, or about $12 a barrel, essentially wiping out the backwardation in oil prices and wiping out the gain to the U.S. Treasury. While oil producers would lose $12 a barrel, oil consumers would gain $12 a barrel. But it would not be a wash for Americans because the loss to U.S. oil producers would be only on their production, which is only 40% of U.S. consumption. So the net gain to the U.S. from a $12 per-barrel price drop would be $144 million a day (12 million of imports at $12 a barrel less) or $53 billion a year. Now that's real money.

(...)

There's an even more radical step the U.S. government should take that would benefit consumers also while benefiting the government. The government should sell the SPR oil and not replace it. If the government made even $80 a barrel on its 700 million barrels, it would make $56 billion, which is serious money even to the feds.

Many will argue that selling the reserve is a bad idea because then we would be unprotected from the vagaries of world oil markets. This is false. Speculators who anticipate future shortfalls would act in oil markets the way they do in wheat markets, buying oil in anticipation of higher future prices. This would dampen future price increases in oil markets, doing a big favor for future consumers. That's better than the federal government does, which, even as you read this, is stupidly buying $90 oil to fill the SPR.

Sigh... "the mind boggles" does not even begin to cover it. Let's sell the strategic reserve to lower taxes for the rich for one year (by $280). Now that's a good idea.

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

by Jerome a Paris (etg@eurotrib.com) on Tue Nov 13th, 2007 at 05:59:48 AM EST
Many will argue that selling the reserve is a bad idea because then we would be unprotected from the vagaries of world oil markets. This is false. Speculators who anticipate future shortfalls would act in oil markets the way they do in wheat markets, buying oil in anticipation of higher future prices. This would dampen future price increases in oil markets, doing a big favor for future consumers.

He's saying "We don't need physical oil reserves because the market shall provide!". Somehow the S for strategic in SPR is completely lost on him.

You're clearly a dangerous pinko commie pragmatist.

by Vagulus on Tue Nov 13th, 2007 at 06:59:06 AM EST
[ Parent ]
Somehow the S for strategic in SPR is completely lost on him.

Well, that's because he is an idiot. ;-)

Money is a sign of Poverty - Culture Saying
by RogueTrooper on Tue Nov 13th, 2007 at 07:05:01 AM EST
[ Parent ]
Strategy is planning until the end of this quarter.
by Colman (colman at eurotrib.com) on Tue Nov 13th, 2007 at 07:07:27 AM EST
[ Parent ]
I found some background information on the SPR in Wikipedia.

Strategic Petroleum Reserve

You're clearly a dangerous pinko commie pragmatist.

by Vagulus on Tue Nov 13th, 2007 at 07:22:16 AM EST
[ Parent ]
"Energy is a commodity like any other."

Sigh.

Hey, maybe we should privatize the armed forces or the nuclear deterrent?

I mean after all, if they are needed, the market will provide.

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

by Starvid on Tue Nov 13th, 2007 at 08:44:39 AM EST
[ Parent ]
Careful there! They are already at it with the armed forces. (Blackwater and friends)
by someone (s0me1smail(a)gmail(d)com) on Tue Nov 13th, 2007 at 08:47:25 AM EST
[ Parent ]
I guess they feel the 1648 Treaty of Westphalia is... "quaint".

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Nov 13th, 2007 at 08:50:01 AM EST
[ Parent ]
I think some people do.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Tue Nov 13th, 2007 at 09:44:27 AM EST
[ Parent ]
The only place where a peaceful if only partial transition to a post-Westphalian system has taken place is the EU, which as usual is sui generis.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Nov 13th, 2007 at 09:48:25 AM EST
[ Parent ]
In most places the transition to a Wesphalian system (imposed by European colonizers on different political cultures) is still imcomplete.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Tue Nov 13th, 2007 at 09:59:09 AM EST
[ Parent ]
There are some interesting aspects to these proposals.

Global Strategic Reserves is useful background. I remember from my IPE days how our IPE Gas Oil contract delivery rules (in the Amsterdam/Rotterdam/ Antwerp area) had to take account of EU strategic reserve obligations.

The actual ownership of reserves isn't the issue here: it's the existence of them that's the point. Selling off stocks is one thing: draining them is quite another.

Many jurisdictions impose obligations on refiners to maintain minimum stocks of crude, which might at times not suit them financially.

For the US government to intervene in the market as suggested by carrying out a "reverse arbitrage" to take advantage of market backwardation does not seem to me to be a bad way of obtaining an income from a "dead" asset.

Any Central Banker competent in money market operations would be capable of managing this, and there is an analogy between the Central Bank as "lender of last resort" and that of the Strategic Petroleum Reserve.

My proposal would be to create a neutral "Oil Pool" entity - neither "Public" nor "Private" - in which all US storage could participate, and based upon the SPR.

Oil would flow continuously into and out of this Pool, and the "market price" is the spot price of deliveries into and out of the Pool.

Investors would be invited to acquire units in the  Pool entity which gives them an entitlement to x barrels of oil or (better?) an equivalent carbon energy content.

Such units would in fact be "fungible" energy Value Units, and the oil would be held in the ownership of a neutral "Custodian".

These Units = "Carbon Dollars" would be accepted by the Pool, instead of conventional dollars (and at a different rate, since the prices would diverge after  the launch date), for oil actually supplied to (say) a refiner who had bought them as a "hedge".

Such a neutral utility would allow both the SPR and private stocks to be sold off to Investors who are interested in hedging against energy price rises, thereby releasing "dead" capital.

It would form the basis for an extremely liquid asset class of energy units.

And more to the point, such "energy units" could become what is essentially a "Carbon Dollar" with an energy-based value in exchange independent of the Fed "deficit-based" Dollar.

Moreover, such "Carbon Dollars" - based upon energy content of carbon fuels, make infinitely more sense than basing a carbon currency on the carbon in emissions.

So, draining reserves would be the act of a clown, for sure, but with a bit of imagination the strategic necessity for energy reserves could be used as a basis for a more rational market.

 

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

by ChrisCook (cojockathotmaildotcom) on Tue Nov 13th, 2007 at 07:37:13 AM EST
[ Parent ]
Interesting concept. Got a question though:

Investors would be invited to acquire units in the  Pool entity which gives them an entitlement to x barrels of oil or (better?) an equivalent carbon energy content.

Such units would in fact be "fungible" energy Value Units, and the oil would be held in the ownership of a neutral "Custodian".

Who decides whether the investor can exercise his entitlement - he himself or the custodian? If it's the latter, wouldn't the lack of discretionary power make the units less attractive/valuable to the investor?

As for the "reverse arbitrage", I take your point in principle, but as a practical matter I don't see it as possible for the next 15 months + n. The band of ideologues in power holds government - both the idea and the actual administration of the public's - in such contempt that it does not occur to them to appoint competent people and expect them to perform quality work.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt št gmail dotcom) on Tue Nov 13th, 2007 at 08:58:42 AM EST
[ Parent ]
Who decides whether the investor can exercise his entitlement - he himself or the custodian?

The custodian does nothing itself other than "own" the infranstructure and oil etc in it: the Pool would be operated and managed by a "Pool Service Provider" consortium.

Only an oil user Pool member(eg a refiner) with a supply agreement with an oil supplier/distributor Pool member would have the choice of exchanging the "value unit" for actual crude oil, rather than tendering Fed dollars.

This is a disintermediated model, and delivery would not be from the Pool as intermediary, it would be from other Pool members through the Pool relationship/protocol.

Essentially Units would be oil-specific "legal tender". But a holder of Units would not be able to demand delivery in the way he could with (physically deliverable) futures contracts.

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

by ChrisCook (cojockathotmaildotcom) on Tue Nov 13th, 2007 at 09:28:55 AM EST
[ Parent ]
So if I understand you correctly, a pool member would have to maintain an inventory on which other pool members can draw in order to be able to draw on the inventories of pool members themselves. Wouldn't be simpler to require the refiners to maintain a minimum inventory cushion?

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman
by dvx (dvx.clt št gmail dotcom) on Tue Nov 13th, 2007 at 10:26:47 AM EST
[ Parent ]
The Pool would essentially become a collectively owned asset in which members may invest as they see fit in line with their market expectations and commitments.

It is already the case (certainly in the EU) that there is a requirement for a certain level of inventory to be kept, either in addition to, or instead of, government owned stocks maintained in government owned storage.

Depending on whether the market is in backwardation or not this requirement can cost refiners a lot of money.

My proposal allows them to sell this material in appropriate market conditions, and to buy it back as they see fit - and thereby make better use of the capital.

For the financial investors to whom they sell the purchase of units is to all intents and purposes the same as buying shares in an "Exchange Traded Commodity" fund. ie they get no income from their investment (as with gold) but they will profit from a price increase.

An "energy unit" is in effect an "un-geared" and "undated" forward agreement. If gearing is required, a buyer may always borrow trhe unit purchase price, or possibly use options.

There is a significant benefit in terms of costs of maintaining their position, however, because the conventional ETC model means that Investors get hit when by very significant transaction costs when the Fund vehicle "rolls over" the necessary futures contracts.

The outcome could be to free suppliers/distributors from capital constraints, and to allow them to become a pure service provider.


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

by ChrisCook (cojockathotmaildotcom) on Tue Nov 13th, 2007 at 10:57:13 AM EST
[ Parent ]
I remember in the aftermath of Katrina the EU had to tap its strategic gasoline reserve to supply the US because the US has a strategic oil reserve but not a strategic gasoline reserve so it was vulnerable to refineries being off line.

And now this guy wants to sell the strategic oil reserve?

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Tue Nov 13th, 2007 at 08:06:20 AM EST
[ Parent ]
http://www.dailykos.com/story/2007/11/13/93623/922
Also on the Oil Drum

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Nov 13th, 2007 at 09:41:53 AM EST
I note also the intrinsic contradiction of saying on the one hand that the world economy is doing fine and on the other that "the demand is not here"...

:: ::

The only question for them is if higher prices lead to lower consumption by the use of alternatives, or energy savings, which reduce demand durably and not just punctually.

If they think that demand is dynamic enough to justify current prices, then they can decide to not fight them and enjoy them instead. But they are using the exact opposite argument.

Which makes for good diplomacy, of course, and allows the real issues to remain undiscussed...

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

by Jerome a Paris (etg@eurotrib.com) on Tue Nov 13th, 2007 at 09:45:37 AM EST
[ Parent ]


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