My Economist came in the mail today and I was amused to see this map. Can anyone identify the problem? (Hint: it has already been corrected in the online edition.)
Just ponder that those 378,974 contracts were traded on the NYMEX today 425,099 times. That’s a churn rate of 115%! The net change in price was 1% and the net change in open interest was less than 1%. What would you think of a stock or option contract where the entire float turned over in one day? This is what goes on EVERY SINGLE DAY at the NYMEX. 425,099,000 barrels of oil were traded yesterday, readily available to any trader who wants them delivered in July, with another 136,725,000 August barrels traded and another 73,297,000 September delivery contracts written, yet in not one of those months will more than 42M barrels ever be delivered because that is the transfer capacity at Cushing, OK.(I think Phil needs to understand that while the contract specifies delivery at a particular place--in this case Cushing, OK, actual delivery usually takes place elsewhere. In fact, there are contracts you can use to hedge basis risk--in this case, the difference in cost if you have to take delivery of your oil in some place other than Cushing, OK. Since obviously, not all oil--not even most--is delivered to Cushing. But Cushing is used so that the contract will be standard for everyone.)
So the ENTIRE thing is a joke. People are ordering barrels they don’t want with contracts written for a place that will never accept delivery AND, if anything actually happens to disrupt supply, there is a loophole called "Force Majeure" which allows the contracts to be cancelled by the shipper due to "supply disruptions" so they are not even buying insurance. The only thing they are insuring is that they will bleed you dry by forcing you to pay $130 a barrel for something that has a global average production cost of $42 a barrel.
This is nothing less than the single largest con in human history and your "reliable sources" are a government that was elected thanks to hundreds of millions of Petrodollars of campaign contributions and a media that is owned by companies that either are energy companies or accept millions of dollars from energy companies. The 30M barrels of oil that were actually accepted for delivery in July set someone back $4Bn, that sounds like a lot until you realize that that $4Bn locked in a price increase of $25 a barrel during the month of May x 85Mb a day worldwide or $65Bn bonus dollars paid to the same people who are churning oil contracts in the pits.
What if you had 15 shares of IBM at $100 and the price of the last trade on June 24th will set the price you can sell IBM for in July. What if you could buy that last contract for $150 and that would let you sell the ones you are already holding for $150. You would spend $50 extra for a single contract but would collect $50 more on the 15 you have for a net profit of $7,450! Would you do it? Do you know anyone who would? Do you think no one would? That’s how the NYMEX works. Those 30M barrels that are "accepted" at the contract close determine the price of the 85M barrels PER day that are delivered for the 31 days of May. That’s 2,635 barrels over 30 or 1/87th.
This is how you are being ripped off, this is how the manipulation operates, this is the only reason that oil is over $70. There is no shortage, there is no great demand, there is just a greedy cadre of immoral people who manipulate a system that costs the American people $500Bn a year (the premium we’re paying over $70) just so they can skim a few million for themselves.
Whew. Phil, take a valium. But even though he is an options trader and financial adviser, he doesn't seem to know much about oil trading. It's hard to take his fulminations seriously.
But... It now turns out that the Commodity Futures Trading Commission has been secretly investigating market manipulations for several months.
Federal regulators — in a highly unusual move — revealed today that they have been conducting a wide-ranging probe into oil trading practices for the last six months.
And in response to growing concerns about the role speculators may be playing in driving up oil prices, the Commodity Futures Trading Commission said it will require energy traders to begin providing more information so the government can better assess what effect they may be having on the markets.
Platts gives more detail:
Among the CFTC initiatives is an agreement with the UK Financial Services Authority and ICE Futures Europe to enhance information-sharing between the two agencies for energy commodities, including the West Texas Intermediate crude oil futures contract, which trades on UK-regulated ICE FuturesSo maybe greater transparency and some threat of government intervention (like jail for manipulators?) will change things. The big question, though, is what can the CFTC do about OTC contracts, which are not regulated?
Europeand settles off the traditional NYMEX crude oil contract.
One final thought to leave you with. If you are worried about oil manipulation, what is the craziest, most horrific solution you could think of? I think I found it, courtesy of Martin Hutchinson. Take it away Martin!
We could invade somewhere. […] The obvious place to invade is Venezuela (even if current estimates of Venezuelan and Saudi reserves are wrong and there is in reality more oil in Saudi Arabia that could be unlocked if ExxonMobil and the boys were given free rein, the Saudis are nominally our allies, so an invasion would be considered unsporting by world opinion.) Since the 1.8 trillion barrels of Venezuelan oil deposits consist largely of theWell, whatever happens, I assume the grown-ups--and not the Martin Hutchinsons of the world--will be making the decisions.
tar sands, a Venezuelan oil-related invasion would impose an additional requirement: to keep the environmentalists away, in order that reserves could be exploited with maximum efficiency. Orinoco
"Let's say I'm an oil producer and a refiner comes to me and says, 'Last week I paid $110 a barrel for crude, I'll pay you $110 a barrel today,'" WTRG's Williams said. "I tell the refiner, 'I'll get $130 a barrel if I just sit on the crude for a month.' What's the refiner going to do? He has to pay."And the risk here is that if demand decreases (due to belt-tightening and recession) at the same time as producers ramp up production, the price of oil will fall dramatically--as dramatically as it has run up in the past few months.
This is not to say, in my view, and of others, that today's oil prices reflect the economics of marginal supply and demand. There are people out there who have bought physical oil and stored it so as to sell it in the future. But the real commodities buying frenzy has been defensive buying by consumers, government stockpilers, and processors trying to protect themselves from the adverse effects of future price increases.I wonder if that includes such stockpiles as the strategic petroleum reserve. Nonetheless, it is striking that he mentions people who are hoarding for purely speculative reasons. But where could these supplies of oil be held? Naked Capitalism offers some possibilities:
Eugen Weinberg, a commodities specialist with Commerzbank, who thinks we are in the late stages of a bubble, says: "At the moment we have big inventories worldwide, about 3.5bn barrels in the OECD countries, which does not include China. That is enough so that if Saudi Arabia stopped exporting, the world could run at its present level of demand for a year and a half with no increases in production from other countries." [Emphasis added.]
1. Given the speed of the run-up, there may be a delay in hoarding taking place (real world buyers and sellers may have thought prices would fall back, as they did for a bit earlier this year).Of all of these, choice 5 seems the most reasonable (Calculated Risk seems to agree as well). But they all could be true to an extent, and they could be pushing the price of oil up. But what many people are claiming is that the price of oil is being pushed up by futures speculation. To me, this doesn't make sense unless you assume that the speculators themselves are hoarding the oil--which seems only possible with options 2 and 4 (and possibly 3, if we assume the Chinese are secretly playing the oil futures market with a mind to manipulation--a secret attack on the decadent West!).
2. Tankers full of Iranian crude are floating around the Gulf. Admittedly, this is nasty, less preferred crude, but it is still in surplus
3. The Chinese are very secretive, and known to be stockpiling diesel, and possibly crude as well to prevent any embarrassing outages before and during the Olympics. According to Xinhua, China's oil and oil derivative products growth 1Q 2008 versus 2007 is well ahead of GDP growth of 10.6%.:China's net imports of crude oil was 44.95 million tonnes in the first quarter, up 14.9 percent, and net imports of oil products rose by 31.8 percent from a year ago to 5.47 million tonnes, according to General Administration of Customs. China's imports of diesel in the first quarter surged over 600 percent to 1.66 million tonnes and the imports of gasoline, rose by nearly twice to 76,654 tonnes.
The article also noted:Deng Yusong, a researcher with the Development Research Center of the State Council, said that abnormal needs boosted by below-cost prices of refined oil products controlled by the central government over concerns of the country's rising CPI is another major reason contributing to the country's surging oil consumption.
In other words, domestic players suspect that the government will have to raise oil prices and are moving their purchases forward.
4. The IEA only counts primary inventory as inventory. Anything else is demand:Demand is total inland deliveries plus refinery fuels and bunkers minus backflows from the petro-chemicals sector. It is thus equivalent to oil consumption plus any secondary and tertiary stock increases.
Further note how narrow the definition of primary stock is:Unless stated otherwise, all stocks included in the report are primary. They include stocks held in refineries, natural gas processing plants, oil terminals and entrepôts (where these are known), pipelines and stocks held on board incoming ocean vessels in port or at mooring.
Thus any end user inventory, which is one place you might see hoarding, would not be included as inventories.
5. Finally, some suppliers may simply be choosing not to pump. Some readers and commentors have provided anecdotal evidence, and James Hamilton in his new paper also provided some quotes from the Saudis and Kuwatis along those lines. A reader gave the logic:
It is being left in the ground.
For over a hundred years the oil industry has been building out a huge infrastructure for mining, transporting, refining and distributing oil and its associated products.
It doesn’t make much sense to add to this infrastructure, if we’ve reached the peak of physical throughput. Going forward, refining capacity will probably move closer to the source of crude, and more of the transport will be devoted to moving of product. But, that prospective shift is a detail.
There’s no accumulation of speculative inventories in the refining and distribution chain, because there’s no slack in that chain, and won’t be any, because, looking forward, creating such slack makes no sense.
The only way to “hoard” oil effectively in these circumstances, is to delay oil production from fields with low marginal unit cost, while shifting production to fields or sources with high marginal unit costs. This conserves the expected rents, in a balanced way. That is, those with low marginal cost oil to produce see their wealth rising, while those with quasi-rents on infrastructure are protected.
Each day about 88.5 million barrels of crude trade on the Nymex, Novak said. Because of speculators, the total trading volume can be three times the physical amount of crude available. Most are paper trades, with speculators betting the real crude will be available when contracts are settled.
"The 20th (of each month) is when parties contract to take delivery," Novak said. "If the amount of crude available is short of what's needed, the crude price rises. You as a refiner have to have the crude, and it has to be delivered." So the going price is paid.
But this implies that investors are holding the contracts to expiration, and that they actually expect receive oil. This can't be true. Indeed, the Pittsburgh Tribune article quoted above goes on to say:
"A large number of contracts bought and sold are paper contracts, and so when it's time to match up contracts to physical product, many contracts are liquidated because speculators want nothing to do with product," said Tom Skarada, vice president-refining at Warren, Warren County-based United Refining Co., a privately held, small refiner (70,000 gallons of crude oil per day), who also is a wholesale and retail gasoline supplier.So at the end of the day, how is the demand for delivered oil mismatched with supply? Excluding hoarders (including the Strategic Petroleum Reserve), the only people who want oil delivered are refiners. So I still don't understand how futures speculation adds to the price of oil. Again I appeal to my 13 dedicated readers to explain it to me in the comments. I'm serious. I really want to understand how futures speculation is pushing the price of oil higher than it would be is the price were being set purely by supply and demand fundamentals.
Imagine that you're a speculator. You own a bunch of oil you bought at prices ranging from $75 to $125 a barrel. You are hoping that the price will go to $200. But nothing lasts forever; already Americans are driving less and switching to more efficient cars. A recession in the United States would slash Chinese export earnings and slow the growth of the Chinese automobile market. As the U.S. and Chinese economy weakens and oil consumption dips, the price of oil begins to soften. It dips back below $125, then $120, then $115. As a speculator, you've lost money on your last purchases, yet you could still score a huge profit on the earlier ones if you act fast. But uh oh: your competitors have the same idea. You all rush for the exits at once and after a year of frenzy on the buy side, it's pandemonium on the sell side.OK, let's say I am a hedge fund guy, and I bought a bunch of oil a year ago. Where is it now? Oil is not stocks or foreign currency. It's stuff. To hold it, you have to store it in tankers or tank farms. Which is costly and difficult, especially if you aren't, you know, actually in the oil business. Does he really think there are a bunch of hedge funds, insurance companies, and pension funds with enormous stocks of oil sitting in tanks somewhere?
Labels: Publishing business
John Culberson (R-TX): ...it contains provisions that have nothing to do with our troop's survival and safety in the field. To burden our troops with pork, with tax increases, with special provisions that have nothing to do with the war, adds to, I think, the obvious misuse of the process and I urge members to vote against the pork and support our troops.I thought, ok, maybe he's just flustered in a floor debate. So I went to his site to see what he specifically objected to in the bill.
David Obey (D-WI): I yield myself 30 seconds...I'd like the gentleman from Texas to point out a single piece of member pork in this bill.
Culberson: Does the gentleman yield?
Culberson: Mr., Mr. Chairman, there's a number of un-un-unnecessary provisions in this...
Obey: Name one.
Culberson: Well, why are we separating out, sir, why aren't we just passing...
Obey: (nearly yelling) Name one.
Culberson: Why are we...
Obey: (yelling, finger pointing) Can you name one or can't you? The fact is there is not a single piece of member pork in this bill. You ought to...
(pounding gavel, "time expired")Culberson: (inaudible)...why are we passing provisions in this bill with tax increases?
Congressman Culberson voted “present” today on an amendment to increase taxes by billions of dollars to pay for more domestic spending and new entitlement programs. Entitlement programs already account for two-thirds of all domestic spending, and expanding these programs would only add to our record debt and deficits.
“The Democrats used the troop funding bill as a shell game to sneak 54 billion dollars of new taxes and spending past Congress. We have a responsibility to provide our soldiers with the resources they need to accomplish their mission in Iraq. Our military leaders on the ground have told Congress they need this funding by Memorial Day to sustain their progress, and we should honor their request.
“Republicans used the only legislative tool at their disposal to protest the unacceptable conditions that were imposed on troop funding by voting ‘present.’ Democrats brought this bill to the floor without a hearing, without amendments, and without any input from the minority party.
“The bill contains items that have nothing to do with the safety of our troops in the field. Muddying the bill with new taxes and spending is a blatant abuse of power and process,” Congressman Culberson said.
Yep, Culberson really doesn't say what he doesn't like about the bill, except for some undefined spending and some taxes. I mean, c'mon. Do you really object to this bill for some reason, or are you just being obstructionist? Have you even read the bill? If you truly have a problem with it, say what the problem is. Don't just wave your hands and cry "pork!"
We are no longer living in an age of abundant resources. It is possible that huge shifts in supply and demand will reverse this situation, as happened in the 1980s and 1990s. We can certainly hope for that happy outcome. But hope is not a policy.(He's so damn sensible, that Martin Wolf.) Paul Krugman takes a more strictly economic approach to analyzing the issue.
One of the things I find puzzling about the whole oil market discussion is how complicated people seem to make it. They get all wrapped up in stuff about forward markets, hedge funds, etc., and lose sight of the fundamental fact that there are only two things you can do with the world’s oil production: consume it, or store it.
If the price is above the level at which the demand from end-users is equal to production, there’s an excess supply — and that supply has to be going into inventories. End of story. If oil isn’t building up in inventories, there can’t be a bubble in the spot price.
Again, this seems really plausible. If you think of other bubbles, like the current housing bubble, or the telecom bubble in the late 90s, or the apartment bubble of the 80s, after the crashes you were left with huge inventories. That's because speculators were building inventory with the intent of selling high later. So massive numbers of apartments (and thousands of failed S&Ls), massive quantities of fiber optic cable (and Global Crossing, WorldCom, etc.), and now huge housing inventories (and the current MBS-driven liquidity crisis). But Krugman is saying oil is different--no one is hoarding it (except for the U.S. government, and they in quantities too small to count for much).
I am going to suggest, however, that there is hoarding going on. Maybe. Krugman makes a mistake in his analysis in suggesting that you can only store oil that's been produced. On the contrary, you can store oil that hasn't been produced. That's why proven reserves are assets. Now the important thing to remember here is that most oil in the world is controlled by national oil companies--companies like Aramco, Pemex, PDVSPA, Pertamina, etc.--or by companies that if not owned by the government, are closely tied to national governments, like Lukoil.
Now if a reserve is controlled by a big, publicly-traded oil company like Exxon, BP, or Total, they have every incentive to produce as much as they possibly can right now. They have a great incentive to turn those reserves into cash while the price of oil is its highest, rather than leave them in the ground. If shareholders thought Exxon was holding back, they would flip out--and probably sue.
But a national oil company has all kinds of reasons to half-step it on production. If a nation's income depends heavily on oil, banking reserves makes sense. Because when, say, Kuwait runs out of oil, it's going to turn into a poor country overnight, a new Nauru. So policies that put off that day might be prudent.
Now Matthew Simmons (king of the peak oil guys, and certainly no crank) and many others say that, on the contrary, OPEC nations are producing at full capacity, and furthermore they are lying about their reserves. He knows more than I do--my speculation that oil producing countries are not producing as much as they could is just that (although I will offer a few supporting arguments below). But I do think he makes a mistake about their motives. He believes that the Saudis are overstating their reserves, and points to their lack of transparency as one reason for his suspicions. But why should an oil producing country be transparent? The actual size of their reserves is of strategic importance to them, so one can imagine many reasons why a country might want to understate them and keep the real number hidden. Again, their motives are quite different from a company like Shell, which is motivated to overstate its reserves for financial reasons. Saudi Arabia doesn't have to worry about its share price like Shell does. But it does have to worry about keeping its people fed and happy 25, 35, 45 years from now.
So lets look at Mexico and Venezuela. Pemex and PDVSPA are infamous for being inefficient at getting oil out of the ground. Now if Mexico and Venezuela were really interested in producing as much oil as physically possible right now, they could simply hire Exxon or Chevron or Total to do it for them. But not doing so, aside from the nationalist political benefit, keeps some oil in the ground to be retrieved in the future. This is what I'm talking about. Venezuela is using incompetence to hoard oil.
Who else is hoarding oil by not producing it? The United States. We have reserves controlled by the federal government that are not being produced, particularly ANWAR and the fields off California. And we're not the only ones.
I'm not trying to say that deliberately slow production is the sole reason for rising oil costs. Increased demand actually exists, and every barrel produced depletes some reserve somewhere by one barrel--and the cost of producing additional barrels keeps going up. But slow production and non-production has some effect on current prices.
I don't expect a correction quite like what we saw in the 80s. But I do think a combination of new technologies, new production, and economic slowdown will cause the price of oil to drop--eventually. But it will likely go up before it drops.
More than a week ago, the carbon-conscious students offered to buy and install a bike rack at the school, but were baffled by the response. Principal James Riccobono declined the offer.
"It didn't seem that logical. It would be at no cost to them," Slosberg, 18, said yesterday as she slipped on her bike helmet and prepared for a nearly 20-minute ride home.
"Actually, they said no on Earth Day," remarked Katherine Dransfield, a senior who has tried, with a group of other students, to start a bike club. "Essentially what they told us was that they didn't want to promote biking as a way to get to school."
Slosberg and Dransfield said Riccobono expressed concerns over the safety of students jostling with the heavy bus and car traffic in front of the school and biking along busy Garretson Road.
Or, as has been remarked elsewhere, maybe he was concerned with drivers on Garretson Road being inconvenienced.
Offended by the snub, students promptly began planning a response. Yesterday, more than 50 students rode their bikes to school, commuting in pairs and groups. After studying up on state biking laws -- and carrying copies with them -- the students legally tethered their bikes in conspicuous clusters around lamp posts, trees and other poles dotting the circular drive in front of the school.
Students then delivered a letter to Riccobono's office protesting the decision over the bike rack. Dransfield, who noted Riccobono seemed "pretty mad" all day, said she was later summoned to the principal's office and given a letter. "I walked into the office and he was like, 'Here's your letter -- go.'"
The protest, it seemed, had not been persuasive. One line in the letter was printed in bold face:
"In as much as the district provides courtesy busing to students who live within walking distance of the high school, because of the danger on Garretson Road, it does (not) make sense, in my opinion, to promote the riding of bicycles to school," the letter read. [ . . . ]
Without school support for bike outings or activities, Hennessey said, the biking club has been reduced to being a forum for merely talking about biking, not actually doing it.
Environmental club member Alec Story noted the school spent a great deal of money to expand the senior parking lot to allow for spots for every senior. With the rising cost of fuel, to discourage students from a health-conscious, cost-free form of transport seems counterintuitive, Story said.
Story added he enjoyed his 10-minute ride yesterday morning so much, "I'm going to do it again tomorrow."
Amazing. And good for the students. Really, it is astonishing that the school would go out of its way to discourage biking. It's been a long time since I was in school, but is this normal? Has anyone encountered this attitude elsewhere, or is Bridgewater-Raritan High a weird outlier? I hope so--I'd hate to think this was a trend.
This is Bridgewater-Raritan High School, and Garretson does appear to relatively narrow. It is possible that cyclists could be endangered riding along it, if motorists were driving especially badly. However, Garretson is long and straight, so it's unlikely that cars wouldn't at least see the cyclists they would be sharing the road with. To refuse a free bike rack on the theory that it might encourage bike riding which might result in an accident is just plain stupid. I'd say Principal Riccobono is just another example of the great American suburban scaredy cat.
But Beebe and I have been astonished many times on these walks. Hong Kong City Mall on Bellaire, tucked away behind a nondescript parking lot; the hippy colony in Fifth Ward; a hip art gallery on Harrisburg and a sculptor’s studio a couple of blocks from Hobby Airport; the industrial ruins of Clinton Drive; the graveyard in a tire shop parking lot and the 150-year-old German church on Long Point; the folk art cobbled together by mechanic-artisans in front of many a muffler, tire and transmission shop all over town; the Vietnamese village apartment complex on Broadway; and hell, the vacant temple out near where Richmond Avenue begins on this very trip. It’s only when you take this 70 mile an hour city at our snail’s pace, only when you venture out of your village within the city, that you discover this stuff.And that is as good an explanation as any for why I ride the streets with my Key Map and camera at the ready.
Labels: Houston Streets