Running out of oil?

A century and a half ago, serious thinkers predicted that our cities would soon be cast into darness.

After all, the world was running out of whale oil.

 

Oil price discovery mechanism via the futures is flawed, as there can be no meaningful arbitrage between physical and futures (unlike e.g. natgas, which is why on a energy-equivalent basis, natgas is now 40% cheaper than oil, a situation which has never persisted in the past).

The financial bleeding on the order of trillions to the pockets of oil producers (with Wall Street acting as profiteers) is a much bigger scandal than the entire SIV mess.

 

You're deluded if you believe high oil price is caused by anything else than high demand by oil consumers.

 

There is plenty of oil left

 

Sanctions on Iran and we're up $3 on oil. Of course, poltics has no bearing on the price of oil. Neither does war. lol.

Ken Lay must be looking up from below wondering why he didn't get into the oil and defense industry.

 

Had we used whale oil only, we would have ran out of it by 1880...

 

True but exploration and implementation of these new wells will generally be much more expensive.

 

Quite understandably, when price of any product rises, people assume that demand is running amok.

The main culprit here is a market which is being cornered. Due to lack of (meaningful) physical arbitrage, we have an asymmetric market: e.g. oil might rise 10% on "fears of supply disruption due to hurricane XYZ", but when the "fears" fails to materialise into actual effect, oil doesn't give back any of those gains.

This emboldens investors to throw even more billions into the oil futures.

It's a flawed system and consuming countries have probably paid a few extra trillion because of it, but what's an extra trillion among friends ?

Further reading on how the oil pricing mechanism works:

http://www.oxfordenergy.org/comment.php?0008

"It is nice to say that markets should rule. The statement is however
meaningless and indeed dangerous in its implications if one does not
specify which market, and the conditions that qualify a market to rule.
The oil futures markets as they exist today and for the reasons
mentioned earlier on do not qualify". -- Robert Mabro, August 2000,


Mabro CV: http://users.ox.ac.uk/~sant0084/cv/index.html
Awards: "In December 1991 Mr Mabro was awarded the International Association for Energy Economics 1990 Award for Outstanding
Contributions to the Profession of Energy Economics and to its
Literature. In December 1995 he was awarded a CBE by HM the Queen in the
New Year's Honours List. In 1997 the President of Mexico awarded him the
medal of the Mexican Order of Aguila Azteca and in 2000 the President of
Venezuela awarded the medal of Francisco Miranda, and in 2001 was
promoted Officier des Palmes Academiques (France). In 2004 he received
the first OPEC award for contribution to oil studies."
http://www.oxfordenergy.org/opec_mabro.shtml

‘‘Leon Hess, whose oil company made more than $200 million by trading
oil futures during the Persian Gulf crisis ... ‘‘‘I’m an old man, but
I’d bet my life that if the Merc [New York Mercantile Exchange] was not
in operation there would be ample oil and reasonable prices all over the
world, without this volatility*,’ Hess said at a hearing the Senate
Committee on Governmental Affairs held on the role of futures markets in
oil pricing.’’

So, do the powers that be know the crude oil pricing is flawed? Ofcourse they do!

 

So says the chief economist from an oil refiner: Tesoro economist slams record oil prices, Chief economist Westfall says fundamentals support price in $60s, not $90

 

Yep. Economists believe that when price is high enough, God puts more oil into the ground.