naked capitalism

Anonymous says:

Maybe oil prices will drop 50%… but I still feel that $4.00 to transport a 5,000 pound Sport Utility Vehicle 20 miles is a bargain.

CurlyWurly says:

Not only the oil importing Japanese are complaining, even the Saudis think oil prices are too high: http://afp.google.com/article/ALeqM5hHRIivpJH1-zDk1gaPspGqMskrWA

Anonymous says:

Is there a way to speculate about the speculation about whether oil is in a speculative bubble?

trotsky says:

unfortunately for the gentleman from Japan, global monetary inflation IS a ‘fundamental’ fact that flows into the calculation of prices. let us not forget that money and credit have been inflated at historically unprecedented rates for nearly 4 decades. as long as the effects of this inflation showed only up in financial asset prices, nobody complained. now they are in the process of migrating elsewhere. did the purveyors of money and credit really think they could inflate so much for so long and the effects would never percolate through the economy? they have created one of the worst cases of malinvestment ever witnessed (the global real estate bubble), and now we see the secondary lagged effects of their policies pop up in all sorts of unwanted places, such as the price of oil. when the minister talks about the fundamentals of the oil price, he appears to be forgetting the most important fundamental factor of them all (a quick look at Japanese money supply expansion over recent decades confirms that his country has been a generous contributor as well). besides, how does anyone know what the ‘correct’ price is? the market price IS the correct price. there is no substitute for it – it reflects all fundamental factors plus expectations about future developments of these factors. oil is not ONLY rising due to the lagged effect of inflation of course. there is the not inconsiderable fact that non-OPEC production has entered what appears to be a steepening rate of decline, which collides with pretty steady long term demand growth of 2% per annum. over 80% of oil production is in the hands of various government bureaucrats instead of the private sector, which largely explains the colossal failure to react in timely fashion to the price signals.

Francois says:

All the CFTC has to do is raise the freakin’ margins!

Unintended consequences…pray tell what could be worse than having oil going up up up?

After all, it’s been done before no? Did everyone stopped trading for 2 decades after that?

I say, raise’em to 35 – 50% just to test the mettle of those who have skin in the game. Margins can always be readjusted downward after a while anyway.

juan says:

Within the modern oil price regime, price of oils is real market related, not real market determined. Contrary to previous regimes (e.g. ‘seven sisters’ and then OPEC), financial markets are in the driver’s seat and these drivers are not exactly sober.
Where are the cops?
Legislated away.

Jonathan Bernstein says:

I’d enjoy lower oil prices as much as Japan’s MITI Vice Minister Kitabata. Nonetheless his logic leaves a little to be desired. Says he, “Kuwait’s economy could function at $45/ barrel.” So, Kitabata seems to be saying that the price of oil should be set at a level commensurate with the economy of its producer being “able to function?” in his judgment? Bet that one had them rolling in the aisles in Kuwait City. And he is outraged that sentiment and news headlines can drive the oil market’s daily fluctuations? Bet he loved it when sentiment drove the Nikkei UP during the Eighties.

To Yves’s point: As long as M3growth continues at 18% p.a. (per John Williams’s shadowstats.com) people will seek inflation hedges and that will be part of the oil price equation.

I don’t doubt that commodity funds and ETFs bias the market price of oil upwards to a degree. It’s no different than what happened to stocks after Congress passed the Employee Retirement Income Security Act of 1974 (ERISA). Thereafter we made equities an institutional asset class and inaugurated a semi permanent structure of funds and institutions to invest in them. That is why Warren Buffett has said that stocks may never become as statistically cheap as they were at the 1974 bear market bottom: these institutions are to a degree long only in stocks and so stocks will always have a bit more of a bid than before the pension investment merry-go-round started. And so it is for commodities now. Why not invest in something whose supply may be close to peaking and is fantastically useful to our civilization? Sounds like a better reason for longterm investment than many things I have heard in my career in this business. Even if oil might well be overbought short term.

Jonathan Bernstein says:

Thanks for your interpretation, it sounds exactly right given my (more limited) acquaintance with the Japanese. As you say, no one knows how much more OPEC could supply if they cared to. I’m just not sure it is in OPEC’s interest to care.

Until this upward price trend began, it just might have been in OPEC’s interest to do what Japan wants them to do. To the extent that we credit OPEC itself and not world market forces, OPEC did well in keeping the price high enough to make money and low enough to keep customers addicted to oil. Now with peak oil approaching if not already here, that game may well be ending.

The first big shift in oil pricing happened because the US production peaked in 1971. With the US finished as world oil swing producer, only then could Libya successfully squeeze Occidental Petroleum in the prelude to the 1973 embargo. Now that the Saudis are no longer swing producer (and that there seemingly is NO swing producer) we can expect more price explosions in the long term, even if we might be overbought or in a recession that could slow demand growth. OPEC has no reason not to take as much as they can get, for if we are at the world peak, by definition there is no one left to take market share from them if they fail to raise their production.