naked capitalism

Lune says:

Agreed with Anon 1:38. More than once, the American military has war-gamed scenarios in which they take control of Saudi and other middle eastern oilfields (of which one scenario is currently being played out right now, albeit perhaps not as well as originally hoped…). If the Middle East were to assert control of money supply as well as oil supply, they’d need an army far larger than the one they currently have to defend their peg.

DownSouth says:

River,

Agreed. Iraq was the last, best hope for a military solution to the U.S. energy problem, and our failure there marks the passing of our century-old pretensions to Mid-Eastern, and to a larger degree world, hegemony.

Russia doesn’t get much mention in these discussions, but that country has emerged as a major world player in the oil game. All recent indications coming out of Russia are that it is evolving into as big of a price hawk as Venezuela and Iran.

It is extremely difficult for the United States–its leaders and its citizens–to realize and accept that they have little control over world oil supply. With the U.S. military failure in Iraq, combined with a massive foreign debt and a huge current account deficit, the oil baton has been passed to the OPEC-Russia axis.

Expect those countries to control oil supplies to their benefit, not ours. They will eventually develop a system that resembles the Great Depression-era Interestate Oil Compact (IOC). As the State of Texas archives explain:

“State governors and oil company executives formed the Interstate Oil Compact (IOC). The IOC aimed to stabilize the industry in the name of a steady supply of oil, predictable prices, and minimal federal interference. Each state would control its own production. Members of the IOC would have monthly meetings to review predictions of demand and establish production totals. Congress approved the existence of the IOC in August 1935.”

Many predict that a world-wide recession would bring back $60 barrel oil. That is mere wishful thinking, cognitive dissonance at its best. After the establishment of the IOC, and in spite of being in the midst of the Great Depression, oil prices rose to $1.12 per barrel, well above pre-Depression and pre-East Texas Field levels.

It is a huge blow to the ego of most Americans, this end of the era of American exceptionalism. Denial is the first line of defense to go up, even on blogs like this one with intelligent, introspective commenters. It is Timothy Garton Ash who best captured the moment:

“If you want to know what London was like in 1905, come to Washington in 2005. Imperial gravitas and massive self-importance. That sense of being the centre of the world, and of needing to know what happens in every corner of the world because you might be called on – or at least feel called upon – to intervene there. Hyperpower. Top dog. And yet, gnawing away beneath the surface, the nagging fear that your global supremacy is not half so secure as you would wish. As Joseph Chamberlain, the British colonial secretary, put it in 1902: ‘The weary Titan staggers under the too vast orb of his fate.’
The United States is now that weary Titan.”

Anonymous says:

We already have an oil backed economy….oil is purchased around the world only in US Dollars.

Juan says:

Price management via production control has a long history, from major domestic producers’ pressure for prorationing and greater power in hands of Railroad Commission of Texas right on over to the international level with formalizations in the 1928 Achnacarry and Redline Agreements, the so-called ‘International Oil Cartel’ and ultimately OPEC.

The latter’s reign was, though, relatively short lived, failing due to the confluence of: Global economic slump, increased non-OPEC production, revolution in Iran, Saudi attempt to discipline other OPEC members,,,overproduction and price collapse.

IOW, the type of structure mentioned in the post is not so different that that which ended in 1986 and, during 1987-88 was replaced with a formula pricing structure based on both the physical trade and price discovery via futures markets. or, “market related” pricing.

The modern price regime had been born but has itself undergone change as the spot to futures channel became very much less important than the futures to spot channel.

The current phase is perhaps best exemplified by saudi arabia, iran and kuwait’s (then others) 2001 shift to futures prices alone as benchmarks (i.e., the pricing of shipments to europe in relation to ipe (become ice) brent weighted average futures, to u.s. on basis of nymex wti lt swt futures, to asia in relation to dubai/oman).

As I wrote on the 5th:

If financial markets were not open to trend-following, return seeking, self-justifying momentum but in fact captured real and most likely conditions in an efficient manner, the above would be no problem.

Under such conditions, it seems unlikely that we would have seen total otc commodity derivatives notional value rise from $1 trillion dec 2004 to $9 trillion dec 2007 (BIS) or such a ballooning of exchange traded commdity derivatives, of which energies constitute a major portion.

Yes, there have been substantial changes in the world real economy but not, imo, sufficient to justify the divergences and bubble-type prices which developed.

S. Aramco et al price in reference to prices made in financial markets, a situation which came about due to squeezes and other manipulations in benchmark crude oils’ markets as their production fell and physical trade thinned.

Most mistakes in the popular press and elsewhere seem related to a failure to recognize changes that have taken place but to demand that causation runs one way, physical trade to financial even though what developed has been a system in which price and real economy fundamentals can substantially diverge, and not only over short terms.

The Oil Wars: http://www.tsl.state.tx.us/exhibits/railroad/oil/page4.html
Draft Achnacarry Agreement, 18 August 1928:
http://www.mtholyoke.edu/acad/intrel/energy/achnacarry.htm
OPEC Pricing Power, March 2007: http://www.oxfordenergy.org/pdfs/WPM31.pdf
Multiple others and modicum of experience.

Anon 12:45,

Wasn’t SemGrp short even as prices ran against them.