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Chris Cook: The Oil End Game

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By Chris Cook, former compliance and market supervision director of the International Petroleum Exchange. Cross posted from Asia Times

The end game is about to begin. On the one hand you have the noise and rhetoric. Greedy speculators gouging gasoline prices; mad mullahs preparing to wipe Israel off the map; bunker buster bombs and fleets being positioned; huge demand for oil from the BRIC countries; China’s insatiable thirst for oil; the oil price will head for $200 a barrel and will never again fall below $130 …

On the other hand you have the reality.

Oil Markets

The oil markets are completely manipulated and orchestrated, and the conductors of the orchestra have the benefit of having already held a rehearsal in 2008.

History never repeats itself, but it does rhyme. This time around it is not demand from the United States that is collapsing, but European Union and United Kingdom demand, as oil prices in euros and pounds sterling have never been higher. In the meantime, the US is awash in oil as domestic production quietly increases, flushed out by the high prices.

As I have outlined in previous articles, the culprit for the high oil prices between 2009 and 2012 – with the exception of the speculative “spike” between March 2011 and June 2011 driven by Fukushima and Libyan price shocks – has been passive investment by risk-averse investors, which enabled producers to support oil prices at high levels.

Much of this passive money underpinning the market and enabling producers to monetize inventory pulled out of the market in September 2011, and another wave pulled out in December 2011.

What is now happening is the end game: an orchestrated wave of noise that is drawing in speculative money. This is enabling the producers who are actually in the know to hedge by selling production forward during what they confidently expect will be a temporary – and pre-planned – managed fall in the oil price.

The Game Plan

The smartest kids on the block knows that gasoline prices much over US$4 per gallon will be both deflationary and lethal to President Barack Obama’s re-election chances. So that won’t happen other than briefly.

I am by no means the only commentator who has pointed out the complete counter-productivity of these oil sanctions. The smart kids are well aware that oil sanctions are completely useless, and simply enable China to fill its strategic reserves at a discount to the market price at the expense of Greece and Italy in particular.

But the US has been quite happy to let the EU – as useful idiots – take the economic hit. The high oil prices caused by all this noise and nonsense are actually a net benefit to Iran – which rattles its sabre loudly as elections approach.

The effect of a managed decline in oil prices to, and probably over-correcting well through, $60 a barrel – which is coming fairly soon – will be extremely beneficial to the US in two ways.

Firstly, it will be catastrophic in particular for Iran, Russia and Venezuela – not exactly on the White House party list – whose hugely oil-dependent revenues will collapse. The ensuing economic mayhem will open these countries up to regime change and to rescue plans which Wall Street will be dusting off.

Secondly, the US population will be laughing all the way to the gas station as gasoline prices fall – at least temporarily – below $2.50 a gallon and release purchasing power into the economy, thereby doing the president’s re-election chances no harm at all.

What will then happen is that members of the Organization for Petroleum Exporting Countries will panic and genuinely reduce their production. The Saudis/Gulf Cooperation Council will again orchestrate the inflation of the oil price – as they did in 2009 – comfortable in the knowledge that they have been able to hedge against this temporary fall in prices at the expense of the speculators currently pouring in to the market.

That’s the game plan as I see it of the smartest kids on the block. What could ever go wrong?

A Buyers’ Strike

Quite clearly, consumer nations, like everyone else, are in the dark in relation to what has been going on in the oil market and have swallowed the populist “greedy speculator” meme. They are simply unaware of the nature and cosmic scale of the oil market manipulation that has been taking place, and as a result have been happily overpaying for oil for years.

What happens if they simply refuse to pay these prices?

Possibly a “buyers’ strike” by China would be enough to crater the market. We’ve already seen the effect of that on Iran, which has clearly agreed new terms with China after the latter held back purchases earlier this year.

Or possibly speculative short selling of crude oil by hedge funds funded by Chinese investment? I pointed out at a rather spooky conference on “economic terrorism” a few years ago in Lausanne – which examined ways in which terrorists might make economic rather than physical attacks – that the only difference between an economic terrorist and a hedge fund is motive.

System Fragility

The markets in oil have never been so fragile and susceptible to shocks. Private inventories of oil are low. The investment banks interpret this – as they interpret everything – as a sign of physical demand and therefore as bullish for the oil price … oh, and by the way, here are some oil funds they have to sell you.

The reason inventories are low is that private intermediary buyers will only store oil if they can both finance it and lock in a higher forward sale price. Bank financing is scarce and getting scarcer, while forward prices are below current prices; the result is that inventories are low.

The systemic shortage of finance capital means that neither physical oil traders nor the remaining proprietary traders of banks can afford to take into storage much of the approaching flood of oil onto the market.

Also, derivative market risk has become concentrated – since intermediaries are no longer capitalized to take it – in centralized clearing houses, which have for commercial reasons become fragmented silos.

In my view, the steep decline which is planned could easily get out of hand in a not dissimilar way to the tin market in 1985 when the price collapsed – literally overnight – from $8,000 per tonne to $4,000 per tonne.

We will then see whether the clearing houses are “too big to fail” – and ask why, if so, such utilities are run for private profit?

When, Not If

In my analysis, absent a massive, and sustained, shortfall in oil supplies – which I cannot see occurring, since all involved have every interest in ensuring it does not occur – the oil price will, as I have already forecast, fall dramatically by the end of this year’s second quarter at the latest. It’s not a matter of if, but when it will happen.

Finally, as an interesting aside, I have credible reports that Marc Rich – who got on well with both the Shah of Iran and Imam Khomeini, and who sold oil from Iran to Israel for 20 years between 1973 and 1993 – has recently been seen again in Tehran. I doubt that this is for the night life, or because he prefers Tehran air to Swiss: but as a trusted third party there would be few better placed to act as a go-between.

Let’s hope so. Once the stultifying political uncertainties of elections in Iran and Russia are over, things could get interesting.

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115 comments

  1. Binky the Bear

    So this will be like the 1980s when oil prices crashed leaving states and nations dependent on high prices high and dry and gas went below a dollar a gallon?

    1. nonclassical

      hmmnn…don’t think so-bushbama is no bushitter, so won’t get benefit of Wall $treet speculators selling off futures, just prior to elections…as was done 2004,
      noted by Gretchen Morgenson.

      Also, oil companies during Iraq wouldn’t buy nationalized Iraqi oil till U.S. carried out “pacification”=protection of oil fields, from “terrorists”..Oil companies stated they had made more $$$ with OPEC than ever. They aren’t going to upset that apple cart. (Greg Pallast documented)

      Let’s all remember, Wall $treet 2004, Goldman-Sachs owned world leading 13.8% of total oil futures…other Wall $treet banks owned also, were selling futures back and forth to one another, specifically to raise price$$…that’s the speculation game…goes back to 1800′s…

  2. Calcixeroll

    I’m not sure I understand the mechanism by which the price (WTI) drops from ~ $108.50 to $60.

    thanks

      1. Calcixeroll

        I’m not really trying to be obtuse (it just comes naturally).

        In the case of tin, was there some kind of acute demand destruction that drove the price decline? For oil pricing, what [specifically, here and now] would cause a steep decline in growth, especially given India and China’s domestic growth rates (and their apparent interest in absorbing excess crude oil production/exports)? Because it seems that the price drop would certainly not be due to a rapid increase in oil production or exports.

        Anyway, thanks. I’ll go back to just reading

        1. Chris Cook

          @Calcixeroll

          The International Tin Council – a producer cartel – were able to keep the tin price high through stockpiling, and through forward purchases on the London Metal Exchange, which at that point was an organised bilateral market (like the London Bullion Market Association still is) and had no central counter-party clearing, and no regulation.

          Over a period of years (tin mines take a good few years to get going) a lot of new tin production came onto the market.

          Eventually the cartel were unable to continue the price support, and the price collapsed from $8,000/tonne to the lower ‘buyer’s market’ clearing level of $4,000/tonne.

          What happened was that a lot of LME dealers threatened to default on their forward contracts, and the LME declared a ‘ring out’ at the lowest price at which all the dealers were prepared to perform on their contracts…. ie $6,000/tonne.

          The litigation from those sellers who had sold forward at $8,000/tonne – and had through the ‘ring out’ lost $2,000/tonne – went on for years.

          1. JamesW

            While your answer is most likely the correct one, I would have said just doing HFT wash sales on ICE Futures between Goldman Sachs and Morgan Stanley, each time lowering the price a bit…..

            And tremendous blog post, sir.

          2. RanDomino

            So then the analogy falls apart, since there is no significant new source of oil. Shall we pretend that there is another 100 million barrels/day capacity just sitting around somewhere? Maybe a few, maybe 10 million per day.

          3. Elizabeth

            I heard there were significant new sources of oil. The only reason North Dakota isn’t flooding the world market is because of the lack of a pipeline (which Obama of course plans to fix). And there’s the presalt off Brazil.

        2. Philip Pilkington

          By all means, you’re right for asking for a channel. And it is this: that hedgers have piled into the market and that this is beginning to squeeze consumers to the point that they might cut down on their fuel consumption.

          If the bottom falls out of this it could all get a bit dramatic. (If Cook is correct, of course…).

          More resources:

          http://www.youtube.com/watch?v=wgBSo_B6vJ8&feature=g-u-u&context=G2909e0cFUAAAAAAAAAA

          http://news.bostonherald.com/business/general/view/20120222with_gasoline_consumption_trending_down_motorists_wonder_why_price_keeps_rising/srvc=home&position=recent

          http://www.eia.gov/oog/info/twip/gtpsusm.gif

          And regarding the ‘insiders’ in the Boston Herald article:

          The industry analysts are very strange with this stuff. From the Boston Herald article:

          “”…Even if the decline was 7 percent (in the U.S.), it makes very little difference, given how much gas we use and the increased demand in nations like Brazil, China and India,” he said. “Our drop in demand does not begin to offset the increased demand in those countries.”"

          A quick Google search turns this up:

          http://www.reuters.com/article/2012/02/09/china-oil-cnpc-idUSL4E8D914I20120209

          Do oil market analysts use Google?

          1. ebear

            “”…Even if the decline was 7 percent (in the U.S.), it makes very little difference, given how much gas we use and the increased demand in nations like Brazil, China and India,” he said. “Our drop in demand does not begin to offset the increased demand in those countries.””

            It does if the subsidies come off. A large part of the developing world subsidizes energy which results in a lot of waste and inefficiency. Start raising the price in those nations and watch the effect of that.

            Then recall that oil isn’t just about driving. Look around you and add up all the things you don’t need (or don’t need to replace) that are made from oil. The computer I’m writing this on is already 5 years old and I expect at least another 5 out of it. Food? Half the items in our supermarket could disappear with zero effect on general nutrition – hell, you might even see an improvement.

            Brazil, China, India? All exporting nations. What happens to that when the consuming nations start to seriously retrench, as we’re just beginning to see? You don’t need rising prices to choke off demand – falling wages can do it just as well.

            Peak oil may be the defining issue of this century, but we’ve got 30 years of massive credit excess to work off before that day arrives. When it does, things will be a lot leaner than they are now, so the effect may not be as dramatic as some expect.

            All that aside, all I really need to see to predict lower oil prices is how few forecasters are making that call. – ebear

  3. ebear

    Chris, what happens to the petrodollar recycling trade under your scenario?
    Should we expect a spike in US interest rates? Thanks. ebear

    1. Philip Pilkington

      Don’t know what Chris will say, but I don’t think these really have the effect that people think they do. Where does ‘demand’ for bonds come from today to ensure zero interest rates? Eh… remember QE?

      1. ebear

        “Where does ‘demand’ for bonds come from today to ensure zero interest rates?”

        Fear?

        I do get your point, but I’m sure the fear trade still has something to do with it. Maybe I just answered my own question, but if oil exporters notice that recycling petrodollars (cheap credit) no longer generates demand, then wouldn’t they put some of that money elsewhere, especially if the Fed already backstops their existing holdings? So, new question: where would that money go?

        Heh… this thing has more angles than a dodecahedron. I’m going to bed.

  4. Dan B

    Light sweet crude oil production peaked in 2005; oil from shale and tar sands cost over $80 a barrel to produce and are low in net energy return. Price falls if economic activity further contracts or crashes. And if economic activity expands, price rises and the cycle of volatility repeats -except that each downturn is worse than the one before. The cheap oil = a growing economy days are over. This is a geological reality imposing boundaries on human actions. Europe has an energy crisis; so does the U.S. It is no accident that Greece has the worst energy deficit in Euroland. Portugal, Italy, Ireland and Spain are not far behind in energy deficits.

    1. MRW

      A barrel of oil from the Alberta Oil Sands (no one who haas ever set foot in the province calls it the Tar Sands) costs under $10/barrel to produce.

      The reason why Pierre Trudeau could engineer a comeback in 1980 was because he could undermine the $24/barrel Oil Sands cost by setting a Made-In-Canada price for oil at $16/barrel and forcing everyone west of the Ottawa-Cornwall rule to buy from Alberta. (Everyone east of the line was allowed to by on the open market price of $52/barrel out of General Revenue, which tanked the economy because they were paying for over 250,000 barrels/day of out that gen rev.)

      The US oil companies left Alberta as a result. This nearly bankrupted Alberta, which was Trudeau’s real goal. He wanted to go down in history as the guy who created a Canadian Constitution (1983) and the heavily independent Alberta did not want to go along. (The Canadian provinces functioned then like the countries in the EU.)

      After a barrel of oil on the open market was $10/barrel in 1990, the US oil companies developed methods that got production of a barrel of syncrude under $10/B.

      AS for your claim of “low in net energy,” you’re wrong. A barrel of syncrude had three times the concentration of ‘sweet crude’, and yields three times the amount of gas at the refinery. The US has been using Alberta oil for the past 45 years. In fact, it is the number one oil import, not Saudi Arabia or any other country. Alberta has ennngh oil to supply North America for the next 200 years, and currently, the US is awash in oil…just not gasoline because of the restriction on building refineries.

      1. molim

        net energy has nothing to do with concentration of energy.

        in fact if the syncrude is made from a lower concentration energy source then due to the laws of thermodynamics the total energy is reduced when it is concentrated

      2. mmckinl

        America is closing refineries. Tar sands at $10 a barrel cost- ROTFLMAO. Syncrude at $10 a barrel – ROTFLMAO …

        You are either delusional or a terrible liar …

        1. kris

          Whoever likes Trudeau becomes some kind of liar. The man wanted to cubanize Canada and almost destroyed it, much like Obama is trying to cubanize USA now.

          1. ambrit

            Dear kris;
            Come off it man. Obama is so far to the Right not even an ‘intervention’ by Tio Fidel would put any “Pink” in his cheeks.

          2. securecare

            Time for you to change the drugs you are taking, they are making you delusional. Cubaize my okole.

            *sheesh* what ignorance.

          3. kris

            Government run part of economy:
            - Car industry
            - Medical care
            - Military
            - Banks
            What’s left for private sector?

          4. different clue

            Government doesn’t run the banks. Banks run the government. Kris has that part, at least, exactly backwards.

          5. different clue

            Sorry, no. Because it is not a merger. It is a hostile takeover. Or perhaps a penetration, subversion, and capture from within.

            The black hat megabanks quite strictly run the government and not in the least bit the other way around.

            So, sorry again . . . but no.

      3. rjlaures

        I’ve heard that gasoline is one of the U.S. biggest exports. If this is so it’s hard to believe that lack of refining capacity is really a cause for higher gas prices.

        1. nonclassical

          20 years ago there were 8 major U.S. oil companies-players. As they coalesced,
          they closed refineries, over the last 15 years..don’t want any of that nasty competition…

      4. Fiver

        The demented level of propaganda hatched in Alberta by the fossil fuels industry and its wholly owned political class surrounding the Canadian National Energy Program and its purported “rape” of Alberta is so wildly skewed in its assertions and accusations as to qualify the spewer of such blather to run for the Republicans along with Bachmann, Trump or Santorum or umpty varieties of loose-pinned “birthers”.

        You’d never know that it was Canadian Federal Government was key to truly viable tar sands exploitation in the first place, that the NEP was a RESPONSE to enormous energy price spikes from a combination of inflation and the Islamic Revolution in Iran in 1979 that inflicted serious damage to most of Canada’s economy, and that the subsequent slide in oil prices AFTER the NEP was introduced had NOTHING WHATEVER to do with the NEP, and everything to do with Iran and Iraq pumping all out to fund their US-sponsored war of attrition. To suggest the NEP was an effort to screw Alberta for political reasons is simply lunatic:

        Even a brief blurb in Wiki contains:

        “By this time the world was in the thralls of an energy crisis. Beginning in 1973, the members of the Organization of Petroleum Exporting Countries had taken advantage of tight world oil supplies to rapidly and regularly increase prices. Policy-makers in the oil consuming countries therefore considered it a matter of national urgency to develop stable, secure energy supplies. Because the resource was so large and development was clearly possible, the oil sands looked like Canada’s best bet. As a result, the prospect that the Syncrude project would collapse was a matter of both political and economic concern.

        An executive group representing the remaining partners invited the other governments of Canada to participate as commercial partners in the project. The province also reviewed the cost estimate given by the oil companies. When it found that the consortium’s cost estimates were not out of line, the governments of Canada, Alberta and Ontario participated in a historic meeting in Winnipeg in February, 1975. That meeting salvaged the project.

        The federal government took a 15 per cent interest, Alberta 10 per cent and Ontario five per cent. The private partners – Cities Service Canada, Gulf Oil Canada and Imperial Oil – agreed to retain their $1.4 billion interest in the project, but gave Alberta the option to convert a $200 million loan to Gulf and Cities Service into ownership interests. Alberta also took full ownership in the no-risk pipeline and electrical utility which the plant needed.[2]

        http://en.wikipedia.org/wiki/History_of_the_petroleum_industry_in_Canada_%28oil_sands_and_heavy_oil%29#Pioneers

        http://inflationdata.com/inflation/inflation_rate/Historical_Oil_Prices_Table.asp

  5. LeonovaBalletRusse

    All of this *justification* is such a crock of dis-information. Anyone from the Oil&Gas Colony of Louisiana knows that “Big Oil” has been trying to get retail gas/petrol up to $5.00/gallon since at least 1980. It’s an old game:

    “THE GREATEST GAMBLERS: The Epic of American Oil Exploration” – Second Edition -by Ruth Sheldon Knowles (Norman, University of Oklahoma Press, 1978; New York, 1959);

    “BLESS THE PURE & HUMBLE: Texas Lawyers and Oil Regulation, 1919-1937″ by Nicholas George Malavis (College Station, TX, Texas A&M University Press, 1996).

  6. duffolonious

    I don’t understand the storage side of things. Inventories are low because of financing? Really?

    That still means that production has to be lower, either:

    a) involuntarily (can’t produce any more)
    b) voluntarily (reduce production)

    I dunno how this would affect exploration – given the long time lags, and the weak financing – meaning producing more early.

    To me, only demand can get weak enough to cause this much price drop. We still aren’t seeing that much C+C come on line (only all liquids goes up – and that’s mostly NAT gas) because of current high prices.

    1. JamesW

      It’s about the future contracts; there is the ability to purchase an unlimited number of commodity futures contracts to manipulate things (ostensibly there are supposed to be position limits, but seldom are they really verified, and one can see from Gary Gensler’s (CFTC) interactions with Jon Corzine and exemptions given him at MF Global, corruption is the rule of the day. (Also, position limits are easily gotten around with the use of shell companies and holding companies and OFCs.)

    2. Chris Cook

      Inventories are low because the price now is higher than the future price (a ‘backwardation’), and it costs private sector traders money to hire tanks and finance stocks.

      Petroplus – a refiner – went bust because they could no longer finance purchases and stocks of crude oil, because the banks pulled their credit lines,

      Producers are another issue.

    3. Yves Smith Post author

      I wrote about this at some length in 2008, when everyone looking at inventories missed that there was an oil bubble.

      First, there is not all that much storage capacity. Per Dan Dicker:

      “…in the world of energy trade, there is lack of fungibility that has always broken down thus: Electricity, non-storable — Natural gas, more storable — Crude oil, mostly storable.

      Although easiest of the three, oil storage has been historically inelastic, no matter the price… Over the last 4 years (and for most of my trading life) forward stocks have always hovered between 50 and 55 days — storage is expensive and limited, and just not efficacious.

      http://www.nakedcapitalism.com/2008/06/oil-falls-2-as-saudis-report-that.html

      Second, you can store it in the ground. Big producers can adjust production levels pretty quickly.

    4. nonclassical

      as Gretchen Morgenson noted 2004, Wall $treet speculators controlled just under HALF of entire world’s oil futures….Goldman sold off 1/3 of theirs, July,
      and others blinked-they were playing nice game of I sell u my futures, to raise
      price, then you sell them to the next guy, who sells them back to me…so on.

      Goldman stated they would be buying back in, in blended or biodiesel, but in August, sold off 1/3 more-everyone panicked and sold oil futures, price came down from $4,00 to $2.00 2 months before November 2004 bushit reelection..

  7. JamesW

    A tremendous blog post by an honest whistleblower (how few and far between they are today!).

    Everyone should well recall that the paper market price of oil, mid-2008, was 13.8 times the actual physical market price for oil.

    Thanks to massive futures purchases by a select number of firms (Goldman Sachs, Morgan Stanley, et al.) plus naked short selling, plus forward freight futures manipulation to drive up the price of transportation via costs of supertankers and bulk carrier rates, plus massive futures purchases by a select number of firms of refinery-involved chemicals, price surges occurred in a by design fashion.

    Deja vu all over again…..

    Mr. Cook, regarding:

    “Also, derivative market risk has become concentrated – since intermediaries are no longer capitalized to take it – in centralized clearing houses, which have for commercial reasons become fragmented silos.”

    Ever care to extrapolate on the present and future uses of the ICE Credit Clear LLC???

    1. Chris Cook

      I think that there is a great deal of confusion concerning the relationship between the physical and derivative markets, and I covered some of that here not long ago

      http://www.nakedcapitalism.com/2012/01/chris-cook-naked-oil.html

      I think that central clearing of derivatives is an accident waiting to happen, and that mandating the central clearing of ‘off-exchange’ contracts concentrates all market risk in one single point of failure.

  8. LJ

    Well, he certainly does leave out Peak Oil out of the equation. Saying he doesn’t believe is one thing. But to simply ignore the discussion is very puzzling.

    1. mmckinl

      While speculation in oil contracts does play a role it is not as large as Cook would have you believe.

      Of course Cook doesn’t mention “peak oil”. His theory wouldn’t hold water if he did.

      1. RanDomino

        Economists! No concept of the material world. “If prices are high, they’ll just produce more!” Never mind scarcity, it’s not in the equations.

  9. mmckinl

    Wow … What a load of crap. The current shortage of oil was forecast by the Pentagon in 2010.

    “” “By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day,” says the report, which has a foreword by a senior commander, General James N Mattis.” “”

    http://www.guardian.co.uk/business/2010/apr/11/peak-oil-production-supply

    We are past peak oil. We have been on a conventional oil production plateau since 2005. Storage is empty because supply is down while the “driving” season is approaching. It is not only the EU and Britain that are using less oil but America as well. Refiners are now exporting because they have too much product. Refineries are closing and up for sale.

    This piece is sheer nonsense. Peak oil is upon us. Alternative oil such as tar sands, nat gas liquids and shale oil can not keep pace. The price of crude may indeed fall precipitously but it will be because of economic chaos not a glut of oil.

    1. Chris Cook

      I’m a Peak Oil denier am I?

      Well, actually, if you’ve ever read my posts on the Oil Drum site, you’ll know that I subscribe to the common sense idea that oil is a finite resource; that there is indeed a peak level of production of crude oil; and that as you say – we are either there or thereabouts.

      But there is a big difference between financial demand for physical oil and demand by consumers for oil, and there is a constituency of people out there who make fortunes from ramping the price up and crashing it again.

      “Storage is empty because supply is down while the “driving” season is approaching. It is not only the EU and Britain that are using less oil but America as well. Refiners are now exporting because they have too much product. Refineries are closing and up for sale.”

      Make your mind up.

      There’s plenty of US crude oil being produced and much of this is, for logistical reasons, being sold cheaply giving windfalls to mid-West refiners.

      If refiners are closing all over the place – and they are indeed – then what does that say about crude oil demand?

      What do you think is going to happen to the 500,000 barrels per day of Venezuelan heavy crude now that Hovensa refinery has closed? Do you REALLY think PDVSA will be able to sell it anywhere without a massive discount?

      The fact is that there’s any amount of crude oil going to be on the market in the next few months, and quite a few buyers who are taking delivery of oil for which they opaquely ‘pre-paid’ using the financial techniques first developed by Enron, and now more widely adopted by the likes of BP and Goldman.

      This means that the actual amount of crude oil available for sale will exceed by far the actual dollar bids, and the price will crash.

      Once the price has collapsed and eventually ‘clears’ at $60 or less, then because the market is fairly tight overall, OPEC’s panicked cuts will take enough oil off the market for the price to be re-inflated.

      Rinse and repeat.

      Now Peak Oil is bad enough – but the problem is that the energy markets have become completely dysfunctional and their volatility makes it impossible to invest in renewables and energy savings.

      Kindly keep a civil tongue in your head.

      1. mmckinl

        The Saudis think there is a future for heavy crude even if you don’t …

        “”Saudi Aramco, the national oil company of Saudi Arabia, is proceeding with a plan announced last May to re-open oil production at its Dammam oil field. Dammam is the country’s oldest field discovered in 1938 and has been shut-in for about 30 years.

        Saudi Aramco estimates that 500 million barrels of heavy oil remain in the field and believe production could reach 100,000 barrels/day. A total of 32 million barrels were produced at Dammam before it was closed. Saudi Arabia’s — and the world’s — largest field, Ghawar, has produced 65 billion barrels and is still active today.”

        Read more: Saudis to Re-open Idled Oil Field – 24/7 Wall St. http://247wallst.com/2012/02/16/saudis-to-re-open-idled-oil-field/#ixzz1ndMTqNXS

        The fact is there is increasingly heavy demand coming from Asia that the drop in demand from the US/Europe isn’t covering …

        Then as you know many exporting countries are using more and more of their own oil for domestic use even while their own production falls. Read net exports available.

        The fact is we are on the down side of the production curve for crude oil and tight oil and nat gas liquids are failing to keep up.

        As I previously posted:

        “”"By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day,” says the report, which has a foreword by a senior commander, General James N Mattis.”"

        http://www.guardian.co.uk/business/2010/apr/11/peak-oil-production-supply

        The current supply impasse is the beginning of “driving season” … after that demand will fall but not to previous levels given the increased demand. At some point oil supply will be short the entire year … IF the economy doesn’t crash first.

      2. LJ

        Oh, that Chris Cook. I used to read the Oil Drum as my first, middle and last read of the day. Need to get back. I have the highest regard for its work. I will check out your posts.

        Thanks for clarifying you position with regards to peak oil. Very helpful.

      3. mmckinl

        Why oil prices are so high: Production shortfall, Iran concerns, and low interest rates by Gail Tverberg

        “”In my view, the biggest contributor to high oil prices is the first one–stalled out oil supply. At this point, the interaction between oil demand and oil supply does not work in the way most people expect it would. Even if the price of oil rises, world oil production doesn’t increase by very much (Figure 1), if at all.”"

        http://www.energybulletin.net/stories/2012-02-27/why-oil-prices-are-so-high-production-shortfall-iran-concerns-and-low-interest-ra

      4. robert157

        “if refiners are closing all over the place, what does that say …”

        Refiners are closing in the US but opening in Asia. Since global demand seems to be holding strong as US demand declines, and the global price remains high, it would seem that US consumers are simply being outbid in a sense for the world’s declining available net exports of crude oil. People in Asia don’t have the same issues with 4$/gallon gas, in fact it will probably seem quite lovely to them. In the US a refiner on the east coast can lose a million dollars per day with high crude oil costs, because they can’t pass the cost onto the consumer.

  10. patricia

    That’s because he’s writing about markets regarding oil, and more specifically, markets current and into the near future. He’s not discussing oil itself.

    It is important to know that the prices you are paying right now are based on market shenanigans.

  11. Jim

    I don’t see sustained PPB below 85 dollars. Saudi Arabia has made fiscal commitments (to coopt the opposition) which are contingent on a PPB of at least 85 dollars, and possibly as much as 95.

    65 dollars PPB may lead to regime change in Saudi Arabia, and I don’t believe that many of the Republicans or Democrats in power want that.

    1. Chris Cook

      Neither do I Jim, and I think that the Saudis – as the Qataris did last November, and Mexico routinely do – have been hedging themselves against the fall they know is coming.

      Once it’s crashed – and dealt a very bloody nose to their unhedged rivals – they’ll try and pump it back up again when OPEC panics and cuts production, and using the same methods they used before in 2009.

      I don’t think it will be so easy this time, because I think that market participants will wake up to the fact that they have been screwed, while ‘inflation hedging’ investors may be hard to find as commodity prices slump generally.

      1. paulbkk

        From Reuters 14 February 2012:

        “Hedge funds and other money managers are now running more than six times as many long positions in U.S. crude futures and options (287 million barrels) as short ones (45 million barrels).

        The ratio of long to short positions has doubled since October and is more stretched than any time since May 31, 2011, when funds were still liquidating long positions after the flash crash on May 5.”

        I’m guessing the same is pretty much true with Brent, but haven’t checked. So you’re saying the oil producers have hedged short, 45 million barrels, in order to catch out the speculators who are long 287 million barrels. Am I understanding you correctly?

        1. Chris Cook

          I’m saying that some oil producers – particularly those who know the true position about pre-pay and the ownership of the resulting ‘Dark Inventory” – are on the other side of the long positions.

          ie they have sold futures contracts to lock in high prices – because they fear (or know) physical market prices are going down – to speculators who have bought futures contracts because they are betting prices will rise.

          If my thesis is correct, then these canny producers will make massive profits on their ‘hedge’ at these speculators’ expense, and this profit will compensate them for the temporary fall in the physical market price before it gets marched back up to the top of the hill again.

    1. kevinearick

      the price is what the market will pay. the make-up of the price is what you want to watch from here. the only question is the path to changing taxes on energy.

  12. Fiver

    1) Oil is where it is today precisely because of the flood of global monetary “easing” unleashed since November by ECB, the Fed (swaps, “Twist”, 2 more years of ZIRP, all manner of “dovish” talk) BoE, BoJ, BoC, and others, as well as the key reversal of “tightening” in China, NOT some imagined “safety” of oil/commodities, which have always been a speculators’ game every bit as much as currencies. Europe clearly has been hardest hit, with Brent near 130. If anyone wanted a no-risk inflation hedge, they’d be in TIPS or some similar instrument. Oil since March 2009 has been riding repeated bouts of “easing” – music to speculators’ ears.

    2) In Cook’s earlier piece at NC, the outright “manipulation” of oil markets was merely speculated upon. Here it is not just stated as fact, but in addition it is implied as deliberate US policy – which is what in response to that original piece I said would be the only way it actually goes this way. In other words, the way this happens at all is if the US deliberately does NOT act to prevent the perception of a financial meltdown in Europe.

    3) The presumption in the current piece is that Iran is shelved for this year. I’ve read in Haaretz that Netanyahu will in his meeting with Obama in early March be presenting an ultimatum, i.e., that Obama commit irrevocably to attacking Iran in early 2013, or Israel moves soon. Netanyahu is the one with all the cards.

    4) When oil crashed in late 2008/early 2009, it was in the context of a tangible global panic and industrial/trade collapse, with uncertainty stretching out to the horizon and beyond. The situation today is simply not comparable, given nearly 4 years for all and sundry to position/protect themselves and 2 years specifically with respect to Europe. Again, the only way what the author describes is for this to be the deliberate aim of US policy, NOT as a “natural” market reaction to a mild European core recession .

    5) Oil prices below $70 don’t just hurt official “enemies”. They also do great damage to Iraq, Canada, Norway, UK, traditional and new (shale) US oil producers, the various Asian “stans”, Angola, Nigeria, Brazil and all the other Gulf States.

    I note this prediction remains pegged for H1 2012 – just happens to dovetail with what umpty analysts have said is the most likely time for a move against Iran this year, and the next several key decision dates in Europe. We’ll just have to wait and see what the US (and its twin, Mr. Market’s) policy choices are. As for AFTER any short sharp sell-off, here’s the view from another oil expert looking ahead:

    http://english.caixin.com/2012-02-24/100360462.html

    1. Fiver

      Additional note: In the first piece presented on NC by Mr. Cook, the downside target was $45. Now it’s $60. Why is that?

      1. Chris Cook

        If you re-read my article you’ll see that I refer to an over correction through the price level of $60/bbl which I think is probably the clearing level ‘buyers’ market’ for crude oil right now.

        As I said before this could be to $45 or $50bbl, and there are people who have taken out 2012 put options at these levels, as far as I know.

        Re Iran and Israel I disagree with your analysis.

        In my view this is all noise, which suits Iran, because it keeps up the oil price, and suits Israel as a distraction from creating realities on the ground, which is and always has been their number one policy goal.

        The number one policy goal of the US – and China – is energy security, and the US adventurism in Iraq – with Iran to follow (‘Real Men Go to Tehran’) – was in my view stopped in its tracks by a Chinese economic veto (a ‘Suez Moment’) in 2007.

        That is IMHO the main reason why the US have already pulled out of Iraq and will limit their action against Iran to currency wars and completely dumb embargoes.

        I grant you that low oil prices will also hurt other producing nations, but I am afraid to say that the US does not give a stuff.

        As a British politician put it in the heyday of the British Empire, the US has no friends: only interests.

        I don’t doubt Messrs Brzezinski and Kissinger would say precisely the same.

        1. Fiver

          So it’s just “noise” is it? We can just forget the entire history of UK/US/Israeli actions in the region which would pretty much make the last 75 years a conspiracy theory JUST to keep oil prices first down, then up. I suppose that’s why they knocked over Libya, are ripping Syria apart, destroyed Iraq & Afghanistan, drove Pakistan to the brink of overt war AGAINST the US and all the rest. And why they’re bombing sites in Iran, assassinating civilian scientists with bombs (with wives at their sides), engaging in all manner of sabotage and subterfuge, while imposing sanctions that are even more brutal than Clinton’s, which managed to kill half a million innocent Iraqi children in the blissful, Golden ’90′s. All for show? BS. This is a deadly serious conflict.

          My own assessment stated here months ago was for the attack on Iran to be put off until after the election, which Obama will win handily – nobody could’ve garnered more for Wall Street with less opposition than the Harvard Drone King.

          So, as I pointed out, virtually every “analysis” put any war at all in H1 because anything closer to the election was just too dicey to risk for Obama (note: Netanyahu’s calculus rides on what he believes US public reaction would be – and the fact is the US public could care less so long as any war is short and awesomely “sweet” – i.e., no boots on the ground). So what you’re saying is that the Iran “risk premium” comes off. OK. So it comes off by, say, June. That leaves Europe over the same time frame.

          Do you believe Europe between now and summer is going to blow itself up? Or do you believe they will do what it takes to avert that? I believe the latter, though I expect another “scare” inflicted by Mr. Market demanding more, more, more. But nothing remotely like a Lehman scenario UNLESS it is quite deliberate, US policy to do so. Ditto with the US economy. If the data turn south in the US, and Bernanke does NOT respond by putting the pedal to the floor, it can be considered a deliberate US policy to again use markets as a hammer to FORCE a directional change in mega-wealth flows. So in terms of real economic conditions, and real “security risk” reasons, and assuming the US is not intent on being a global wrecking ball, we are back to pre “Arab Spring”, say Dec. 2010 (right in the middle of QE2, with oil at $100+ per barrel). Of course, in keeping with Official Truth, we’ll pretend that soaring energy and food prices had nothing to do with the sudden explosions of popular unrest.

          Now, I’ve no doubt the US power elite (or its other face, Mr. Market) has the power to crash the oil market, or any other market, for that matter, anytime it so chooses. That has in fact been my position all along. But doing so in a fashion that again inflicts so much damage, leaving all the existing predators in place, while simply transferring astronomical sums of money from producers to consumers and poor to rich as a “fix” is about as stupid as it gets when the cluster of critical producers are smack in the middle of a bubbling cauldron of political instability, so many “friends”, many poor but important, take it squarely on the chin, and all to be reversed as if nothing happened? That is NOT the way US planners think.

          How much sense does it make to throw away a 5 trillion dollar (at least) investment after having slaughtered millions just to turn around and hand the oil secured to your top competitor while hopping onto a mirage of “security” by developing the far more expensive and environmentally problematic sources of domestic oil when all the US has ever had to do was act like any other customer and pay the going rate while it got off oil? Tell me, when did US planners EVER back off in any perceived contest of wills in a strategic setting? Never, that’s when.

          I quite agree energy security is China’s top strategic objective. After all, they have eyes, can see the US is essentially pursuing a “containment” policy and is intent on having the means to cut them off at the drop of a crisis hat (including in the South China Sea, Sudan, Libya, Venezuela – anywhere China tries to secure oil it is disrupted/made “secure NOT”)

          Anyway, we are apparently agreed on 1 thing: what unfolds will be a direct consequence of US and its alter-ego, Mr. Market policy.

  13. vividvew

    Seriously… The whole thing reads like some massive conspiracy theory.

    I’m not saying there is no speculation premium or NO manipulation going on but in the whole post not once is increased demand from China or the developing world mentioned as an effect on price.

    China’s oil consumption in 1999 4.3M bpd
    China’s oil consumption in 2009 8.3M bpd

    It almost doubled. You think this had NO effect on prices!! That’s just delusional.

    It’s estimated that China’s oil consumption in 2012 will be more than 10M bpd. That’s a ~25% increase in 3 years!!

    In a market as large a world oil trade, speculation and/or manipulation can either exacerbate the trend line or counter it for a short time but the trend line is still the tend line.

    Acoms razor provides the best explanation. In a supply constrained market, fluctuations in supply and demand, or expectations of, will have a comparatively large effect on price.

    Again, not that there are no other forces at work but suggestions that anything other than supply/demand or expectation of supply/demand are THE dominante force should stand next to those who think we never landed on the moon.

    1. Chris Cook

      I agree entirely that the increasing demand from China among others led to increased, higher cost, crude oil coming into play over that period.

      The market price was inflated during that period well above the ‘buyers’ market’ lower bound, all the way to, and spiked way through, the upper ‘sellers market’ boundary at which demand gets destroyed.

      So we have pretty much reached a point of ‘Peak Demand’ – as I have heard it called, and which has been exhaustively analysed on the ‘Oil Drum’ site.

      My point relates in particular to the operation since early 2009 – after the death of the credit system – of the crude oil market, due to the completely opaque participation of financial purchasers via Enron-style ‘pre-pay’.

      This has essentially killed the market as a pricing mechanism, and is having pernicious effects on everyone else except one or two oil producers, and the financial and trading intermediaries who serve them.

  14. Ray Duray

    Chris,

    I’d like you to take a peek at this short video if you have a chance and comment upon the veracity of what this Canadian geoscientist claims with regard to the myths being spread about the necessity of the Northern Gateway and the Keystone XL proposed pipelines.

    http://www.bnn.ca/News/2012/2/1/Why-Northern-Gateway-is-unnecessary.aspx

    If what David Hughes has to say is true, then it seems that the entirety of the debate in the US about the Keystone XL pipeline is just a red herring.

    Furthermore, if you have any expertise on the matter, I’d love to hear your expert’s opinion on why Canada does not seem remotely interested in supplanting crude oil imports into eastern Canadian refineries with Alberta syncrude. Is there a strategy at work here that I’m not understanding?

    TIA for any reply.

    ***
    David Hughes bio: http://www.postcarbon.org/person/36208-david-hughes

    More: http://www.thegreeninterview.com/david-hughes-bio

    1. Chris Cook

      Ray,

      That’s interesting stuff, and my advice to you is to chuck that tasty bone to the Oil Drum to fight over and give you a more informed view than I ever could.

  15. JamesN

    Well then, time to get busy burning some cheap oil then, isn’t it? NASCAR’s back for another sellout season, and of course the US military’s burning the stuff like there’s no tomorrow (?) 24/7 as well. Who are we, the mere subjects, to resist the magic? The ship of empire’s definitely going down in due course, but the band ain’t done playing yet. Will you honor me with this dance, my dear?

  16. Tim

    If I get the gist of this article it really has nothing to do with Peak Oil, it is neither debunking it or promoting it. It is a demand side analysis of current circumstances.

    Everyone knows Oil supply is fairly inelastic and yet demand is set up to be more volatile than ever due to the current backwardation. It is certainly within the realm of possibility that price could drop dramatically, although as a trader in this environment I’d have to say I’d guess the moves would be dramatic but not necessarily deep. We saw how deep deep can be during 2008 due to demand drop which was after a full blow speculation blow-off. Anything else that occurs now will be just a fraction of that.

    It should be noted on the supply side that despite these super high prices supply has held relatively constant at these high levels, which simply didn’t happen before. Production would always increase since somebody else would prefer the revenue over max profit %, which proves to me that on net over the last 5-7 years, the amount of oil people really would like to use is way more than the amount of oil available to pump any more.

    That is simply a combination of severe reduction in the increase of supply and a massive increase in developing economy demand.

    We will have price downdrafts from time to time due to demand volatility (via manipulation and recessions), but on average prices will continue to demand all the money that the world economy can manage to give it. Said another way: The entire world economy is going to stay oils bitch for the forseable future!

  17. joecostello

    Well oil has never been a “market”, how ever you want to define them, and “‘pre-paid’ financial techniques” are hardly the only opaque aspect of the industry, pretty much the whole thing is opaque.

    You make a comment that “someone” here wants Obama reelected, Im not sure who you mean by that, the traders, oil companies, the Sauds?

    I will say, its been very peculiar looking at the economic numbers and particularly the monthly oil consumption numbers, which all need to be taken with a slab of salt. But the numbers in the US have all been down and continue to be, and we are the biggest oil pigs on the block. The refinery numbers and refinery exports in particular.

    oil disconnected from the rest of the markets back in Oct, continuing to go higher, then with latest Fed and ECB money dumps the rest caught up again. And the question then comes concerning all these markets, what do prices have to do with reality?

    But,the crash scenario you put forth has more to do with a lack of demand, if OPEC is going to cut production, particularly demand drop here and in Europe, which together is almost 50% of global demand, but I’d say who knows in recent months whats happening in much of the rest of the world, especially as oil has been at $100.

    The crash in price you say will occur, has never occurred without a decrease in demand, at least in the last fifty years, and well maybe that demand crash is already there.

    This is all not to say “oil markets” arent and in fact have always been tremendously manipulated. I think the one thing we can all agree is that our financial system through blatant fraud and other dysfunctions is at this point a cancer on the entire world, be interesting to see how it all turns out.

  18. kris

    Mr. Cook. I am “ekm” from FT Alphaville.
    It took me 3 years of internet scouring to get to understand what you’re writing. It’s basically 2 or 3 full college classes, but this stuff is not taught in colleges. I’m not surprised people are at awe.
    I am quite happy though that you’re making the BP vs Enron comparison here, but you told me on FTAV that “I’m scratching my head on this one…”. I did the same comparison and I got banned for one week for “unsubstantiated” comments. I understand the blog choice.
    By the same argument, Naked Capitalism could have been the perfect place for Post-Modern Fiscal Theory on FTAV. Most of people here would understand pretty well, but it would take me another 2 years of my life to understand what you wrote. That’s why I didn’t comment.
    There is one main thing I disagree with you though. Peak Oil is false. As a mechanical engineer, speaking in the true scientific spirit of Richard Feynman, it is true in the sense of ‘CHEAP” oil, but it is totally unproven in the sense of “finite” element.
    Thx a lot for sharing your honest knowledge with us.

    1. RanDomino

      There is the outside, hypothetical, mental-masturbation possibility that oil is not finite, true. Just as there is an unverifiable and non-disprovable chance that God exists. And just as useful. Peak Oil is about as proven as the existence of gravity.

      1. Skippy

        Yes the earth is an inverted milk dud w/ the chocolate center comprising 99% of its mass being oil.

        Skippy… wait, that’s still finite

        PS. good thing there is no mitigation required in its usage.

        1. RanDomino

          No, no, maybe there’s a portal to another dimension that just spews oil. Or maybe yet-unknown natural processes compression millions of years of solar energy in a single year.

      2. Ken

        I often wonder about all the peak oil talk. It’s sort of like the sales guy that says buy now before they’re sold out. The Earth is still creating oil even as we pump it out, right? At what rate that is happening I don’t know, but it’s happening non the less.

        1. different clue

          Any high-carbon energy-dense material which was created in the earth by analogous processes long ago (millions or millions and millions of years ago) can fairly be called “fossil” due to its age and bio-geological process origins. The basis of tomorrow’s fossil fuel (mainly coal) is being laid in the building peat-beds of today. Just put millions of tons of sediment on top of them and compress them under time and weight and heat and they will harden up into coal.

          But the earth isn’t making new fuel as fast as we are finding and burning the fossil fuel. That’s why the carbon load in the atmosphere and the ocean-water is going up.

        2. different clue

          I read the link. It seemed interesting. If the energy extractable from the final manuroil is net-more than the energy it took to turn the manure into manuroil, then it may be a winner.

          Of course enough manure would have to be held back and returned to the soil from which the pigfood came so as to sustain and preserve the ability of the soil-based bio-life to continue functioning well enough to maintain the soil system’s ability to grow more pigfood.

          1. kris

            Different Clue
            Question:
            What is energy need to create hydrogen? I remember that one the greatest physicists in world (don’t remember the name but it was a she), said that Hydrogen is the most abundant thinkg in nature, except for stupidity. She was pushing for hydrogen cars.
            I’m not sure the famous Net Energy analysis is correct either.

  19. kris (ekm)

    Mr. Cook
    It took me 3 years of internet scouring to get to understand what you’re writing. It’s basically 2 or 3 full college classes, but this stuff is not taught in colleges. I’m not surprised people are at awe.
    I am quite happy though that you’re making the BP vs Enron comparison here, but you told me on FTAV that “I’m scratching my head on this one…”. I did the same comparison and I got banned for one week for “unsubstantiated” comments. I understand the blog choice.
    By the same argument, Naked Capitalism could have been the perfect place for Post-Modern Fiscal Theory on FTAV. Most of people here would understand pretty well, but it would take me another 2 years of my life to understand what you wrote. That’s why I didn’t comment.
    There is one main thing I disagree with you though. Peak Oil is false. As a mechanical engineer, speaking in the true scientific spirit of Richard Feynman, it is true in the sense of ‘CHEAP” oil, but it is totally unproven in the sense of “finite” element.
    Thx a lot for sharing your honest knowledge with us.

    1. Leverage

      Peak oil is not about finite resources but about production. If you understand the concept of EROI it’s very easy to understand why peak oil is a reality, that translated into the end of cheap oil and/or limitation of economic expansion (with other resoruces production also peaking in the future).

      However technological advances can delay it a bit (weeks or months, maybe even years), but are not a panacea and there is no discovery in sight that will change it significantly (the production curve). Humanity will have to adjust to a lower energy equilibrium until we have the technological support to increase energy consumption again.

      Not the end of the world, if we decide it not to be it (off course we can decide go nuts and create the apocalypse, sure some people will try). It’s mostly a political and social issue (how we decide to spend the available energy and make the transition smoother), demography hopefully will help (declining population in OCDE nations) with it. Not enough energy for McMansions and affordable housing for everyone, but yes for affordable housing w/o McMansions, less oil-dependant society (less transport, new urban design, less consumption of toys but still having good diets, etc.).

      There aren’t enough resources to cover greed, but more than enough to have a decent living.

    2. Chris Cook

      Kris

      Thanks for the compliment, and indeed it was not until that remarkably very well-informed Alphaville thread that I finally made the Enron/Prepay connection with the current antics in the market.

      ie I’ve stopped scratching my head. I now have the complete picture and timeline.

  20. Matt

    There are a lot of charges in this article without much substantiation. As big a consumer as the US is, it seems hard to believe that a few nefarious players could engineer a price run up and decline so precisely. Said players have been trying to goose house prices for four years now to. O avail. Where are inventories low? Cushing is overflowing. US gas prices are up because it has become profitable to export gas rather than sell it domestically. Maybe I’m just naive, but I don’t see why it should be surprising that the price of a highly demand inelastic product can change by a large magnitude quickly. Very few people in the US have much choice in the short term.

    1. with the doves

      Cushing is oversupplied because there is insufficient pipeline capacity from there to the Gulf of Mexico. It’s a phenomenon unique to that location as I understand.

  21. Jack M.Hoff

    I think the deluded ones are those who think there is no manipulation in markets in general, let alone the oil market in particular. There seems to be no shortage of those…

    1. kris

      Jack
      That’s correct. Think about every single corner in the world has been either grinding to a hal (China) or totally clogged (Europe). If world economy is slowing down, why would the crude oil price go up? Enter Chris J Cook.

  22. Steveb

    As long as there is the possibility that Israel will attack Iran, and as long as there is the possibility that Iran will then respond by trying to cut oil production or distribution from other countries, then the price of oil should stay very high. I don’t see how the price of oil can drop this calendar year.

    1. kris

      Sir,
      When (not if) Iran is attacked, there will be only few buyers for their product. Those buyers (let’s assume China) will beat the crap out of Iran’s oil price and Iran would have no choice but to reduce the price to sell oil in order to buy food.
      http://www.piie.com/blogs/?p=2698
      Oil is 80% of Iran’s exports. Any hit in price would kill its economy and probably cause wide spread hunger, particularly now that the sanctions have cause hyperinflation of the local currency.

        1. Fiver

          While an impossible-to-justify US war on Iran would indeed destroy its economy, and any oil Iran could still produce would be sold for whatever they could get, that would not affect the world price nearly so much as the fade of the “security premium” now built in, but dies together with the Last Enemy on the infamous neocon hit list – but I would suggest that “security premium” would be almost seamlessly transferred from the Iran/Arab/”radical Islam”/”terrorist” propaganda “threat” directly to today’s steadily embellished, imagined Chinese “aggressive posture” or some such BS. Absence of conflict is not an option for maximum predatory profiteering OR Pentagon spending.

          1. kris

            I’m not saying it’s good to have war. I’m saying that seeing the rhetoric and the perceived threat, the decision has been made. Whether Iran has nuclear weapons or not, is irrelevant for the decision makers. It didn’t matter for Iraq, it won’t matter for Iran. Good or bad, that’s the reality.

    1. kris

      It sounds attractive, but if the government makes legal oil betting (paper futures in the market without taking delivery), it’s not the fault of hedge funds.
      To clarify, I am no hedge-funder.

      1. Rotter

        lets try to guess what would happen if the govt actually attempted to make some very profitable hedge funder behavior illegal. next.

  23. Fiver

    Does anyone else find it criminally ironic that the US, engaged in decades of war at astronomical cost, wars entailing the destruction of several countries and millions of civilians in order to control access to oil, should end up with the US chasing a home-grown, expensive, damaging, dirty oil boom while the great “prize” of the last century, the world’s biggest, cheapest, cleanest oil reserves fuel its chief competitors’ environmentally disastrous “growth” targets? A more self-defeating policy can scarcely be imagined. Even now, if we’re only talking about using oil to the extent absolutely required while making the switch to alternatives, it’s still a gigantic capital/production costs, rapid production declines and emissions loser of a proposition to NOT buy Iraqi or Iranian or other ME oil – particularly having pounded the living shit out of them to grab it in the first place (note: not everyone in the Bush I through Obama Admins were/are Israel-firster neocons, plentiful though they be – the policy of serial regime change could not have carried the day without that ocean of oil in play)

    Apparently so, according to this official organ of “energy” . Note that the door on irreversible Climate Change closes in 2017, and it’s evident from this “Agency” forecast that no serious effort at all will be made to avert it:

    http://www.worldenergyoutlook.org/docs/weo2011/executive_summary.pdf

  24. Maju

    There is an alternative: go solar, go hydrogen, do it now!

    Of course reducing consumption in general and producing locally what is consumed locally is also a good idea. But for everything else: the solar-hydrogene tandem (and where climate may reduce solar input, there are other sources of renewable energy: windfarms, tidal, etc.)

    Sure, at first it may seem challenging and maybe even somewhat expensive, but that’s something that should be solved in a decade as a market is created and experimentation and invention in these technologies go mainstream.

    Why is not happening already? Because energy monopolies and oligopolies do not want to lose their control of society and hence wealth and power: electric companies are like medieval barons who get paid tithes, while oil multinationals resemble more the Venetians trying to impede in unholy alliance with a Muslim coalition that the Portuguese mariners could reach India via Africa.

    If solar (renewables) and hydrogen goes mainstream, then all those companies will collapse and won’t be able to blackmail the market so much as they used to. But by trying to exact the greatest profit in the shortest term they are also accelerating the process of change unavoidably, as more and more states, like Cuba right now, find that solar is actually cheaper in many cases (never mind in hidden environmental costs).

  25. robert157

    In the time it took to read this still more cheap crude oil went away forever and had to be replaced with much more expensive forms of oil. In fact a number of additional expensive barrels had to be produced to achieve the same amount of energy, because of the differences in net energy between these vastly different types of oil.

    This could cause the price of crude to ramp higher even as demand stays flat — potentially even as demand falls, if the cheap oil is going away faster than demand. This is one potential explanation for a seemingly paradoxical situation of weak demand and rising oil prices.

    The world gets much of its oil from a very small number of very large oil fields. Ongoing depletion of these existing giant oil fields is the most important factor going forward which affects the price of oil. (For instance, look at Prudhoe Bay, which used to produce around 1.5 mbd.) But somehow, that is the factor that the economists/finance types always seem to forget or ignore. The world makes a lot more sense if you factor in the ongoing depletion of existing giant oil fields. That said I do not discount the ability or desire of major financial players and oil producers to manipulate the market in any possible way.

  26. Leverage

    You don’t need to go to the 80′s for examples, the market collapsed 50% from late 2008 to mid 2009. Same will happen again in next months.

    Futures markets are a joke, but specially stuff like oil or gold, banks are using them for pure trading purposes to extract rent from new retail products that invest in commodities, an other scam.

    Anyway, there is a cyclical bull trend in commodities due to shortages & increasing demand, oil will fundamentally go higher & higher (probably with lower lows/higher highs); the problem is higher commodity prices trigger automatically economic contraction & recession, so are self-limited. But all this price volatility is induced by too-much-money is financial types & financial repression by central banks driving liquidity into commodity markets. Four months ago oil was barely over $70.

    1. Leverage

      I may add that a lot of commodities are depressed and have been for months, dues to demand contraction. Oil et al. are due for a major correction towards the intermediate trend in the commodity complex and a recouple of correlation, in line with the recessionary environment we are entering right now.

  27. Hugh

    I don’t agree with Chris Cook on all his reasons, but I do agree that we have seen this all before and this is another case of “Wash, rinse, repeat.”

    You can see though how the multiplicity of factors surrounding oil: peak oil, supply-demand, political tensions, geopolitical gaming, production, ROI, EROI, spot versus futures pricing, and speculation both on exchanges and in OTC markets can and, from looking at the comments, does underpin a host of often contradictory theories.

    My advice is to ask cui bono? and look to the kleptocrats, domestic and foreign. In a kleptocracy, the only purpose of a market is as a vehicle to separate rubes from their money at as many points as possible.

    1. different clue

      Time for non-rich people to try understanding in detail all the different wealth streams and revenue streams by which public wealth is privatized and concentrated upward . . . and by which widely distributed micro-private wealth is compressed and concentrated upward into a narrowly distributed layer of mega-private wealth-gainers.
      A detailed understanding of all those pathways might enable the understander to withhold some of his/her micro-wealth from the concentration-pathways leading social-class upward.

      Is it possible for would-be members of an “economic resistance” to make themselves klepto-resistant or even klepto-proof to some degree? Is anyone even going to bother to even try? For example, people who could buy daily things with cash but choose to use credit cards “for the convenience” have no legitimate complaint against the Lords of Card Credit when they are feeding those very same Card Lords by using their credit cards.

      1. kris

        It’s been 5 years I’ve trying to understand finance. I am addicted to it and spent countless days studying it. It’s not easy; not easy at all.

  28. cbs00

    From the last article by Chris Cook:

    “The classic case was US environmental restrictions on oil products, which led to restricted supply, and to price increases in oil products. Now, anyone would think that reduced refinery throughput will reduce the demand for crude oil and should logically lead to a fall in crude oil prices.”

    Can someone explain to me how this makes sense?

    My understanding: If a refinery is refining less oil, then that means the supply is decreasing, not the demand. The price of oil would rise.

    1. kris

      Refinery is the bulk consumer which passes on refined products to individual consumers. But nonetheless, it is the consumer. If they see there is no demand from businesses and individual consumers, they reduce inventory and stop buying crude. Hence, decrease in demand from refinery as consumer to crude oil producers.

  29. jgalt

    I don’t buy the argument presented. Nothing I read on many sites have mentioned any chance of oil going below $100 in the near future unless there is a global depression. THAT I do believe may happen, precipitated by the collapse of the financial system and the dollar. At which point Americans will be lining up for food and not cheap gas. But oil addiciton is not different from any other drug addiction. The adict will pay any price for his/her fix including murder eventually. China can grow with oil above $100 for a long time, paying with Walmart dollars they are holding and using before it becomes Charmin.

  30. nb

    i do not believe, that there is any chance, that Obama could somehow manage oil prices. if economy will continue to grow, especially in EU, USA and China, even in a little percentage, the oil will not drop.

  31. The Oracle

    What caused oil barrel and gasoline prices to plummet in late 2008, with gasoline prices dropping below $2.00 a gallon, almost approaching what gasoline prices were when oilman GW Bush was sworn-in as president in January 2001? Did this precipitous 2008 drop occur due to a surge in supply or a drop in demand, that is, an abrupt downward shift in oil market “supply and demand” factors? No.

    The 2008 financial crisis essentially placed “limits” on oil futures trading. The oil futures speculators on Wall Street and elsewhere were heavily invested in the “housing bubble” and when this finally burst their oil futures speculative activities also burst as the overall market contracted severely. Ergo, unintentional, collateral “limits” were placed on their speculative “manipulation of prices” on the world oil market and at the gas pump.

    The Dodd-Frank bill contains a provision placing “limits” on oil futures speculation, a provision ordering the Commodities Futures Trading Commission (CFTC) to restrict excessive gasoline-price-spiking speculation, but conservatives on the CFTC have refused for two years to implement this federally-mandated provision, slow-walking it, trying to water it down. The Bush-packed CFTC was also missing-in-action during the last record-breaking 2008 oil barrel and gasoline price spike.

    Drilling for more oil won’t bring down prices at the pump this year. Switching to alternative, renewable energy sources won’t bring down prices this year. Wishing that the oil futures speculators will suddenly get a conscience and self-regulate by placing “limits” on their oil futures gambling activities won’t bring down prices this year. Blaming President Obama (or demanding that he release oil from the Strategic Oil Reserve) won’t bring down prices at the pump this year. (Remember, blaming former President GW Bush in 2008 didn’t bring down prices, only the market collapse in 2008 did).

    Only by the CFTC placing federally-mandated “limits” on oil futures speculation will prices at the pump go down this year, a repeat of 2008 when prices at the pump plummeted the last time. The CFTC placing these “limits” is the easy path, because the alternative to this is another global financial crisis (like in 2008) forcing down oil barrel and gasoline prices as all trading, all cash flow takes a hit. I really prefer the first course of action, not the latter, which apparently the Republicans and oil futures speculators what to happen again. Are they nuts?

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