International Energy Agency to Try to Gather Supply Data It Won’t Get (And Other Oil Information Gaps)

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The headline above is perhaps the most important message contained in the front page Wall Street Journal article, “Energy Watchdog Warns Of Oil-Production Crunch.” Well, in fairness, it may rank as important as the thrust of the article, which is that the IEA, which recently had predicted that oil supplies would be able to more or less keep up with rising demand, now has taken a gloomier view and intends to survey oil producing nations to get a better handle on supply.

Um, that is tantamount to saying that if it is right now, the IEA was plenty wrong before. It also says that the agency tends to hew with conventional wisdom. Oil prices start rising, and then it goes out to try to survey supply. Hhhm.

Why am I so deeply cynical? Because, as the article points out, the IEA simply can’t get the information it needs to make forecasts with any reasonable degree of accuracy. Now if the IEA admitted the fact that you could drive a truck through its estimates, I’d have a lot more respect for this exercise. As a management consultant/sometimes special situations analyst, I frequently have to deal with data about markets where the information is very soft. The definitive tone of the IEA’s reporting (see their April report, courtesy reader Bjornar) seems to overrepresent the integrity of the underlying work.

And while the survey-in-progress will attempt to remedy some of these shortcomings, it’s clear there will still be quite a lot of guesswork in the final product due to the lack of cooperation of pretty much all of the interested parties save perhaps the US and North Sea producers:

The IEA, employing a team of 25 analysts, is trying to shed light on some of the industry’s best-kept secrets by assessing the health of major fields scattered from Venezuela and Mexico to Saudi Arabia, Kuwait and Iraq. The fields supply over two-thirds of daily world production.

The findings won’t be definitive. Big producers including Venezuela, Iran and China aren’t cooperating, and others like Saudi Arabia typically treat the detailed production data of individual fields as closely guarded state secrets, so it’s not clear how specific their contributions will be. To try to compensate, the IEA will use computer modeling to make estimates. It will also collect information gathered by IHS Inc., a major data and analysis provider based in Colorado, as well as the U.S. Geologic Survey, a smattering of oil and oil-service companies, and national petroleum councils.

As someone who does primary research, 25 analysts does not strike me as a large enough team to do this much fieldwork.

Again, our pet peeve: no mention of Iraq, which is anywhere from number one to number three in reserves, depending on who you believe. But since they’ve had relatively little drilling (a mere 2000 wells as of 2002, versus a million in Texas), there are probably gaps in the geological information (the Iraqi Oil Ministry’s recent claims are a confirmation of sorts) and given the security situation, they aren’t likely to be remedied soon. Similarly, a recent Business Week article mentioned that Russia produces “awful data” and OPEC countries often fail to report accurately, since they don’t want it known that they are pumping more than their quotas permit. (Another pet peeve: note that the price rise today was largely driven by an unexpected drop in US inventories. But those inventories are only primary inventories. End user inventory increases are counted as demand. In the 1973 oil shock, my father, who managed a large paper mill, went out and immediately bought as much fuel as he could and urged his fellow mill managers to do so as well. The company went long more than a year’s supply and it made a significant difference in its bottom line. Given the bullish talk, any industrial user with an operating brain cell and storage capacity would take as much as they could).

Now despite all the foregoing, the recent spikes up in oil prices could be entirely warranted by supply/demand considerations. But I am disturbed by the lack of critical thinking and examination of the data. If a casual observer like me can see gaps and open issues, it would seem this vitally important issue merits further investigation. For instance, oil industry executives grilled by Congress said that oil prices “ought” to be between $35 to $90 a barrel (the estimate varied by company). They were being attacked, among other things, for their high profits and excessive executive pay. Why would it be in their interest to say oil prices should be lower? They’ve just handed the legislators a justification for imposing an excess profits tax.

Conversely, depleting supplies would argue that Big Oil needed the cash flow to reinvest, since any new finds would almost certainly be more costly to develop than their current fields. Saying oil was indeed scarce and the high prices are warranted also would argue for relaxing environmental restrictions on Alaskan drilling, a big item on the industry’s wish list.

That isn’t to say that the mainstream view isn’t getting a once-over in some quarters, but I am not certain those views are getting the hearing they deserve. For instance, Jim Hamilton at Econbrowser states, rather cautiously, that while the oil price rise appears largely warranted by fundamentals, there appears to be a speculative element that means prices may currently be ahead of themselves. Jeff Frankel, following a recent speech by the Fed’s vice chair Donald Kohn, argues that negative real interest rates in the US are playing a role in agricultural and energy commodity price increases.

Another considerable gap in the coverage: this story is being treated almost solely from an economic, not a geopolitical standpoint. But let’s tease out a couple of issues as grist for thought.

The first oil shock was due to an oil embargo by OPEC to punish the US and other allies of Israel in the wake of the Yom Kippur War. But the notion of the strategic uses of oil is remarkably absent from this discussion.

Consider: the fact set may be as many observers assert: the Saudis aren’t pumping because they are past their own Peak Oil (Oil Drum had some charts that suggested that might be the case for Ghawar, the biggest Saudi field, a year ago, with speculation on other possible causes, such as the Saudis taking highly productive wells offline). Thus the Saudi posturing is simply to hide their weakening power in the oil markets.

But consider some other elements in the equation: Iraq has completely eroded the US’s standing and annoyed and embarrassed Riyadh. They now have an unstable neighbor and the specter of an US occupation without end, which does not go over well with its own population (the Saudis having promoted a particularly conservative form of Muslim is now causing them headaches). Having botched Iraq, the US continues to threaten Iran (the latest: Israel’s Army Radio, run by the Israeli Defense Forces, claimed that Bush would attack Iran before the end of his term. The Jerusalem Post picked up the story, which was then denied by the Administration. But if you were in Saudi Arabia, who would you believe?).

Consider further: even though the Saudis are not fond of the Iranians, they are no doubt even less fond of having yet another country in the vicinity destabilized. And it is not clear at all why the Bushies have Iran in their crosshairs, save some crazy fundamentalist desire to bring about the End of Days. Stratfor, which is widely believed to be plugged into Israeli intelligence, went on for at least a year after the Iraq invasion about “the coming US-Iran alliance,” describing at some length how helpful the Iranians were being. Conversely, attempts to claim that Iran has been providing materiel to Iraqi insurgents was not only revealed to be trumped-up charges, but to the US’s embarrassment, the Iraqis have decided to investigate (which means they are no longer willing to participate in unsupported Iran-bashing).

Now look at a map. Iran is on one side of the Strait of Hormuz. The US has been signaling its hostile intentions for some time. If the Iranians can close the Strait, the Gulf’s oil supply has nowhere to go. This doesn’t seem like a great strategy, and certainly not a risk the Saudis want to see run.

So the Saudis have every reason to want to leash and collar Bush, particularly after the gaffe of coming directly to plead for oil after participating in Israel’s 60th birthday celebration.

Now add another element: the IPCC climate change report. In 2007, both global warming and the role of CO2 emissions went from being a granola-head belief to widespread acceptance. There has been lots of chatter about carbon taxes, cap and trade, and carbon offsets.

Now if you were sitting on a diminishing resource and your country was a one-trick pony, why would you let governments tax it if you could drive the price up yourself and collect the windfall?

Thus if I were an OPEC member, I’d have every reason to foster the Peak Oil story, which undoubtedly is generally accurate, the question is how immediate. Second, I would not pump more if I could, or would make only token supply increases, Indeed, I’d be trying to restrict supply without looking like I was doing so, which makes the Iraq war and supply disruptions godsends.

To put it more simply, the Saudis have every reason to leave their inventory in the ground. As the Financial Times noted:

Ali Naimi, Saudi energy minister, said the demand forecasts he was reading did not warrant an expansion past the 12.5m b/d capacity Saudi Arabia’s fields will reach next year, following a laborious investment of more than $20bn (£10.3bn, €12.9bn). King Abdullah, the country’s ruler, put it more bluntly: “I keep no secret from you that, when there were some new finds, I told them, ‘No, leave it in the ground, with grace from God, our children need it’.’’

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  1. Anonymous

    and this morning on CNBS I heard some bubbleheaded congressman say we need to build more refineries using abandoned military bases….question, aside from some environmental issues, why haven’t the refiners built any refineries in the past 10 yrs or so….could it be that they see that “peak oil” is a very real possibility and that alt energy is the way to go…..also ask T Boone Pickens why he is exiting the oil busieness after making his fortune there

  2. bobo7874

    Boone might not support your case for peak oil. Boone might tell you he thinks that oil is in a speculative bubble, and is getting out at the top, like Sam Zell selling real estate to Blackstone at the top, or Mark Cuban selling tech to Yahoo at the top for stock Cuban fully hedged.

  3. Anonymous

    there is a very interesting discussion, on “the oil drum”, of what “peak oil” is…in essence it is that as existing oil deposits decrease in avaialble capacity and new oil field are harder and harder to find the oil producers will begin restricting exports for domestic use thus restricting oil for export. so perhaps this is why Pickens is exiting the business and looking toward wind as a future investment.

  4. macndub

    Anonymous, 7.55: Refineries have nothing to do with the fundamental supply-demand balance of crude, except in very rare cases of market dislocation (say, after Katrina). Refining is not a great business: you earn your return on capital, and that’s pretty much it. They are insanely complicated machines, and outrageously expensive to build, but ultimately, the economic rent in the crude oil supply chain accrues to the owner of the crude oil in the ground.

    Now if you were sitting on a diminishing resource and your country was a one-trick pony, why would you let governments tax it if you could drive the price up yourself and collect the windfall?

    This is a very important point. Leaving oil in the ground, and driving up the returns from owning the resource, constitute a form of investment. In fact, it’s not a strategy reserved by the Saudis: every single oil producing state (including Alaska!) has increased royalty and tax rates to capture a larger piece of the pie, directionally harming the economics of oil extraction by private companies.

    Basically, the oil supply curve may be inverted right now. So while Krugman doesn’t believe there is speculative excess because above-ground inventories are normal, below-ground inventories are enormous. These may start hitting the market if (or when?) prices fall significantly.

    Thus if I were an OPEC member, I’d have every reason to foster the Peak Oil story, which undoubtedly is generally accurate, the question is how immediate.

    To quote the Saudis again, “The stone age didn’t end because they ran out of stones.”

    This is why the Saudis drill only a few hundred wells a year. Of course, their wells are multiple orders of magnitude more prolific than wells in the lower 48, but it’s also not in their immediate interest to alter the balance quickly. These types of supply/demand constraints come along once in a generation… time to make some hay.

    Finally, the future of hydrocarbon consumption is natural gas, not oil. The world has plenty, but the middle east and Africa flare (burn it at the production site) for lack of markets. It’s a sin greater than almost any other that I can think of. 75% of drilling in the lower 48 is gas-directed. Global natural gas supply chains are being built. Gas is a cleaner fuel from almost every perspective. The downside? The largest remaining gas reserves in the world are in Iran and Russia.

  5. Anonymous


    Excellent post that pretty much touches on all the bases.

    Michael Lynch is a leading peak oil skeptic who has spent years trying to debunk peak oil theory. He expresses the reasons for his doubts in this white paper:

    Personally, I think both Lynch and the peak oiler advocates are whistling Dixie. As you point out, there is a derth of reliable information, and this makes any kind of “scientific” or “geological” approach nothing but sheer speculation, a point that came through loud and clear to me when I was reading Lynch’s white paper. There may indeed be sufficient information to declare a geologically based non-OPEC peak, but beyond that the information gets pretty sketchy. The oil business of OPEC countries is about as transparent as that of a New York investment bank, and 75% of putative oil reserves lie within the borders of these OPEC countries.

    But arriving at non-OPEC geologic/scientific peak oil would be a watershed event, because it would greatly enhance OPEC’s power over the markets. At that point the mantle of controlling prices that was enjoyed so many years by the Texas Railroad Commission would be passed to OPEC.

    And the effect of the diminished military, moral and economic prestige of the United States cannot be overemphasized. There was a time when the U.S. spoke softly and carried a big stick. But those days are over. As one commentator put it, there certainly is no respect for the United States, but more importantly there is no fear. Countries from Buenos Aires to Riyad are in open defiance of the United States, and the leaders of those countries have made it clarion that they are going to do what is in the best interest of themselves and their people, not what is best for the United States.

    So perhaps we have passed two milestones at approximately the same time–non-OPEC geologic/scientific peak oil and US peak prestige.

    Both of these portend significantly higher oil prices for US consumers.

  6. Anonymous

    Anonymous said…

    ☺☺”…also ask T Boone Pickens why he is exiting the oil busieness after making his fortune there”–May 22, 2008 7:55 AM

    I read once that Boone Pickens made more in one year speculating in oil and gas futures than he did in his entire career as an oil producer.

    There exists this confusion about what Pickens does now with what he did back when he was drilling oil wells and building tank batteries. Pickens himself suffers from no such befuddlement. I saw him in a recent interview in which he discussed the almost impossible task of finding and producing new oil and gas reserves. Clearly, in the current emotionally charged environment in which oil and gas prices are determined, it is infinitely easier to make money speculating in oil and gas than in producing it. What people fail to realize is that the game Pickens is playing now is a zero sums game: Pickens wins a million, somebody else loses a million. I pity the little traders that populate these blogs that think they can out trade Pickens, with his discipline, work ethic and 24-hour-a-day intelligence gathering network. My only question is: “Where do you want the body sent?”

    I think an appropriate inquiry would be to ask what are the social and economic consequences of the zero sums games in which Pickens is now engaged. Do they perfom a service for the society and the economy? Do they draw talent away from productive endeavors? Are they destructive?

  7. Unsympathetic

    They’re not a one-trick pony. MidEast (and, to an extent, Eurasia) have 80% of the world’s proven natural gas reserves.

    If Bush was smart (go with me, here..) he’d switch the country to LNG which is currently under 1/4th the price of crude, and has not even a remote chance of running out of supply in the next 40 years.

    We still need to crank up the production of nuclear and wind turbine energy production in the US to become energy-independent. However, LNG is a step in the right direction and can at least mitigate the coming $12-$15/gallon price.

  8. Anonymous

    Unsympathetic said…
    ☺☺”If Bush was smart (go with me, here..) he’d switch the country to LNG which is currently under 1/4th the price of crude,,,”

    Unsympathetic, I think your figures are a little out of date. Correct me if you have information to the contrary, but LNG in the open global market is now selling for between $16 and $18 per million BTU, or between $96 and $108 per barrel oil equivalent.

    This compares to todays Henry Hub spot of $11.78 per mmbtu. It’s hard to justify paying $16 to $18 for something that sales on the domestic market for less than $12.

  9. Anonymous

    First, the big increase in Iraq’s reserves comes entirely from an estimate by IHT, the outfit behind CERA. It did not come from any new systematic research in the field, but from a reworking of past data. Further, both IHT and CERA have consistently overstated world reserves and likely future production. Their records at predicting oil production and oil prices have been consistently abysmal since 2001–along with Michael Lynch, they have literally the worst records out there.

    Iraq was overpumping during all the years of the embargo. When you pump too fast, you damage reservoirs. Damaged reservoirs often decrease the reserves ultimately recovered. I agree that Iraq will be contributing to oil supply for a long time, and it may even be possible to increase their annual production for a time by roughly a million to a million and a half barrels per day. Maybe. But we’re not talking about anything close to Saudi Arabia’s production rate, even if their reserves are substantial, because we’d be going after damaged reservoirs and wells that were problematic to produce and dinky fields. And reserves don’t set prices–flow rate sets prices. Further, even if you get all the oil companies into Iraq’s oil fields tomorrow, they won’t have significant new projects online for at least a year, and by the time they are able to increase production to anything close to their max potential, it’s unlikely to do much more than slow down our increasing decline rate.

    Natural gas is not a solution either. The IEA started warning of a global gas shortage a year ago: Dubai no longer has sufficient natural gas to for its power and desalination plants: They’re burning diesel for power. The UAE is suffering from a natural gas supply shortage of more than one billion cubic feet per day:

    Argentina has a natural gas shortage: Russia’s natural gas exports to Europe are in trouble:

    I could give you at least 500 links about natural gas shortages all over the world. We are going to be competing for LNG with the entire rest of the world.

    Boone Pickens is moving into wind from oil and natural gas production not because oil and natural gas production are emotionally charged, but because it’s getting really hard to replace reserves. I can tell you this with authority. The reserves are just not out there for anyone at any kind of realistic price for real-world uses. Exxon, Conoco, Shell and BP are having exactly the same problem and they say so in their quarterly and annual reports.

    There is actually not that much of a dearth of reliable information on oil reserves and production. We have enough information to make some pretty good estimates of world reserves and maximum flow rates. The problem is that nobody wants to believe these estimates. Independent oil companies established all of the oil fields in the Middle East, and explored every inch of those countries, including the Empty Quarter. (Saudi Arabia recently invited IOC’s into the country to look for natural gas in supposedly lesser-explored places–nobody found anything new.) IOCs have been involved in recent years in Russian production. Petroleum engineers meet regularly (SPE conferences) and put out publicly available papers on their production challenges. U.S. oil service companies are involved in servicing wells all over the world. We can literally count the number of wells in fields all over the world: We can’t get in and monitor everyone’s exact production every month, but we know a lot about reserves, a lot about the technology being used in various fields, a lot about how much is being shipped (because we can monitor tankers), and a lot about how much inventory we’ve got.

    People have been calling for better information for years. If you can get everyone to cooperate on that, it would be great. But you don’t need perfect information to get a pretty good idea of what’s going on. People have been acting successfully on imperfect information for many years, in all kinds of fields of endeavor. Our information is good-enough to know we’re in trouble.

    The Middle East kept oil supply off the market in the 70s, and was able to control the price for two short periods. But because it was so easy to raise production in the rest of the world, production went up quickly and prices soon went into decline. There was no 1300% steady increase in the price over a period of 7 years. The reason we’re seeing a long steady increase in the price like this is because nobody is able to bring on enough supply mo matter how high the price gets.

    I have more to say, but this post is long enough.

    Moe Gamble

  10. Anonymous

    This is Moe Gamble again. One more thing. It is perfectly rational–not cruel, not a punishment for Bush–for Saudi Arabia to withhold some oil from the market for the future. After all, that is exactly what we in the U.S. are doing with the continental shelf and ANWR.

    When you have a resource in decline, you want to produce it at a rate that gives you the maximum possible price for the life of the resource. And you want to run out at exactly the time when the price will have gotten so high that everyone has moved on to something else.

    And it’s good for oil users for the product to be produced and priced that way. That is what gets us through the transition most efficiently. Otherwise, what do we have–we burn up all the resource quickly, for cheap, and then we’re left with nothing at any price, and no alternative. That would be hopelessly stupid.

    Moe Gamble

  11. Anonymous

    One more thing still regarding the oil execs’ testimony. On the report I saw, an expert explained to the reporter what the oil execs meant by a proper price of $30 to $90. He explained, correctly, that they were talking about the price of producing oil. Older, “heritage” fields can be produced at roughly $30 a barrel, but to bring on some deepwater project in the Gulf of Mexico costs (at least) $90 a barrel. Historically, commodity prices have always been cost + a small profit, and when they moved higher than cost + profit, they soon moved back as new production came online (as in the 70s). The reason they’re not at cost + profit right now is because the industry hasn’t been able to bring on enough supply for demand.

    The problem with bringing on supply is that new energy projects are extremely difficult and expensive to bring on. You have the reserves, but they’re more expensive to get than they’re worth, even at current prices.

    I posted yesterday that Matt Simmons, the premier oil investment banker, has said that oil execs are misleading the public about energy supply problems out of a desire to maintain share prices. Their compensation depends on share prices, and who is going to pay for expensive executive compensation and all the IOC’s other expensive overhead when all shareholders can really expect is production of existing reserves? Share prices depend on being able to replace reserves. I think oil execs realize that they’ll make more money propping up share prices than they will telling the truth, even if it costs them some windfall profits taxes.

    Moe Gamble

  12. bobo7874

    anon 10:54am says: I think an appropriate inquiry would be to ask what are the social and economic consequences of the zero sums games in which Pickens is now engaged. Do they perfom a service for the society and the economy? Do they draw talent away from productive endeavors? Are they destructive?

    If you want us to embark on endeavors outside financial services, you’ll have to pay us. Life is funny that way. It is quite amusing to hear corporate executives in the US and Japan complain about a shortage of engineers, when the problem is they refuse to pay people enough to do the work (so they see talented people go into financial services, law, or other things). Or to hear millionaire politicians complain about a shortage of MDs or K-12 teachers in inner city or rural areas (because people do things that pay better).

  13. Anonymous

    ☺☺”But you don’t need perfect information to get a pretty good idea of what’s going on. People have been acting successfully on imperfect information for many years, in all kinds of fields of endeavor.”–Moe Gamble, May 22, 2008 12:56 PM

    7. The power of arriving at a wise decision or conclusion on the basis of indications and probabilities when the facts are not clearly ascertained; as to use your best judgment; discretion; discernment; as, a man of sound judgment.”–Webster’s Third New International Dictionary

    Even though it is becoming evident that the peak oil advocates showed “good judgment” in assessing the oil reserve and production situation, they nevertheless showed “bad judgment,” and in so doing diminished their credibility, by trying to pass their peak oil judgments off as hard facts.

    Western Culture embraces objectivism almost with religious fervor. Daniel Yankelovich explains:

    “The assumption that factual information is real knowledge whereas judment is not, is rooted in a philosophical doctrine that can be regarded as the ‘official’ epistemology of the Culture of Technical Control. It is a doctrine that philosopher Richard Bernstein calls objectivism. Objectivism, says Bernstein, is the belief that ‘in the final analysis there is a realm of basic uninterpreted hard facts that serve as the foundation for all empirical knowledge. The proper apprehension of this factual core is the only genuine mode of knowing. The realm of ‘hard facts’ exclusdes values and norms and opinions and judgments because these express subjective preferences that cannot be scientifically verified in the way that factual assertions can. Facts represent those aspects of reality that can be ascertained through objective methods whereas judgment is rooted in the emotions and values that are the hallmarks of subjectivity.

    “From an objectivist point of view, any discipline tht seeks knowledge about the world must guard against the danger of passing off mere judgments as if they were facts…

    “The quest for knowledge enjoys enormous prestige in our society and scientific technical-factual information has hegemony over other modes of seeking knowledge.”

    Moe Gamble, I certainly can understand your frustration when you bemoan the fact that the “problem is that nobody wants to believe these estimates…”

    But I think it is important to understand the philisophical tradition in which the peak oil skeptics have been schooled as well as the manner in which the Michael Lynchs of the world exploit that in order to discredit the peak oil advocates.

    As Yankelovich concludes, it takes significant life experience to abandon “objectivism with its imperialist and arrogant claim to be the only valid form of knowing.”

  14. Yves Smith


    Per a links provided, the Iraqis have remarkably few wells and claim considerable new reserves, allegedly confirmed by international companies (remember, they are now negotiating deals).

    I am pretty skeptical, but if a consortium’s deal implicitly confirms more reserves. that is noteworthy.

  15. Yves Smith

    Anon of 3:21 PM,

    I think you are missing my point. I am not denying that we will run out of oil. We have to, It’s a finite resource. What I question is the notion that the recent price runup is justified entirely by fundamentals. The flow of money into commodities index funds, which are long-only (there are only a few short ETF short funds, and their size pales compared to institutional money) has not only been large, but it has increased substantially with each passing year. And more and more trading is being done OTC .

    Moreover, the world is being forced to deleverage. But commodities trade on exchanges. You get tons of leverage not from a bank but from any exchange via the use of margin. There is evidence that hedge funds have moved into commodities (I personally know of ones that have).

    How much is speculation and how much is fundamental? Who knows? But for anyone to assert they know what the correct price is given the considerable uncertainties on the information that ought to be easiest to get, current demand and supply, is misleading.

    Look at the divergence between the oil industry executives’ statements and the price. This is what these guys do all day. They have a tremendous web of information and contacts. I could see them being wrong by maybe 20%. But prices 50% over their top estimates? That is attention getting.

    Similarly, I have three oil industry types (brokers and analysts) that rather than writing in comments per Moe, have been sending me research and new links that I simply have not had the time to go through and compile. They have provided ample support for the thesis that speculative factors are influencing the price. Some of it is pretty technical, and I have not had the time to write it up and do it justice.

    Finally, I am not opposed to judgement; it’s what I get paid to do. But I am clear with clients that that is the nature of the exercise, and I tell them where I think the conclusions are quite solid and where there was more interpretation involved. I am bothered as a professional when information is presented as factual when it is actually a judgment with some factual underpinnings. That’s misleading.

    I’ll give a personal example from another field that will hopefully illustrate the point. I had a knee injury many years ago that didn’t get better after the usual 10 days of being nice to it. The orthopedist ordered an MRI.

    Ironically, I got a lucky break via the orhopod’s bad bedside manner. He threw the MRI report at me and said, “So what do you think this means?” 5 paragraphs, one of which is the diagnosis, which said, “possible tear of the medial meniscus or possible false positive”.

    Tear of meniscus means you need an operation, but I said to the doctor, “This says it might be a false positive.” The doctor argued hard for operating: “Oh, they all say possible false positive to cover their asses. I’ll go in and have a look. It’s no big deal.”

    Had the doctor not thrown the MRI report at me, it never would have occurred to me to get a second radiological opiinion. By happenstance, a good friend of mine was married to a radiologist. I got him on the phone. He had me read the report. He asked who wrote it. He then said, ” I know him, he wouldn’t write possible false positive unless he had real doubts. Send me the films.”

    The entire radiological department at a major teaching hospital looked at the films. The radiologist friend called back. “Your knee looks perfectly normal.”

    And indeed, while my knee is not 100%, none of the symptoms are consistent with a meniscus tear and no one since has suggested an operation.

    That is one of many reasons why I think it is important that people be candid about the uncertainties in their information and conclusions.

  16. Scott

    Whatever President Bush is doing at this point is essentially marking time as he has a few months left in office. Talk of foreign governments putting a “leash and collar” on the President are absurd. They don’t really care what he says because he is a lame duck at this point.

  17. Yves Smith


    Bush is still the commander in chief, and by all accounts was looking to use what now turns out to be a false claim of Iranians arming the insurgents as a pretext for aggressive action, probably air strikes. And the Iranians have threatened to close the Strait of Hormuz if attacked.

    Putting the country on a war footing is believed to be to McCain’s advantage. Don’t assume a lame duck is powerless.

  18. Anonymous

    Yves Smith said
    “They have provided ample support for the thesis that speculative factors are influencing the price. Some of it is pretty technical, and I have not had the time to write it up and do it justice.”

    Well I wish you would hurry up, because I would like for someone whom I respect to explain to me how that is possible. For the life of me, I don’t understand what the mechanism is.

    To me the role of these traders is more like gamblers betting on the outcome of a sporting event. Afterall, the amount being wagered is far in excess of the amount of actual oil changing hands. The majority are not doing this with the intent of buying or selling any physical oil. So here’s the deal: One guy believes that on July 1 the price of oil will be above $130 per barrel and another guy thinks it will be below. So they make a bet, if the price is higher than $130 one pays the other the overage and if it is below $130 the other pays the one the underage. But what does all this action have to do with the people who are actually buying and selling oil? It would be tantamount to saying that the wagers placed on the outcome of a football game influence the outcome of that game. Sure, some enthusiastic alumni might get oversold on their team and run up the point spread much higher than the abilities of their team merit, but come game day does that make their team play any better? Won’t they lose their money just the same, regardless of their optimism?

    And for every dollar bet that oil will be over $130 per barrel, doesn’t there have to be a dollar wagerd that it will be below?

  19. Yves Smith

    Anon of 8:32 PM,

    This isn’t as air tight as I’d like (there are better explanations of how futures trading is distorting price formation in the cash markets) but for one-stop shopping, it isn’t bad:

    There are also reports of traditional sellers and hedgers leaving the futures markets due to what they regard as price distortion.

  20. Yves Smith


    Can you please provide some links that support your contention that Iraq’s oil fields were damaged during the Hussein years? I poked around on Google and The Oil Drum, I found plenty of references to oil-related infrastructure being damaged or in desperate need of reinvestment, but not the oil fields themselves.

    This article does point to damage to Iraqi oil fields, but not by Hussein, but due to KBR management of water treatment plant repair projects and oil being injected back into the reservoirs post the US occupation.

    Similarly, a Brookings paper, “Iraq’s Oil Sector One Year After Liberation.” provides a long list of obstacles to getting adequate production out of Iraq’s oilfields. Damage to the fields themselves is not one of them.

    Moreover, this article mentions in passing three pil fields, Majnoun field, the Gharb al-Qurna field, and Nahr bin Omar field, that have production capaticity of 2 million b/d that have been explored by not developed. They by definition cannot have been damaged. Note the date of this article is prior to the Iraqi claim of greater reserves.

  21. Juan

    anon of 8:32,

    Your comment: “It would be tantamount to saying that the wagers placed on the outcome of a football game influence the outcome of that game.”

    Has more to do with what has developed than you may imagine. In tremendously short form, the modern oil market structure is one of a few benchmark crude oils to which others are referenced.* As it’s turned out, production decline in these benchmarks = thin markets and deterioration in reliability of price determination. Still moreso since the composition of world oil production has been slowly tilting away from light sweet, which two of the benchmarks are.

    Here I’ll turn it over to an excerpt from a March 2007 Oxford Institute for Energy Studies paper:

    The declining liquidity of the physical base of the reference crude oil and the narrowness of the spot market have caused many oil-exporting and oil-consuming countries to look for an alternative market to derive the price of the reference crude. The alternative was found in the futures market. When formula pricing was first used in the mid-1980s, the WTI and Brent futures contracts were in their infancy. Since then, the futures market has grown to become not only a market that allows producers and refiners to hedge their risks and speculators to take positions, but is also at the heart of the current oil-pricing regime.
    (Oxford Institute for Energy Studies, WPM 31 March 2007 )

    Which is not to say that physical supply, storage, delivery has been completely displaced but that direction of causality tends to run more from what are financial markets to the physical. Some papers, though, have gone so far as to argue that price formation became unidirectional which, in my opinion, is extreme.

    Rather than the ‘for every sale there is a purchase’ tautology, perhaps better to consider buying and selling pressures to be an asymmetric process.

    * formula pricing.

  22. tom a taxpayer

    Moe – Thank you for the oil education. May I say you are a fountain, yea, a gusher of high-octane insights.

  23. Tom Lindmark

    I liked your follow up comments more than I liked the post. Here are a couple observations:
    1. I spent about 10 years in the oil business as a lender for a bank that had a major presence in the business. The one thing I learned above all others is that this business is one of insiders and the majors and other players know the realities, while the govies like the IEA are manipulated. You have to dig deep for the truth in the business.
    2. Peak oil scares are as old as the hills. The U.S. government predicted peak oil 10 years after the Pennsylvania discoveries in the 1880’s.
    3. The Saudi’s are inherently a conservative monarchy. They do not want a nuclear armed Iraq and will throw in with the U.S. to do anything to prevent it. The Bush debacle was poor planning on the part of his staff and a natural stance for the Saudis to take while they wait to test the winds of the next administration.
    4. From a present value standpoint, you don’t leave oil in the ground you pump it as fast as you can to maximize return.

  24. Yves Smith


    Thanks for the citation. It’s enormously helpful.

    We’ve seen that pattern develop in other markets. A derivative market is created. It gets increasing liquidity because it’s more convenient to trade than the underlying. Then it assumes a life of its own and starts to distort prices in the underlying (CDS versus cash bonds is Exhibit 1).

    Tom Lindmark,

    Thanks for your comments. I’m not surprised to hear that there is a big gap between what the true insiders know versus those at a remove, including government sources. There is a huge difference in the ability to get good information in banking and financial markets versus those that involve physical goods that isn’t sufficiently appreciated.

    One point (and we may not differ here) is that yes, pumping oil faster leads to a higher NPV, but not everyone is a NPV maximizer. Big Oil presumably is, but OPEC and non-OPEC significant producers have political issues to consider that may lead them to non-NPV maximizing strategies.

    I’m also not certain how far the Saudis would go in supporting aggressive moves against Iran. The threat of them having a bomb is some years away (I forget where I read it, but I think 2013 is the earliest date, and that’s very ambitious). There are a lot of old Soviet nuclear missiles unaccounted for. I’m surprised none has turned up in the Middle East.

    Another war (and sure to be botched due to our lack of boots on the ground) against a Muslim country would be hugely destabilizing. I think the Saudis recognize the danger, but whether the Bushies have the sense to play a smart game of brinksmanship is very much in doubt.

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