Chris Cook: The Ghost of Enron Past Explains Oil Market Manipulation

By Chris Cook, former compliance and market supervision director of the International Petroleum Exchange

I outlined in a recent post my view that the oil market price has been inflated twice by passive (inflation hedgers) investors, albeit with short term speculative spikes from active (speculators) investors: once from 2005 to June 2008; and again from early 2009 to date. In attempting to ‘hedge inflation’ passive investors perversely ended up actually causing it, and allowed oil producers to manipulate and support the oil market price with fund money to the detriment of oil consumers.

But there has always been a missing link – precisely how has this manipulation been achieved?

A comment thread at the FT Alphaville blog a month ago shed light on the esoteric subject of collateralised commodity borrowing by BP, who with Goldman Sachs were the heroes of a January post.

While Izabella Kaminska’s Alphaville post was as interesting as usual, the real nugget on this occasion lay in the extremely well informed discussion which followed.

The protagonists were firstly, Patrick McGavock – a very clued up former banker whose blog rejoices in the name of the “Complete Banker”. The second commenter – whose nom de plume is “Free Again” – not only had technical mastery of a subject that has me reaching for an icepack for my head, but also displayed a comprehensive knowledge of Enron’s modus operandi.

Volumetric Production Payment (VPP) versus Prepay

The very name is enough to make the eyes glaze over, but in essence a VPP is a loan secured against a flow of production which remains in the ownership of the producer.

Prepay, on the other hand, is a forward sale of a commodity where the ownership rights to production pass to the financier.

The Alphaville dialogue is instructive as to the difference.

Free Again (to McGavock): Enron did two types of related transactions: Sales of Volumetric Production Payments (described below), which are being done today in much the same way, and Prepay transactions, which were round-trip trades (three parties involved) meant to create the appearance of Funds Flow From Operations, when it was actually funds flow from financing.

McGavock (to Free Again): Absolutely right. Although VPPs and prepays are essentially the same thing except for the ownership of mineral rights.

A day later came a response which I did not see until recently (my bold).

Free Again (replying to McGavock) Yes, I think we agree, but the most interesting distinction, and what may be relevant to the BP discussion, is the reason a company would choose a particular structure.

A VPP is a form of (acceptable) off-balance sheet financing. In most cases, reserve risk is transferred to the buyer (though the seller usually retains the operating risk).

A Prepay transaction is a little more insidious. It is a form of financing, but if structured as a commodity trade, can be made to look as if it is cash flow from operations.

This is particularly important to companies that use mark-to-market accounting, as there usually exists a huge gap between earnings and cash recognition. In order to maintain credit metrics when using MTM, the companies will structure misleading FFFO transactions, as a key rating agencies focus is FFFO/Interest Expense.


Prepay does not move the oil, which stays where it is in the ground or in tank. What prepay does is to create an ownership claim over oil which may be sold either temporarily (Enron-style) as an ‘oil loan’ to investors, or to refiners, who take delivery in due course of oil for which they have fixed the price by ‘paying forward’.

Investors prepay for physical oil which goes nowhere and stays in the custody of the producer, who has an agreement to buy the oil back from the investor, typically a month later in a forward contract that looks just like a futures contract. The outcome is that – facilitated by an investment bank intermediary – the producer lends oil to the investor, and the investor lends dollars to the producer.

The temporary ownership rights created and sold to investors via intermediaries such as Goldman Sachs essentially enable a producer to act as a private oil bank ‘printing oil’.

How does printing oil affect the market? First we’ll look at the printing process as dollars flow in to the market, and the Dark Inventory which it funds. Secondly, we’ll look at what happens when funds flow out and this paper oil is redeemed by the issuer.

Printing Oil

In early 2009, risk averse money poured into the commodity markets, and a large portion of it flowed in to passive funds such as Index Funds and Exchange Traded Funds investing wholly or partly in oil. Units in these funds are created, and some unit issuers then entered, via investment banks, into prepay agreements with producers.

Producers obtain dollars interest-free in exchange for transferring title to oil inventory to the investment bank, and what this means is that the producers do not need to sell as much physical oil to refiners, who must therefore raise their bid price to secure supply from producers, and this is why the price rose rapidly in early 2009 even though the market was not under-supplied.

The second effect was that the demand for forward contracts for the producer to buy the oil back again drove the forward price higher, and this created what is defined as a ‘contango’ market. In fact, it was so pronounced it was called a ‘super-contango’.

What happened as a result was that traders began to buy oil, and to sell it forward, since the contango difference in price enabled them to pay to insure and finance the oil; to lease tank storage, and even to charter the fleets of tankers which sat as floating storage off the UK coast through spring and summer 2009.

Passive investors, for their part, lose money in such a contango market, because the oil lease contracts are rolled over from month to month at a loss to them, since they would (say) sell June delivery oil contracts which they are in no position to perform, and have to buy July delivery oil contracts at a higher price.

It is this continuing loss to long term fund investors which funds the ‘contango trade’ of the arbitrageur traders who charter the tankers.

“De-Pay” – Fund liquidation

When risk-averse investors ask for their money back, what happens is that the oil leasing agreement comes to an end, the fund units are liquidated, and the dollars are returned to the fund investors.

So when the oil is repurchased by the producer from the investment bank, the position is no longer ‘rolled over’ and no further contract purchase is entered into in the next delivery month. This depresses the forward contract price relative to today’s price, a state of affairs which is known as a ‘backwardation’.

Moreover, the producer now has fewer dollars and more oil, and is exposed to a fall in the price of the inventory which he now owns once again. Of course, the producer could sell to refiners on a prepay basis, which a refiner would be happy to do at a suitably discounted price. Or alternatively, the producer could sell futures contracts to speculators who for some reason expect that prices will increase.

There have been two outflows of passive investment from the market, firstly in September 2011 when sentiment turned in favour of T-Bills as safe haven. The second was in December 2011, following the MF Global problem, which demonstrated that unit issuers come with a counter-party risk, since though the issuer may not be taking market risk themselves, they may nevertheless be playing games with the asset.

In each case we have seen the physical market go into backwardation, and in my view the record deliveries by the Saudis may be explained by an urgent desire to sell inventory returned to their ownership at high prices before the collapse they know is on the way.

But the exit of passive investors from the market has yet to have the effect it did in late 2008 when the price collapsed to $35/barrel from the high of $147/barrel. The reason is that the current noise and rhetoric re Iran has firstly attracted refiners, who have purchased oil forward, and possibly even prepaid, because they fear prices will rise.

This forced up the physical price of oil in the current ‘spike’ which will further kill off demand, while speculators have poured into the market to buy futures contracts, which producers have been only too happy to sell, in order to lock in high prices and insure against a collapse.

It is only a matter of time before this spike ends as the market turns, and at this point there is literally nothing holding the market up.


Private inventories are at record lows, and this is mistakenly taken by commentators as a sign of demand. The reality is that traders will only store oil if they are able to afford to store it and sell it at a profit. The problem is firstly that many traders are being starved of credit by the banks, which will make it difficult for them to act as a ‘buffer’ through buying surplus oil

Secondly, the market is in fact in backwardation, which means that holding oil costs traders money, and if producers have cash flow problems, they too have an incentive to sell at a discount.

Refiners’ Demand for Oil

No investment bank with oil funds to sell you will ever come up with any reason why oil prices will ever go down, but their faulty economic logic can reach laughable proportions.

For instance, falling demand for products in the US and EU has seen massive closures of refineries, to the extent that some 2m barrels per day of US East Coast refining capacity has closed. This is of course good for the refineries left standing since it can create local shortages and opportunities for high margins and profits.

A very well respected investment bank analyst recently suggested in the FT that the resulting higher US gasoline prices would increase the demand for crude oil and hence – surprise, surprise – was bullish for oil prices. What he was ignoring was that all of the crude oil which used to go to the refineries which had shut will be looking for another home.

By way of example, Hovensa joint venture refinery at St. Croix in the US Virgin Island, which used to receive 350,000 barrels per day from the Venezuelan state oil company PDVSA which was one of the partners, has now closed. It is hardly likely that the PDVSA will now increase the price of their heavy crude oil when offering it to (say) the Chinese. The point being that oil refiners have been caught between the rock of a manipulated and inflated crude oil price and the hard place of cash-strapped consumers.

So in a nutshell, demand in the West is dropping like a stone. I do not believe for a minute that demand for consumption in the East will make up the slack. In my view much of that demand (if not wishful thinking and hand waving by analysts) is financial, being the building of strategic reserves and refinery stocks as a physical hedge.

It will be seen that the effect of Prepay on the oil market has been to create a parallel financial market in ‘paper oil’ which means that most participants are completely misled as to the true state of the market.

In summary, as I previously outlined, my analysis is that the oil market stands like an Oil-e-Coyote – running hard beyond the edge of a cliff, but not having yet looked down………

Window Dressing Enron

For those with short memories, Enron fraudulently concealed their financial position from investors and the rest of the world through a variety of sophisticated techniques. One of the most egregious was the use of prepay transactions with investment banks via a special purpose vehicle in a tripartite agreement which essentially misrepresented what was in reality a loan as a forward commodity purchase and sale.

In other words, Enron – facilitated by investment banks – was window dressing its balance sheet and fraudulently misleading investors and counter-parties alike.

Window Dressing the Oil Market

It appears to be the case that BP and Goldman Sachs have for many years been directly or indirectly enhancing BP’s balance sheet and cash flow through enabling BP to lend oil to passive inflation hedger investors and in return obtain interest free dollar funding and literally monetising oil.

Possible accounting legerdemain by BP is one thing, but the greater problem by far has been the effect of passive investors entering the market en masse via this route. As I explained, these transactions have eroded the foundations of the oil market, which have become entirely financialised and have lost touch with the reality of physical production, consumption and storage.

The fact that oil market inventory has been prepaid in this way creates a two tier physical market, where the tiny minority who have knowledge of the resulting ‘Dark Inventory’ of oil in temporary investor ownership have a massive advantage over the majority who do not and who enter into derivative contracts upon a completely false assumption as to physical supply and demand.

Whether or not this is illegal, and if so, in what country, is an interesting question. But as a former head of regulation of a global energy exchange I have no hesitation in saying that the result has been a complete perversion of the oil market, which has become, for maybe as long as ten years, in every sense a ‘False Market’.

The sheer scale of this oil market manipulation, and the staggering sums involved, make Yasuo Hamanaka’s ten year $ multi billion copper market manipulation for Sumitomo look like a car boot sale.

If my analysis of the oil market is correct, many if not all prepay transactions have been terminated in recent months as passive investors have pulled out and the market has become free again of Dark Inventory. However the oil price has been kept inflated by a massive wave of speculative buying attracted by rhetoric and noise about Iran.

With the market’s underpinnings eaten away by fulfilment of these pre-paid contracts (which will temporarily depress physical demand), a collapse in the oil price is inevitable once speculators exit. After this, perhaps steps may then be taken by producers and consumers collectively to free the oil market from the pernicious control of middlemen, and to completely reconfigure the market through a new settlement.

I’m not holding my breath, but I do live in hope.

Author’s Notes: Peak Oil

Before once again being assailed by Peak Oil proponents as a ‘denialist’, I am completely convinced of the proposition that crude oil is finite and that there is a maximum level of crude oil production, which we have either reached or approached.

The problem is that current markets are operated and manipulated by and on behalf of intermediaries with a vested interest in volatility and extraction of profit at the expense of producers and consumers.

The requirement is for a new and equitable dis-intermediated market architecture where carbon fuel prices are maintained at the level where demand destruction sets in, but where part of the surplus is reinvested in renewable energy and energy savings with a view to reducing future demand for carbon fuels)

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  1. mmckinl

    I read a lot of conjecture but I see no proof … Even if I concede manipulation where is the rubric to quantify it?

    1. Chris Cook


      It’s because such transactions are entirely secret there is no proof. The truth as to what they were doing didn’t come out in the case of Enron until after the fact.

      Hamanaka got away with the Sumitomo copper manipulation for five years after David Threlkeld blew the whistle because there was no ‘proof’ and the regulators either did not know their job or deliberately looked the other way.

      If you, or any other reader, can explain what is and has been going on in the oil market better, then please do so, and tell me where I am in error.

      So far, no one has picked any holes in my analysis other than to say BP and Goldman are not providing proof.

      1. Smellslikechapter11

        Excellent post
        Have a small question re terminology; what is reserve risk?

        1. Chris Cook

          I think he is referring to market price risk in relation toil reserves.

          ie the risk that the oil market price will fall.

      2. mmckinl

        Cook ~ “If you, or any other reader, can explain what is and has been going on in the oil market better, then please do so, and tell me where I am in error.”

        It could be that supply is shrinking along with nerves over Iran. We know that conventional crude is on a plateau and that there are disruptions in Iran, Nigeria, Yemen, Syria to name a few.

        It could be the long awaited onset of peak oil. The Pentagon said as much in 2010…

        “”The US military has warned that surplus oil production capacity could disappear within two years and there could be serious shortages by 2015 with a significant economic and political impact.

        The energy crisis outlined in a Joint Operating Environment report from the US Joint Forces Command, comes as the price of petrol in Britain reaches record levels and the cost of crude is predicted to soon top $100 a barrel.

        “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.””

        Yep, the Pentagon predicted this 2 years ago …

        “”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.””

        Tverberg is an editor at “The Oil Drum” … as you know

        1. Philip Pilkington

          That’s as speculative as Chris’ argument and it doesn’t explain one VERY important fact: this ain’t just the oil market. All commodities have gone crazy.

          I have very little time for Peak Oil arguments — something Chris entertains — but even if you buy the internet’s latest doomsday cult, this is clearly a financial issues that is not based on fundamentals.

          Unless of course, we have Peak Copper, Peak Gold and Peak Diammonium Phosphate all at the exact same time? Yeah, right.

          1. mmckinl

            “”Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever “”


            What you fail to realize is that all other commodities are directly related to the price of oil … Mineral commodities are now greatly diminished in their concentrations and only cheap oil has allowed their production to be profitable …

            As far as Peak Oil the report was already submitted to Congress in 2005 : The Hirsch Report

            “”The peaking of world oil production presents the U.S. and the world with an unprecedented risk management problem. As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented. Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking.”””


            According to the IEA (International Energy Agency) conventional oil has ALREADY PEAKED!

            “”IEA acknowledges peak oil””


            Dear Mr Pilkington,

            As you do not believe in Peak Oil then you know more than the Pentagon, The Hirsch Report to Congress commissioned by The Energy Department in 2005 and the IEA put together.

            Nice work !!!

          2. Philip Pilkington

            “What you fail to realize is that all other commodities are directly related to the price of oil … Mineral commodities are now greatly diminished in their concentrations and only cheap oil has allowed their production to be profitable…”

            Specious, at best. There’s no way an increase in the price of oil drove the price of Diammonium Phosphate up 400% in 2008 and 200% today. A simple input-output model would show that.

            “As you do not believe in Peak Oil then you know more than the Pentagon…”

            Or maybe I disagree with SOME PEOPLE IN THE PENTAGON, not the Pentagon itself. And has it ever occurred that these peoples’ ideas might be used by some within the administration to avoid looking into price manipulation? I doubt it. Because Peak Oil is a bloody religion for most of its adherents.

          3. Philip Pilkington

            “There’s no way an increase in the price of oil drove the price of Diammonium Phosphate up 400% in 2008 and 200% today. A simple input-output model would show that.”

            Just to note that for your argument to hold, Diammonium Phosphate production would have to require around 66% inputs of oil for production for the price to rise to current levels.

            Think about it. Let’s say that a pound of DP costs $10 to produce. Oil prices have risen by about threefold. That would mean that for every pound of DP produced there would have to be roughly $6.60 oil inputs.

            I don’t know much about the production of DP. But I can tell you that there is no way that 66% of the cost of production is oil inputs.

          4. Philip Pilkington

            Just did the calculation properly. For the price of DP to double due to the price of oil rising inputs would have to run as follows:

            Oil = 55.4% of total production costs

            EVERYTHING else = 44.6% or total production costs.

            Now THAT would be an oil heavy industry!!! And in 2008? Well, we could only say that they DOUBLED their need for oil. Why? Who cares? Peak Oil isn’t about facts and reasoning, it’s an internet Death Cult.

            P.S. These sorts of calculations can be applied to all commodities markets to show that the Peak Oil explanation of current price rises is based on faith and not reason.

          5. mmckinl

            All I can say is that peak oil production occurred for the US in about 1970. The North Sea, Cantarell, Ghawar, North Slope and other oil fields are all in decline. We are now using 5 barrels of oil for every barrel we find …

            Potash was just another speculative bubble. That doesn’t mean there was manipulation of the market … it could just mean that there were many deluded investors … Markets are going to do strange things as oil peaks because oil is the basis of production for every commodity …

          6. Tiercelet

            There’s a very good reason for diammonium phosphate prices to be sensitive to oil prices; diammonium phosphate requires major inputs of ammonia, which is substantially produced by the Haber Process[1] which is seriously carbon-intensive.

            I haven’t been able to turn up a graph of ammonia prices for the same time period, because I do have to pretend to do my day job, but I wouldn’t be at all surprised if ammonia prices trended with oil prices. That’s probably not enough to account for the diammonium phosphate price changes by itself, but it’s probably a major contributor.


          7. Philip Pilkington

            I was being slightly facetious with this argument. (I also got my maths wrong — should be 50% oil inputs to account for the price rise and you financial wizards should have caught me on that one ;)). The point is that ALL commodities are trending up. The amount of oil inputs that would be needed from this are outlandish. DP was just an off-cuff example that I thought would be funny because its such an obscure chemical.

            There’s no way these rises are being driven by oil prices. Peak Oil is a fantasy. Probably a fantasy in the long-run, absolutely definitely a fantasy in the short-term. What’s appealing about it is that it is a simple narrative that people can attribute all sorts of things to. But in truth, like any simple all-encompassing narrative, it explains nothing. Absolutely nothing.

          8. kris

            Mr. Pilkington
            How about Peak Water or Peak Air?
            Oh hold, since you’re in Ireland, how about Peak Guinness?

          9. MyLessThanPrimeBeef

            Kris, I am not trying to shock or awe you, but primates reached Peak Brain with the Neanderthal Man (or Woman, sorry).

          10. votersway

            Almost NO oil is used in the production of fertilizers, Natural Gas is used. And it’s dirt cheap right now, the prices have been falling during the past few years.

            Don’t confuse energy with oil. Energy is a solved problem. Oil? Who cares.

            The commodity prices are manipulated, and so is the dollar value – the end effect is what you see. The Iran situation is a factor only in oil prices, Peak Oil isn’t yet.

            In any case, energy starvation is a policy, it’s not a natural phenomenon. Think about that.

          11. kris

            I’m shocked. As a 39 year young male, I don’t think I am at Peak Male yet.

          12. Fiver

            You are aware that “Peak Oil” has ALWAYS meant “Peak CHEAP Oil” and that Matthew Simmons was particularly concerned re the sustainability of the mammoth Saudi operations are you not? There is very little public information as to how much permanent damage was done to the supergiant Saudi fields through enormous over-production rates through their first decades, though we know that later they would agree to production run-ups only after intense US pressure was brought to bear to keep a lid on prices. Simmons (now dead) believed the damage to be substantial and the reserves not replaceable, i.e., there are no more big finds to be had in Saudi Arabia, and the small ones are negligible in relative terms. In fact, Simmons told the Cheney Task Force on Energy in early 2001 just that, i.e., the Saudi production numbers, reserves, and field lifetime projections are all highly dubious, the production process now dependent on enormous quantities of water pumped in that then have to be reprocessed to separate oil/other liquids and the water. The ratios of water to oil are just crazy – I’ve long suspected that was 1 prime argument for the US deciding to lockdown Iraq’s oil as first order of business post 9/11.

          13. Ian Ollmann

            Them ammonia in ammonium phosphate is probably made using the Haber process:


            There is a very large energy difference between nitrogen gas and the ammonia that comes out at the end, and that has to be paid for some how. Nitrogen fixation is a big problem for plants too for the same reason, which is why the stuff is needed as a fertilizer. The hydrogen used in the Haber process typically comes from hydrocarbons, natural gas or other hydrocarbon fuels. So, without doing the math, it is at least plausible to me that ammonia containing fertilizer production costs are closely liked to the price of fuel.

        2. Chris Cook

          I have immense respect for Gail, but disagree with her conclusions.

          The UK and EU are having something of a demand ‘shock’ at the moment with record £ and € prices exacerbated by the economic downturn and the current austerity insanity.

          US prices are now reaching the pain threshold as well, and we see the demand for imported oil falling because of that, and the rejuvenation of (high cost) US production.

          Millions of barrels of US and EU refining capacity has been closed, and (despite new refining capacity in the East) this clearly reduces demand for crude oil, and produces temporary squeezes in product supply such as on the US East coast.

          Libyan production coming back on the market will make up for short term glitches elsewhere.

          Finally, Iran can – if they are willing and able to sell at a discount – sell their production to China and India at least, and by doing so will undercut the market further.

          Apart from that I do not see Eastern demand increasing as forecast for two reasons:

          (a) reduced EU and US demand for eastern production of steel, capital equipment, finished goods and so on will reduce both the requirement for energy, and domestic demand;

          (b) I do not see domestic energy subsidies as sustainable, and if they are limited, this will have an effect on demand as well.

          In my view, the market is being completely orchestrated.

          Anyway, we’ll soon see.

          1. mmckinl

            I think the economies are being orchestrated to cover up the peak oil problem. They are using austerity to curtail demand so that shortages don’t appear.

          2. Philip Pilkington

            @ Peak Oil Guy

            THAT is what we call a ‘conspiracy theory’. Peak Oil always leads in this direction. I recommend that the curious tread these icy caves cautiously, if they must tread them at all…

          3. nonclassical

            Morgenson (NY Times) showed July, 2004, Goldman held 13.8% of total world oil “futures” market. Morgan, Lehman, etc, owned 7-8% each. They were selling (and likely “papering”) these futures back and forth to one another, prices rising at each “trade”. Goldman sold off 1/3 of their oil futures, July-August, told other “speculators” they would be buying back in, in blended or biodiesel..but in September, sold off another 1/3— stampeding all
            speculators, who all sold, flooding market, bringing price down, just in time for…November, 2004 bushit re-election…

            manipulated markets, folks…now we know more about “how”..

          4. Birch

            Really, Philip, you’re smart and you do great interviews, but some of your ideas are so devoid of reality I’m embarrassed for you when I read them.

            “Peak Oil is a fantasy.” Wow! Of course, insane market manipulation proves that depleted oil reserves are a conspiracy theory. Couldn’t possibly be that markets are totally manipulated _and_ oil is getting more scarce. We all know that oil is created in the outer core of the Earth and slowly rises toward the surface where it pools up beneath the crust.

            The commodities bubble is a bubble of treasonous proportions. The dogmatic denial of anti-economic growth, where the dis-advantages of production outweigh the benefits, amounts to global class warfare. These ideas are complementary, not exclusive.

        3. Lil'D

          1850 saw “Peak Whale”

          Peak is a natural phenomenon when the resource can be exploited.

          A productive debate can be had over when the curves peak and how prices will be affected, etc. Or over substitutes and at what price points switching becomes profitable.

          but a debate over whether or not peak oil “exists” is pointless

          1. Everythings Jake

            I think it was Herman Melville who first proferred the theory of Peak Whale Oil in his little know tract “TheWhaleDrum.sea”

        4. Damian

          DAP – derivative components are phosphate rock (P) and natural gas (NG) which is ammonia then urea

          the NG in the USA is very low $3 MCF and on long term contract probably less – the P is quarried primarily in florida and the energy again to turn it to phos acid is NG not oil

          in Morrocco quarries and USSR – much the same exists especially in Russia with abundance of cheap NG

          if use of DAP – soybeans / corn / sugar cane – etc production hasnt changed much to compare to 400% / 200% something else is going on not oil related

        5. Damian

          DAP – derivative components are phosphate rock (P) and natural gas (NG) which is converted to ammonia then urea

          the NG in the USA is very low $3 MCF and on long term contract probably less – the P is quarried primarily in florida and the energy again to turn it to phos acid is NG not oil

          in Morrocco quarries and USSR – much the same exists especially in Russia with abundance of cheap NG

          if use of DAP – soybeans / corn / sugar cane – etc production hasnt changed much to compare to 400% / 200% something else is going on not oil related

          1. Kunst

            “I would not tout the Pentagon as the final expert on Peak oil or much else.”

            Is that just a flip comment? The US defense department is the world’s single largest comsumer of oil. They have immense resources to research a topic of vital concern to them. While they may not be the “final” expert, I certainly wouldn’t dismiss them.

      3. sgt_doom

        Outstanding blog post, once again, Mr. Cook, but please allow me to humbly add a cooment to your cogent remarks reprinted below:

        The second effect was that the demand for forward contracts for the producer to buy the oil back again drove the forward price higher,…

        What happened as a result was that traders began to buy oil, and to sell it forward, since the contango difference in price enabled them to pay to insure and finance the oil; to lease tank storage, and even to charter the fleets of tankers which sat as floating storage off the UK coast through spring and summer 2009.

        Additionally, Forward Freight Futures were also bought and sold back and forth repeatedly to drive up the cost of supertanker rentals and leasing as well as bulk carriers, and not does your highly accurate descriptions apply to oil, but also to those refinery-involved chemicals bought and sold on the commodity markets.

        Thanks again, Mr. Cook, for you invaluable insights and expertise on these matters which the rest of us have only the observer’s exposure to.

        And to repeat for the “proofers” out there who dare criticize Mr. Cook:

      4. damie11

        It’s because such transactions are entirely secret there is no proof.

        Typical conspiracy theory reply. Get real

    2. nonclassical

      you’re kidding yourself mmc..

      Gretchen Morgenson showed in NY Times 2004, exactly how this game is played, but NOT the “papering of debt” in the way Yves has noted. Morgenson
      showed Goldman-JP Morgan, other investment banks owned nearly 50% of total world oil futures. She didn’t show this process-which is a little like the barge-tanker processes disclosed during Enron, whereby they never owned the barges,
      except on paper..and shifted ownership for tax-profit paperwork..they never really owned the barges.

      Geisst’s book, “Wall $treet-A History” shows Morgan, other investment bank speculation of similar sort, going back to 1800’s..

      Thanks, Yves…I don’t believe I comprehend it all, but have a much clearer picture than previously…again, it’s speculators speculating=Kevin Phillips’ “Paper debt” orientation, whereby he shows “financial sector” controlled 19% of U.S. economics 2001, but today, 41%. Paperizing of dent is also noted by Michael Hudson’s, “Debt Deflation In America”, posted here by Yves some months ago..

      1. sgt_doom

        Many thanks, nonclassical, for mentioning Prof. Geisst’s book, I had completely forgotten that!

  2. Gerald Muller

    As someone once famously said, “Predictions are difficult, especially when it concerns the future”.
    In this case, the near future will tell whether Chris Cook is right or not.
    One item that could be quantified though, is the amount of demand destroyed in the West, either by the crisis or by using more efficient cars compared to the amount of new demand from Asia and particularly China. I would rather have the actual figures than your “I do not believe for a minute that…”

    1. Chris Cook

      One of the problems with demand is knowing how much is actually being consumed, as opposed to stored in public strategic reserves (which China is building like crazy) or private stocks eg refineries, where games can be played with financing to circumvent credit restrictions.

      This problem – particularly Chinese financing games – is far worse in the copper market, for instance.

          1. Fiver

            170 million barrels TOTAL is dick. .2% of global production is dick. This cannot be considered a factor at all.

          2. robert157

            If the Chinese are building up their strategic reserves when prices are at 120$ for Brent, then you can put the Chinese also on the list of those who “speculate” that the price is likely to go up from here.

  3. toofunny

    You see no proof because there is none. The “thesis” is specious. What it really is is agi-prop, not a rational argument at all.

    The prices are where they are because of 1) market conditions, and 2) the Lefts anti-energy policies as implemented by the Neo0comunist in the WH.

    NC, being a den of Marxist useful idiots and fellow travelers, of course cannot see or admit the obvious truth.

    They could not run a hardware store, yet they tell us how “Big Oil” works. Too Funny.

    1. Chris Cook

      If you had the slightest idea about how the oil market works then you would produce a counter-argument.

      But you don’t have a clue.

    2. Philip Pilkington

      Hahahaha! Comment of the year. Yves, give this Nobel winner another prize.

      Yes, ‘toofunny’ it is NC’s argument that is blinded by ideology.

      Now gaze deep into the face and feel the hate:

      Feeling all riled up? Good. Now, vote Republican.

      Bloody sheep…

  4. bmeisen

    thoroughly enjoyed both this and the FT link.

    I think this is further support for Yves in her flare-up with Krugman, who has argued along the Peak lines to explain the 08 spike.

  5. Kiste

    If you hand banksters trillions of dollars/euros of almost free money, they will use a good share of it to gamble the commodity markets.

    1. Chris Cook

      But that is precisely what is NOT happening.

      The banks may have liquidity, but they no longer have the capital to gamble.

      QE money flooded into equities and commodity markets because banks sold investments by the gazillion not to people who wanted to gamble, but to people who wanted to do the precise opposite, and to simply maintain the value of their dollars which they saw being devalued.

      ie their aim was to avoid a loss, and not to gamble in search of a profit.

      The banks made a lot of money at minimal risk by selling these funds to these passive investors and by taking advantage of superior knowledge and methods such as High Frequency Trading to add a few more zeroes to the roulette wheel for the House.

      There is currently a wave of genuine speculation in the market which has been attracted by all the Iranian rhetoric and noise (who benefits from high prices?) and this is enabling producers in the know to hedge themselves at high prices against the fall they know is coming.

      By way of example the Qataris hedged themselves last November against a fall in prices as low as $45/barrel in 2012.

      1. Ransome

        This was a great read. The moneychangers, moneyderivative creators, speculators, and commissioned confidence men all live under one roof They share the same values and the same money, including QExx.

      2. Susan the other

        Did anyone else hear the report (I think BBC) that just as Ahmedinejad (sp?) is stepping down in favor of the Ayatolla, Iran has announced the find of a huge new oil field? This was not picked up even by RT.

      3. sgt_doom

        Again, a thousand thanks, Mr. Cook fore dispelling that oft-repeated meme of disinformation (although I’m sure the commenter has heard it a zillion times and probably accepts it for the truth, as do many others who hear, but reflexively never analyze.

      4. Fiver

        I find this account perplexing on several levels. I just can’t fathom the insistence on an accountability/legitimacy of policy firewall between the unprecedented “easing” of the Fed and other CB’s on the one hand and the banks they had all just bailed without so much as a wrist slap and set right back loose to go plunder again on the other. The notion presented in this sentence:

        “The banks may have liquidity, but they no longer have the capital to gamble.”

        is simply not tenable. There’s not a credible business reporter, analyst, or even politician on the planet who hasn’t by now said just the opposite at least once, i.e., that the banks went straight back to their old ways. It was not material that they did so with the world’s biggest pools of the cheapest money ever, hugely expensive high-performance systems in place that could handle this flood with myriad machinations under the “supervision” of regulators and politicians that had just promised to the entire world for all of time that the financial system would be rescued no matter what anyone did to anyone else.

        2) You ask us to believe that Goldman and BP have long colluded. I have no problem whatever believing that. But I’d like to note these 2 companies have had a particularly rough time in the PR department (BoA being another) – one of them (GS) precisely for so blatantly returning to a gambling model making uber-bucks prop-trading among other miracles of money. But you don’t mention JPM, Morgan Stanley, Deutchbanke, Barclays or a number of other Primary Dealers who also are loaded to the gills with various commodities bets.

        Thanks to Sgt. Doom who made a visual reference easy for me by posting this above (note this is Sept 2011, before major ECB/Global CB actions in response to troubles in Europe):

        Note as well that BP’s total possible share of real global production is miniscule, as are the number of contracts outstanding (as indicated in above link – and Goldman’s share of contracts is hardly decisive):

        3) Regulators and Governments could not possibly miss any of this irrespective of any BS they spew for public consumption. That spells POLICY, as in “how to re-capitalize banks as quickly as possible” or “how to appear to pay back TARP as quickly as possible” or “how to transfer oil wealth from the producers who own it to consumers to save developed economies – or at least the next elections – while still making piles of money” or just “how to keep those bonuses flowing” etc. That makes it not a “market” phenomenon, but rather an essentially political/power excercise with the “market” both the object of policy and a tool for implementation of policy. What was QE for if NOT to reflate risk assets and allow banks to report astonishing profits, bonuses and balance sheets? We know they made plenty of bogus paper profit, we know traditional speculative assets (that would be stocks, currencies AND commodities) delivered spectacular returns, and we know they were broke when they started. Why is it objectively so perfectly reasonable that GS and BP collude, but not the Fed, or Treasury, or CFTC? What do we suppose we’ve been witnessing for the past couple of decades? They are 2 mouths on the same head. When officialdom speaks, what we’re hearing are incoherent US policy goals completely divorced from both the public interest and reality from the one orifice, and the 24/7 streaming of kleptocratic “implementation” protocols to all existing and prospective Elect from the other.

        4) Re Peak Oil: everyone forgets that Simmons’ chief near-term concern was with a sudden deterioration of Saudi fields due to severe overproduction throughout their early lives, and for several sustained periods in more recent decades – the technical difficulties multiply almost as fast was the volumes of water required to produce the now mostly-water oil. Maybe he knows nothing (though with a $50 billion business, he certainly knows more about it than I do) but if he was at all correct, Saudi production could conceivably give way much faster than supposed, obviously an instant game-changer were it to occur.

        Supposing no Saudi failure, I can readily imagine a REAL though small oil supply glut due to demand destruction now, or soon with new Saudi capacity not yet put to the test, new non-conventional oil and liquids, technology extending production in some older fields, and most important, the capture and subsequent US security state lockdown of Iraqi oil, and the potential to ramp production there very quickly – but again, THAT’s a US policy decision to not choose to be a mere customer, and buy the best quality oil at a much better price from a country that really, really needs the money.

        5) But inside a decade the full scope of how badly we’ve mucked things up re resource consumption/waste production and what we’re going to have to do to deal with it is going to be the defining feature of our lives – that and the dropping of all pretense on the part of the kleptocracy that they need any longer “save the appearances” regarding the hostile takeovers of the entire apparatus of sovereign states everywhere. That makes for a grim combo.

        So if it’s US policy today to hammer quite a number of countries along with a horde of “risk-averse” investors (why are they in speculators’ markets if not deliberately led there to be sheared with full regulatory approval?) together with a goodly number of misdirected, non-inside speculators in exchange for a short-term consumer spending pop, as the latest effort to unditch the truck, and it helps get an already re-elected President confirmed in that re-election, that’s just swell. If it puts added pressure on the European financial system, what’s not to like? That’ll force them to pump in even more liquidity, maybe even cave altogether at the ECB, not to mention some truly choice assets on the cheap. Nothing like a crash that’s one-way good.

        I think they won’t let oil lead other commodities and stocks into anything much greater than 20% drop, for the simple reason that if they cannot stop it there, they may be unable to stop it at all this time around, as real confidence is already so badly damaged. And the same of course holds should something other than oil kick it off. I’ve thought that for a couple years now. Not that it won’t go truly bust within a fairly short time-frame. I figure a couple years down the road still. I just don’t think it’s now if there’s anything they can do about it – and this they can do something about.

        We’ll see.

        1. Chris Cook

          1/ There are any number of commentators out there who do not understand the difference between liquidity and solvency.

          The banks are NOT – repeat NOT – making proprietary bets on commodities. They simply do not have the capital to do so.

          They are intermediating – and feeding off, through techniques like HFT and sophisticated forms of ‘front-running’ – both active (speculative) short-term investments and passive(inflation hedging) long term investments.

          2/ The other participants you mention are loaded to the gills with commodity bets only because they have counter-parties who have entered into transactions with them ie to whom they have sold funds.

          ie the market risk lies with the investors, not them. Unfortunately the passive (risk averse) investors simply do not realise the true risk they run, which is that the market may fall and wipe them out.

          3/ Banks have made excellent returns on commodities NOT from proprietary bets, but from providing liquidity and services to investors -since, as above, to do so is ‘capital lite’ and they receive very substantial returns on the small amount of capital needed to cover operating costs.

          4/ I don’t disagree with you. But news that Libya is pretty much back at full production; that Iraq is over 3m barrels/day, and any other news about increased production or declining demand is airbrushed by analysts and their tame press in favour of noise about the tiniest glitch in supplies.

          5/ I do not believe that ‘they’ can control the market the way you or they may think they can.

          If the Chinese realise that they are paying maybe $70/barrel more than they need to right now, and go on a buyer’s strike (as they just did with Iran) then things will get interesting.

          They would get even more interesting if (say) the Chinese also funded a few hedge funds to sell oil futures big time.

          The market would melt down in five minutes and wipe out the fragmented silo clearing houses (who are grossly under-capitalised for the ‘fat-tail’ risk they run) as well.

          These are of course ‘too big to fail’ so guess who takes the hit?

          1. Fiver

            Thanks for taking the time to respond. That is much appreciated.

            Goldman certainly WAS making prop bets, which has been discussed at length in other venues (how many days without a loss? how many $100 million+ profit days? that sort of thing). But really, that misses the more important thrust of what I’m getting at:

            We are talking about a collection of entities, private and public, with so many demonstrated interlocked networks, back alleys, off-balance sheet operations, SPV’s, complexity layered on lies, and on and on, with “oversight” from revolving-door types from their own former firms (and vice versa, obviously) who have injured necks and eye tics from all the nodding and winking that it is quite simply impossible to view them as on 2 sides of a imagined “fence”. Oil and commodities soared in concert with the series of QE events so clearly that pinning it on bilking “passive investors” fearing inflation just doesn’t hang together

            WHEN INFLATION IS IMMATERIAL relative to the gains made by those who went the right way. You could make the argument that’s what happened for the rise associate with QE1 (and plenty did “fear” inflation), but the verdict was clear re inflation – the “inflation” took place in assets, high-growth emerging markets, and resource-scarce poor countries everywhere – people just ignore the effects of the oil/food/financial crises since 2008 on the majority of countries and people around the world – the poor ones (which happen to include a large portion of the populations of the MENA/Iraq/Iran/Syria/Egypt etc). But it was evident when QE1 expired that only “easing” was holding up markets, and that inflation for the US, Japan, Europe, essentially the “First World”, was nowhere near “alarming” enough in its pass-through effects to First World consumers to warrant advising the same people AGAIN to invest in oil/commodities on the “threat” from inflation when QE2 came around. Again, quite the contrary, QE2 rewarded handsomely those looking ONLY for asset inflation, and a temporary flirtation with “growth”. Anyone who did not make out very well on oil and commodities since March 2009 needs to fire their advisor(s). And any pension plan that gets beat up (again) by playing it “safe” with oil/commodities should have its management removed. In fact, pension plans should be segregated from the Casinos altogether.

            The mechanics you cite have the same effect as my less technical, more cut and dried version, but with the “appearances saved” by a claimed arm’s length set of relationships – a claim on which I cannot but gag. At best it simply means redefining my assessment of the POLICY to embrace “plausible deniability” mechanisms, from “just hand them the money to gamble” to an eyes averted but crystal clear “YES. Quite alright” for Government/Fed/regulators to deliberately create the circumstances wherein banks, brokers, funds and every other financial flogger of the “inflation” story can systematically pillage a substantial chunk of the population (while ensuring their preferred clients head the other way) which quite rightly should be concerned about ZIRP or inflation, but should NOT be investing in markets owned and operated by predators. Anyone who sold clients the idea that oil was “safe” AFTER the events of 2008 was lying. There are any number of other approaches possible if the Fed (or other CB’s) were honestly interested only in getting new money into the economy. But that is entirely secondary, or tertiary, or (what’s the next one?) as we’ve seen. Let’s see how Wall Street and other First World financial markets and assets make out without ANY further “easing” by the Fed or other CB’s. I well know the difference between solvency and liquidity. There are insolvent entities everywhere. The question is how long a sea of liquidity can keep them all afloat. I think after the “scare” that’s been marked on my calendar for March-May for months has passed, the game has a couple more years yet.


            1) Re control of markets. Let’s be clear about who we’re dealing with here – tens of millions of people in poor countries are DEAD as a result of the meltdown. Ditto countless thousands of Americans, Europeans, etc. as a DIRECT consequence of 2008. Very, very few who were either important or wealthy were badly hurt, and in fact, a substantial number made simply unbelievable gains. Take Blackrock for instance, which quintupled to $3.5 trillion in AUM. If Wall Street can pull off a financial coup to cap a decade of criminality on both sides of the imaginary “fence”, wreck the place completely and still retain control, we’re talking about some very, very powerful people indeed. Are they Invincible? No. Omniscient? No. In a position to drive markets exactly where they want most of the time? Absolutely – for now at least.

            2) China going on a “buyer’s strike” is cut from the same cloth as China dumping all its Treasuries at once – not going to happen in a world where the US is still 3 times bigger and orders of magnitude more powerful. That is, however, very bad news for Iran, which has done nothing whatever to warrant this insane sanctions regime. I note the EU representative for nuke talks has accepted Iran’s latest offer (there have been many) to negotiate. All Iran wants is a no BS security guarantee signed in front of the world by the States now out to throttle them, and they’ll happily trash their nuclear program. I for one very much hope they get it.

            Thanks again, Mr. Cook.

  6. financial matters

    Good explanation also of the ‘friction’ effect in ETFs. These funds are constantly placing bets that have transaction fees and the manipulation in these bets can be hard to decipher. Just like the house of a casino, the intermediaries always win. But I also like the thrust of your post in that it doesn’t always result in an upward movement in the price of the underlying commodities that these derivative funds are based on.

    1. sgt_doom

      Negative, financial matters, again another misinformation meme applied to the present:

      ETFs aren’t being used as bets, but simply another multiple layers of leverage.

  7. mcarson

    Thank you for posting this. I understand oil pricing and speculation in a way I didn’t before your post. My question – the financiers are ruining every market they touch. Is there any desire among those who consume these commodities (not just oil, but soybeans, etc.) to stop them? A united, cross-commodity stand against them might make a difference. I see no reason why Saudi Arabia would want this to happen, the money is not going into their pocket, and demand for their product is being depressed for the long term. As an example, I have an older car that gets 25 mpg – and at current gas prices I have to curtail my driving, since there is no slack in my reduced-by-recession budget.
    At one time capital was hard to accumulate, and needed for industry. Now capital is easy to accumulate, and less needed by industry, but the banksters are still in business, even though they no longer serve a useful function. Yet society is still encouraged to think that the person loaning the $1 million for the factory should get guaranteed profit, and the person running the factory should be subject to market forces. By rights, the factory should be making money, and the banks should get a fraction of that. Capital is not king any more, but everyone keeps bowing to it out of habit. All those looking for a ‘secure investment’ are deluded, banks keep destroying markets, then dragging everyone off into the next ‘sure thing’.

    1. Susan the other

      I like the term “disintermediation.” Is it new? The objective being that normal buying and selling can resume without the financializers perverting derivatives and revenue. If they are removed as middlemen, there will be money from real oil revenues from production, consumption and storage (as opposed to disappearing oil “paper”) to reinvest over the long term into good projects like clean energy.

    2. sgt_doom

      Is there any desire among those who consume these commodities (not just oil, but soybeans, etc.) to stop them?

      Sure, and absolutely! There’s been enormous pushback in America — which begs the question why you, and so many others, are unaware of it???

      Because only be reading and paying close attention to government reports, the Federal Register, the Congressional Record and congressional hearing, can one pick up on it as one finds no mention in the corporate myth-media.

      The farmers, various other industries affected in the commodity futures arena, etc., and recently, those beseiged in hay market futures.

      Your media, like your congress, is bought and paid for, my dear.

      1. Whyawannaknow

        Perhaps we can solve this problem with a little social engineering: As speculators/investment bankers/corporate money necromancers are clearly at an overpopulation, degrading their environment and causing long term range damage… Trophy hunting for a mild correction, bounty hunting if a larger/quicker herd reduction is required. The expected reaction by the affected financial class seeking to protect itself will give employment to any excess workers in the military/mercenary area as the recent US middle eastern projects wind down, and re-building the urban areas destroyed during these “financial negotiations” in New York, London & etc. will stimulate the construction sector!

        It’s a win-win-win proposition, let’s do it!

        And after that, I’ve got a modest proposal for the Irish baby excess.

  8. Schofield

    What a nice “little earner” for the Oilsters, the Banksters and the Hedgies. Like the housing commodity bubble it works pretty much the same with the exception you first monetize the commodity (oil) add a dash of Soro’s Reflexivity where the rising value of the commodity on the accounting asset sheet drags in more money from QE or wherever, watch carefully for signs of the big boys wanting to take their profit and then bail out. Repeat process by watching carefully for signs of rising prices and the whole thing kicking off again. Know that it’s unlikely to end as a scam because the big boys give bungs (campaign finance contributions and insider trading tips) to the politicians.

  9. frank c

    The Commodity Futures Trading Commission should substantially increase the margin requirements on oil. This would reduce the number of speculators and speculation.

    However this would reduce volume which is not in the best interest of the exchanges.

    But then again Mr. Gensler has his handsfull with MF Global and Mr. Corzine.

    Lastly remember Former Enron Board member and wife of Senator Phil Gram of Texas was Wendy Gramm. Who also was head of the CFTC.

  10. charles sereno

    I’ve submitted a comment a few hours ago that was not published. Upon submitting again, I was informed that it was a repeat. I’m happy that I have the opportunity to correct an attribution I made in my comment if it is published. I mistakenly referred to the source of US Total Gasoline Retail Deliveries as the St Louis Fed rather than the US Energy Information Administration. I think my original submission was reasonable. I hope you are not censoring comments.

    1. kris (ekm1)

      I’ve noticed that long comments get delayed by quite a lot. Very long ones do not even show up. Every blog has capacity restrictions as far as I know.

        1. kris (ekm1)

          LOL. Nice joke.
          Not at all but I got “upset” a couple of times when my comments would just vanish.
          You know the blog joke:
          “Honey, leave me alone. Somebody is wrong on the internet and I got to fix it”.

    2. Lambert Strether

      It’s not in the queue and it’s not in spam. So far as I can tell, WP just throws some comments into the ether. I don’t know why, and I don’t know why WP thinks it’s a dupe. Best thing to do is save your comments in another medium so you don’t lose them.

      As far as [gasp] censorship, it’s Yves blog. If Yves want to throw every comment whose author’s handle begins with a lower case letter into the trash on alternate Tuesdays, that’s her prerogative. [Adding… I know blogs where even bringing up moderation policies results in instant banning.]

  11. kris (ekm1)

    Mr. Cook
    I’d like to chip in but I got to work doing some engineering calculations and sales here at work.
    Regardless of our disagreement about Peak Oil, I want to thank you for maintaining your human integrity and making good use of your knowledge to help the public.
    As a further proof of what you told Max Keiser about BP and Goldman Sachs being joined “at the head”, click the link to have another independent confirmation of what you said by somebody that was in the business, Martin Armstrong, just released.

      1. kris (ekm1)

        Well, check the FT Alphaville link that Mr Cook is linking and referring to. I am ekm1.
        I got warned for comparing BP with Enron at first and stirring the whole excrement. A couple of hours later I got banned for one week by doing a similar entry on another post at FTAV.
        As to the choice of words, english is a freaking stupid language being a mixture of viking, sakson, latin, ancient greek etc. That’s why it is so humorous.

    1. kris (ekm1)

      Ok, ok, ok. We need some fun though. Stupid english……. It’s not my native language.

  12. kayjay


    I just did a check on gas prices in Cambridge, U.K. at Sainsbury’s(UKL 1.40/litre) and came up with $8.40 per US gallon (3.785 litres= 1 US gallon). The price of gas in my neighborhood is USD 3.83/gallon in a Washington D.C. suburb.

    The production and sales of cars in Europe and the U.K. has declined some, France especially, but it is not calamitous. So, the question is: What is the cause of this enormous run-up in prices?

    This tells me that price manipulation by the majors and gross speculation at the CBOT and similar venues is certainly one major factor. But I think that consumption in Asia, especially by the Chinese and also oil and refined product hoarding by the Chinese is a big factor, despite the decline in consumption in Western OECD as reflected in refinery closures along the Eastern US.

    Goldman Sachs and JPM Chase have most of the puzzle figured out. I don’t think that you have grasped the demand side of the equation.

    1. charles sereno

      In my unpublished comment, I pointed out that since Oct, 2011, Gasoline Retail Deliveries by Refiners (EIA) in the US (a humongous consumer) have plummeted while prices at the pump have gone up. I hoped to get a response from Chris Cook.
      I also made an off-topic remark that went something like this — Philip Pilkington (Peak Oil Denier) and Alexander Cockburn (Climate Change Denier) are well-meaning spirits gone awry.

      1. kris

        Sir Charles
        There is no such a thing as a “denier” of something that has not been proven absolutely at all and has zero chances of even having a physical capacity of being proven seeing the huge mass of earth as a planet.
        As to climate change, I have a curious question: From the Big Bang until the first single cell creatures, who caused the climate to change?

        1. Nathanael

          Uh, the Earth’s climate was actually stable after the initial cooling of the solar system and prior to the “Oxygen Holocaust”, in which photosynthetic bacteria caused a *massive* climate change.

          Don’t ask questions if you don’t want to know the answer. Biologists and geologists know the causes of most of the climate changes of the past. Humans are causing the current one, and the big problem with it is that it’s going to make it a hell of a lot harder for humans to survive.

  13. The Dork of Cork

    I am expecting a 2008 like collapse of the oil price when the periphery Euro countries leave the building.
    Ireland & Iberian consumption should tank like Bulgarian (25% drop in consumption 2010) & White Russia (29%) after their recent devaluations.
    I agree with Chris Cook – the lack of monetory stability especially post 1987 has made long term rational planning impossible.
    The Banking system just does rape these days.
    But the Irish & Iberians spent too much money on Grot.

    2005 Irish Buildings & construction in Euros : 33.405 Billion
    2006 : 38.037 Billion
    2007 : 36.582 Billion
    Total : 108.024 Billion

    Irish Imported capital goods (half of this is vehicles)
    2005 :8.31 Billion
    2006 :7.99 Billion
    2007 :9.16 Billion
    Total : 25.46 billion

    We could have built a rail tunnel between Rosslare & Fishguard (30 Billion)
    Built 3 Sizewell B like PWRs (15Billion)
    A dozen + Heavy Tram lines (5 Billion) and still have enough money for a housing boom and bust.

    Imagine the scale of malinvestment in Spain ?

    This sucker (the west) is going down – its just incapable of wealth creation , its been like that for 40 years.
    A victim of inverse colonisation I guess – it was only a matter of time.

  14. Hugh

    If supply demand were the issue, we would expect consistently upward trending prices. There could be small ups and downs but either a linear or curvilinear progression.

    If external crises, say like tensions with Iran, were the driver, we would expect an upward movement in price but we would also expect a return to baseline after tensions eased and fears of supply disruption abated.

    But if you look at future prices over the last few years:

    you can see for yourself that this does not happen.

    This means something else is going on, and, as we live in a kleptocracy, it isn’t terribly difficult to see what that is. Does anyone seriously think that the same elites who have looted every other aspect of the economy forgot about commodities, especially oil, or said to themselves, we’ll loot everything else but leave oil alone?

  15. GW

    Mr. Cook,

    Thank you for the informative post.

    I think there is even a grander dimension to all this in that an increase price of commodities ultimately translate into net capital inflows into the U.S., courtesy of our reserve currency status and foreigner’s propensity to managing the trilemma.


  16. Harry

    Very interesting piece. I dont fully understand.

    So there seems two points of real interest as far as I am concerned. The first and most interesting is whether ibanks and speculation in oil would push the price up. I can see how it would dramatically affect the term structure of the oil market, but I am less clear on how it affects spot.

    I say this because it is clear that you can create a banking type ponzi in any market. We can sell certificates of ownership in Tulips for example. If you are in the right place and at the right time, you could sell maybe 10 times as many certificates as you have Tulips and bet that most people dont come to you to exchange paper for bulbs.

    So this explains how you can create fake financial oil to satify investment or speculative demand. It would also have the effect of creating supernormal profits for the oil companies because their cost of funds would drop to zero or less. They can write new oil.

    But what it wont do is change the amount of oil on the spot market. You would only affect the spot market if you had an incentive to hoard physical. Why would anyone have that inventive in the oil market? Why wouldnt you just do an oil loan or swap?

    If the financial demand were to leave the market, then the term structure of forward oil might collapse. But I just dont see how this affects directly and substantially moves spot up.

    The second point is whether or not peak oil is relevant. And of course it is. Both as a potential explanation of higher oil prices (higher extraction costs) and as an explanation of why there might be substantial and justifiable investment demand for oil.

    Basically, if you think barrels are gonna cost a whole bunch more in the future than now, there is a very good reason to buy them and hold them in storage. Its actually welfare increasing.

    Anyway, I hope I have made some sense, and I hope you dont treat my failure to understand as criticism.

  17. robert157

    Your analysis of the oil market is not correct.

    It is incorrect to assume that refinery closures in the west leave a bunch of oil sitting around with nowhere to go. All that is happening is the oil and the refineries are following demand. For every refinery closed in the US, how many open in Asia?

    1. Chris Cook

      You are missing the point, which is that refineries have inputs and outputs.

      Tell me why it is – in the Hovensa example I give – that PDVSA can sell to other refineries at the same price or better?

      The closing of refineries improves refinery economics because it increases their buying power in respect of crude oil, and selling power in respect of product sales.

  18. Dan G

    Peak Ponzi.Peak derivative instrument fraud. The Banking cartel gamblers are killing the hosts by sucking them dry.

    The bottom of the pyrimid is porous; the vampires at the top have sucked it dry.
    Peak a boo, and we all fall down a notch. It is what is needed.

  19. Common Sense

    Who cares that oil is expensive? Even if by defect or by conspiracies “for once” (cosmic event!) the market is signalling future scarcity.

    Get over it, I only hope oil reached 200 USD/barrel before its too late and we have a world war over it in 30 years time. The only people getting annoyed about the prices of oil is the spoiled kid that is the society of the developed nations.

    Unfortunately I concord that the oil market is about to ‘crash’ (at least a 30% drop) in the next months along the rest of the commodity complex when recession hits hard. Could only hope that we were in a depression and oil was at 200 USD, but we will get there eventually.

    And if there is social revolt caused by it so be it, about fucking time, apparently only ‘good ol’ supply shocks can create the necessary turmoil, instead of keep drinking the kool aid of cheap resources and exponential growth of consumption and population.

  20. normansdog

    just a couple of questions regarding this very interesting post:

    “Producers obtain dollars interest-free in exchange for transferring title to oil inventory to the investment bank, and what this means is that the producers do not need to sell as much physical oil to refiners…”

    Why not? Do they not like money? They can sell just as much as they did before as they are not constrained by production as the stuff they “sold” to Goldman stays in the ground. Given that there are a number of oil producers I do not quite grasp why they would all suddenly decide to not sell oil to refineries just becasue Goldman had lent BP large bags of money for stuff that is just sitting in the ground.

    “… who must therefore raise their bid price to secure supply from producers…”
    Why? see my comment above.

    “…and this is why the price rose rapidly in early 2009 even though the market was not under-supplied…” somewhat strange, if the market is not “under supplied” then there is not “too much demand” and the price can not rise unless we have a price conspiracy.

    “… to lease tank storage, and even to charter the fleets of tankers which sat as floating storage off the UK coast through spring and summer 2009.”

    Now this is an interesting point. I can not believe that there is enough pjysical tanker storeage to be in anyway meaningful in a market that uses 85,000,000 ballels of oil per day. According to wikipedia there are only 396 super tankers capable of holding around 2million bls each, now if we are interested in moving the price of oil for a period of 4 weeks then someone would need to charter 2 or 3 of these every day for the whole month to make a dent in the oil supply – and that woud mount to around 20% of the entire world fleet of supertankers sitting off Lerwick or Aberdeen – someone would notice.

    Given that the total world production of liquids has held rock steady at around 80mbbd for many years, I simply do not buy this.
    I can believe that there is a lot of paper manipulation but not that somone is storing the stuff somewhere.

    Also, much as I like Mr. Pilkington’s writing I wonder about his dismissal of peak-oil as it is a physical certainty unless he believes that the stuff is being replenished somehow. Peak “environment” and peak “earth” are also certainties unless he is aware of other planets in parallel universes to which we have easy access.


    1. Nathanael

      “Why not? Do they not like money? They can sell just as much as they did before as they are not constrained by production as the stuff they “sold” to Goldman stays in the ground. ”

      Actually, no they can’t.

      If they’ve sold the future production from a well, they won’t have that oil to sell when the time comes for it to be produced. The bank will have the right to sell it.

      Now, they can obviously sell as many futures as they like, but when it comes to the spot market, these “sale of future production” contracts actually tangle them up.

  21. different clue

    Phillip Pilkington,

    Is “peak oil” merely a mis-used concept? Or is it altogether a myth?

    Do you believe that oil is a renewable and renewing resource? If you believe that, can you tell us why we should believe it too?

  22. arrgh

    peak oil adherents, please explain why i can (right now) buy december 2020 crude oil for $87.12

    i’m not pro or con peak oil, just trying to understand.

    1. different clue

      As a total layman I can only suggest that the buy-sell behavior of overly clever overthinkers has little or nothing to do with what resource really does or does not really exist under the ground.

      If we really have used about half the findable oil we know about and are working on using up the other half, we will experience “less-and-less” of it. We won’t suddenly have zero oil all at once. Of course we could still find harder-to-extract oil in ever-more-difficult places. If people are willing to pay enough for it, it might even be developed and sold. IFF! it is physically there.

      Peak oil doesn’t care whether people “believe in it” or not. It is either true or it isn’t, regardless of what people may please to believe.

  23. Fiver

    Mr. Cook,

    You argue refineries closing are not offset by new capacity in China/India/Asia and especially Saudi Arabia, which has a target of 8m b/d of gasoline and other refined product, and that with fewer refineries due to less demand, prices for crude of necessity drop. I’m not sure closings actually do outweigh new refining capacity elsewhere, but supposing the net capacity is declining, there is another possibility:

    You leave out the growth in total liquids vs an apparent “plateau” since roughly 2005 in crude (or crude and condensates) production. Would it not be reasonable to see both closed refineries AND maintained price if the PREFERENCE for quality crude (cheaper and cleaner to refine) was still there, but no excess supply (neither Saudis or anyone else wants to knowingly damage fields by over-producing; Iraq is only starting to realize its potential; Iran is being strangled and may at some juncture be destroyed; known declines in a number of oil-producing countries’ fields)

    These charts show that oil has roughly plateaued, while total liquids are increasing. It would make sense then for a refinery consolidation to occur based around both economic and geopolitical factors to determine who gets screwed (Venezuela, say, for both political reasons and expense/”dirtiness” of very heavy or non-conventional oil) vs who is favored (Saudis and the good ole USA, for instance). In other words, old refineries and refineries dedicated to “dirty” oil are selectively shuttered or targeted depending on available alternatives in their market space or cheaper imports of refined product (why import crude, if you can import gasoline that’s cheaper than what you can produce domestically?) AND how “dirty” very heavy oils and unconventional oil will be the first targeted if clean alternatives are pursued more aggressively. If, when Obama wins, he also takes Congress (both Houses – not at all out of the question given the Republicans threw this Election) you’ll finally see some form of “Cap and Trade” which will have little effect on the overall ruin of the environment, but will be immensely profitable for Wall Street and a “faux-green” bubble.

    But THIS is what prompted me to write again. The Fed is “considering” a form of QE that does NOT feed into oil prices. I near choked on my coffee laughing reading this one. Right on cue I’d say. You? Smells like POLICY, to me.

    Lastly here’s how Saudi Arabia, at least, ranks which customers receive preferential treatment and who gets hosed. Asia gets to subsidize the US and Europe and eat the inflation, or so it appears.

  24. Nathanael

    Thanks for explaining the particular positive-feedback mechanisms through which oil prices “bubble” and “bust” at high speed.

    I have always been tracking oil on both a “trend” and a “local fluctuation” level; it’s been clear that the “local fluctuations” are MASSIVELY larger than the trend and have major positive-feedback effects in them. But you’ve finally explained exactly how this is being done.

    1. Nathanael

      Of course, on a personal level, I don’t actually give a damn about preventing the market manipulation in oil; it appears that it is driving people away from oil faster than anything else. Countries where the market manipulation is prevented tend to subsidize oil use.

      If we’re going to have manipulated bubbles, by all means, do it in oil. Doing it in land has been incredibly harmful; doing it in oil may actually cause demand destruction, when we can’t get government policy to cause demand destruction.

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