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Does the high oil price reflect a bubble?
Paul Krugman writes (and here):
The only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding — an increase in private inventories of black gunk. This actually happened in the late 1970s, when the effects of disrupted Iranian supply were amplified by widespread panic stockpiling.
But it hasn’t happened this time: all through the period of the alleged bubble, inventories have remained at more or less normal levels.
I've never been one to push the bubble hypothesis to explain the high price of oil but I find this an unusual argument to make against bubbles. Isn't it easy enough to argue that the relevant hoarding is of oil in the ground rather than oil in strategic reserves or panic stockpiles? We have lots of state-owned oil companies and maybe their way of speculating is simply to remain sluggish in their exploration and extraction activities, at least for the time being.
I think of a bubble as a market price which is above the fundamental value of the asset, largely for psychological reasons. But with a commodity like oil the fundamental value of the asset depends on the marginal unit and thus how much oil is supplied. Fundamental value, at least at the margin, adjusts to the price and in that sense the bubble hypothesis can seem tautologically false if we apply the traditional definition of a bubble.
The key question, in my view, is how much more the oil-producing nations could bring to the market if a) their state-owned oil companies were not incompetent, and b) they did not tolerate this incompetence as an implicit form of speculation and collusion. I will not offer an estimate here (I genuinely don't have one) but b) does leave some room for bubbly-like phenomena, whether or not stockpiles of pumped oil are high. Note that in b) collusion and speculation work together and a) tosses incompetence into the mix. The whole foul brew is probably easier to sustain in times of rising demand and thus oil price explanations are not going to be very simple, or easily separable, by the nature of the problem.
Addendum: Read Arnold Kling, here and here.
Posted by Tyler Cowen on May 13, 2008 at 05:47 AM in Economics | Permalink
Comments
A number of people made this argument on Krugman's page. But this argument proves too much: we could never distinguish between genuine scarcity and this expanded concept of hoarding.
Posted by: michael webster at May 13, 2008 7:30:17 AM
While incompetent can't be ruled out maybe they are crazy like a fox.
Assume one state owned company owned all of a commodity if they produced 100 units the price would be $10/unit and it had a linear relationship so that if they only produced 10 units the price would be $50/unit. This would result in a reduction by 1/2 for the state.
However if the threat of scarcity caused an exponential increase to $100/unit when only 10 units were produced they would be receiving the same revenue while reducing the amount of future commodity reserves by 1/10.
Now this could cause another normally higher price commodity to be substituted after a large expenditure for start up. All the incompetent state company would have to do is wait till the start up money is spent then turn their valves to the left increase production to a rate and undercutting the start-up. Once the competition is out of business then turn the valves to the right and watch the price jump back up. (See 1980's with all the money that was spent for enhanced recovery of oil that went down the tubes when the price bottomed out).
Posted by: rob at May 13, 2008 9:04:48 AM
National oil companies have a very different set of priorities to those of the private companies. And the NOCs control about 90% of world oil production.
I think the repeated call that oil is in a "bubble" or that "speculators are messing up the market" is to provide for some illusion that prices will drop. As well as to provide an excuse for why all these magical solutions like, oh, "shale oil" or "tar sands" aren't springing into production.
Posted by: Tangurena at May 13, 2008 9:24:47 AM
I am usually alarmed when a major investment bank is very public about oil soon reaching $200 per barrel. This is especially the case when said companies are now able to invest in oil at margins far below what they are able to invest in stocks, for example.
Typical oil contracts are for 1,000 barrels. Depending on whether you are a member of the exchange or not, intial margins are $8,775 (per contract) for a non-member and $7,150 for a member. The maintenance margin is $6,500 for both.
These are for one contract of nymex WTI. It's a bit more for nymex heating oil and nymex gasoline. The margin for an ICE WTI contract is $7,000 (only maintenance, no initial).
The point being that the margin isn’t very much if oil is, say, $115 a barrel ($115,000) and margin is at most $15,275 (around a 15 pct margin). However, contracts are marked to market daily, and I could see financiers of positions becoming nervous if the price were falling and you were long or if prices were rising and you were short.
Perhaps there is nothing wrong with the oil market that a good 50% margin requirement wouldn’t cure.
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Posted by: wintercow20 at May 13, 2008 9:31:15 AM
To Michael Webster:
Certainly, a distinction can be drawn between "real scarcity" and what you call an expanded concept of hoarding. That distinction is obvious right now, as investment flows into more expensive means of production (oil sands, shale, CTL technologies, deepwater, steam-injection enhanced recovery in marginal fields, etc.) are far slower than one might expect with barrel prices at $125.
The problem is that speculators, or NOCs indulging in surreptititious speculation through production foot-dragging, have an excellent point. Demand growth in enormous developing economies, as well as a security premium dictated by political instability in key producing regions, suggest that the price of oil has not yet found its zenith. It will be difficult to know when exactly that zenith is imminent, but it is not hard to know that it is not imminent yet. Add to this the lengthy lead-time of capital investment in production (especially the more exotic and expensive models), and you have a situation where extremely high upside potential will be required to offset extremely high perceived risk.
Bottom line: it may be a bubble, but if it is, it has a lot more inflating to do before it does anything else.
Posted by: Robert Heiler at May 13, 2008 9:56:30 AM
I need some new terminology, (which I'm sure has already been invented) for the "game of chicken" aspect of certain bubbles. Certainly in Tech Stocks circa 1999 or housing circa 2005, there were people who willfully decided to get into the game of chicken, buying just to sell to another chicken player.
If there were a measure of this behavior, I think it would prove predictive of drastic future price declines.
When people report that X% of all houses purchased were purchased with the intent of resale within 1 year, and 0.9*X% of such houses are bought by others with the same intentions, we ought to be able to make some predictions about how long this will last.
So, what are the relevant measures of intentions of people buying commodities?
Posted by: jim at May 13, 2008 10:28:56 AM
Aren't these contracts cash settlement anyway with OPEC following the price set in the futures market? that way there's no need for taking delivery and needing to store what you buy..
Posted by: Duff Samoa at May 13, 2008 10:38:24 AM
I think you're off on a couple counts. First, most of the state oil companies are quite competent. Yes, there are cases where the state companies lack certain specific skills, e.g. PEMEX in ultradeep water, but I believe these are not the only or even a major cause of the high prices.
Second, for the most part, increasing production is not simply a case of opening a few valves and backing up the tankers. You want another 100,000 barrels per day? Great, it's going to cost $10B, take 5 years to design and build the capacity, and by the way, there is a shortage of drill rigs and technical resources available in the world today, so help may not be available at any price in that 5 year timeframe.
Capacity to produce oil is becoming ever more expensive, which moves the supply curve up.
Fundamentally, there is an inelastic short term supply and demand curve, which causes oil prices to swing wildly. When the prices collapse, it won't be because there was a bubble, it will be because, as has always happened, demand was temporarily less than available supply.
My guess is that it will be a short-lived spell of low prices before demand once again drives prices up.
The other factor in play is the weakness of the US dollar, which has driven the price up for American consumers. I'm sure someone has done the analysis of that impact.
Tony
Posted by: Tony K at May 13, 2008 10:52:10 AM
"We have lots of state-owned oil companies and maybe their way of speculating is simply to remain sluggish in their exploration and extraction activities(...)". This actually happened in Brazil in the 70's, for ideological purposes though. Giuseppe Bacoccoli, who worked for 32 years on the exploration area of Petrobras - the brazilian state-owned oil company - has been saying that when the company knew there was a place with no probability of having oil, it auctioned it for the private sector. So, doing this, the sate would have the monopoly of exploration and would also earn some money from the auciotns.
Posted by: Felipe Araújo at May 13, 2008 10:59:56 AM
"Aren't these contracts cash settlement anyway with OPEC following the price set in the futures market? that way there's no need for taking delivery and needing to store what you buy.."
No, Oil contracts on NYMEX have the option of delivery so there is a direct link between the spot and futures at expiry.
I think what Krugman is aiming at is the idea that the Oil price is in a bubble due to financial market speculators not NOCs. And I agree with him. The spot price of oil is high not just the futures the only way financial speculators could be to blame for this is if they were buying spot and storing the oil for future delivery.
To the idea of raising margins on NYMEX contracts. I serioulsly doubt that would do anything. First off Oil is a world market so trading could easily move to the Brent futures contract traded in londo. Second, margins would have no affect on the Cash market which is also high. Third, the price of Natural Gas futures would probably RISE in response, Non-comercials "speculators" are net short natural gas (at least they were a weak ago when I looked at the commitment of traders report). People forget that speculators influence the price in BOTH directions.
Posted by: eccdogg at May 13, 2008 11:07:24 AM
Superimpose the NASDAQ index over the crude oil price, with NASDAQ in March 2000 coinciding with oil
in April 2008. There is a 92% correlation. Do all bubbles look alike? The NASDAQ bubble had
nothing to do with inventories of pets.com, so why do need inventories of oil to explain a bubble?
Oil is an asset as well as a consumption good (like housing that way). Its price can rise if
future supply and demand prospects suggest that future prices will be so high that it pays to buy rights
to oil now. (Hotelling and all that.)
It is odd that Krugman is obsessed with inventories. Some years ago, he presented a model of OPEC with
multiple equilibria: a high price and low price equilibria, made possible by a backward bending supply
curve. The supply curve turns backward for a while because as prices rise, oil exporters want to
invest more, and they invest by keeping oil in the ground. Put another way, they are targeting total
revenue, not profits. So, as you said, one way to build inventories, consistent with the old but not new
Krugman, is to pump less oil.
Posted by: B.H. at May 13, 2008 11:07:44 AM
Krugman is right and Tyler is confusing (maybe not confused). The speculative bubble argument is that prices rise because of the demand from speculators. But for this to cause prices to rise the oil they buy must be removed from the market; this we do not see. Oil is produced and consumed. The speculators do not consume it.They do not keep it in ther closet, so it has to come back to the market eventually. Hence, they cannot drive the price up unless they keep diverting oil to their own strategic oil reserve. If OPEC produces less oil because they want a higher price that is cartel behavior. It is not a bubble. Increased scarcity drives up the price. If there was no OPEC price would be much lower anyway, since they restrict investment in reserves in their countries. Why? To keep the price high.
Posted by: Barry Ickes at May 13, 2008 11:13:07 AM
"The NASDAQ bubble had
nothing to do with inventories of pets.com, so why do need inventories of oil to explain a bubble?"
Because there is a cash to futures relationship for Oil, you can deliver actual Crude Oil against a futures contract for Oil. And the cash market is ruled by fundamentals the price is set at where the market clears supply and demand. There is no such relationship for Pets.com
Posted by: eccdogg at May 13, 2008 11:30:59 AM
>>>As well as to provide an excuse for why all these magical solutions like, oh, "shale oil" or "tar sands" aren't springing into production.<<<
From Wikipedia (http://en.wikipedia.org/wiki/Athabasca_Oil_Sands):
"...2005 production of crude bitumen in the Athabasca oil sands was 760,000 bbl/d...
...As of 2006, output of oil sands production had increased to 1.126 million barrels per day (179,000 m³/d) (bbl/d). Oil sands were the source of 62% of Alberta's total oil production and 47% of all oil produced in Canada...
...With planned projects coming on stream, by 2010 oil sands production is projected to reach 2 million barrels per day (320,000 m³/d) or about two thirds of Canadian production."
Posted by: Thelonious_Nick at May 13, 2008 12:30:48 PM
More likely a case of extreme competence. Produce more and see profits fall or produce less and make it up in price. Particularly when you are already making more money than you know what to do with. Investing in future inventory may be the best investment they can make, and likely is.
Posted by: Lord at May 13, 2008 1:19:43 PM
Wow. It's a little disconcerting to see Krugman write something I've thought.
Recently, I tried to convince my self that I must be wrong (thanks to Paul, I now have more reason to think I must be wrong), that speculation from instability can drive up prices. But I kept hitting that wall that it can only do so if people increase their ability to store. In addition to storing it in the ground, I've also heard that we're increasing our reserves and Iran is building giant barges to store oil in for future delivery.
Posted by: aaron at May 13, 2008 2:07:11 PM
Certainly the so-called Big Oil companies of the west were better at the pursuit of yearly and quarterly growth (sales and earnings). Just look at their fields - most boomed and are in decline now. The NOCs lurch from good production to weak production and thus over the longer term their production can seem much flatter.
I think we have seen a paradigm shift. There are two ways to make profit as an oil producer - pump-more/sell-more and raise-the-prices.
The paradigm shift is that there is now no player in the market with enough serious excess capacity to bring the market to surplus and those reputed to have "some" excess capacity realize that restraint will make them a lot of money.
Thus OPEC has lost one of its two teeth - flood the market to reduce prices.
They can still hold back product.
Perhaps this is even worldwide collusion. Perhaps it is the more subtle signaling. The crude oil producers all just signaled to each other by all the talk of "the easy oil has been found" only difficult oil remains to be found...
and they all picked up on the tune...
Certainly oil sands and tars in Canada and Venezuela are more expensive to produce than other types of crude oil. If some supplier could flood the market they could drive these operations perhaps to bankruptcy. Deep water drilling (like Jack 2 in the Gulf of Mexico) is also very expensive.
So at this point which producer would venture to bring the prices down?
Or perhaps this is about as much as we will ever be pumping on a daily basis and everybody's hands are tied. Certainly if you look at the data most of the growth these past couple years has been biofuels and the capture and selling of the heavy gases known as NGL - Natural Gas Liquids. [ethane, propane and butane]
Posted by: JRip at May 13, 2008 2:24:08 PM
The dichotomy Krugman and others make between a presumably inefficient "bubble" caused by "speculation" and fundamental (geological and technological) scarcity presents a false choice.
The more likely alternative is that the parallel price rises of practically all commodities (not just oil) are a rational and socially efficient response to the inflation (M3 etc.) of the dollar and to a lesser extent of the euro. The vast increase in "non-commercial" or "speculative" participation in commodity futures reflects a greatly increased use of commodities over the last 5 years for their monetary qualities, just as Carl Menger and others would predict. See Commodity Derivatives: the New Currencies and The "Hoarding" and "Speculation" in Commodities.
Posted by: nick at May 13, 2008 2:40:42 PM
No discussion of the possibility that we may be running out of the easy-to-find, easy-to-drill oil?
@Nick: Oil sands are a little silly. Physically, what they're getting now is the most available -- its the part fo the seam that is above ground. If they want to continue producing, they will need to follow the seam underground, which will obviously entail more cost. Add to that the fact that this process consumes enormous amounts of water and natural gas, and this looks worse all the time.
In terms of production, if these optimistic predictions bear out, Canadian oil sands will provide roughly 3% of world needs. It's not clear that the oil sands are now net energy positive, and less so that they will be in the future (when they have to dig deeper into the ground to follow the oil sand seam). More on oils ands here: http://www.theoildrum.com/node/2915
Finally, in the meantime, lots of other oil sources are drying up: http://www.hubbertpeak.com/nations/2004
I now that "peak oil" isn't a popular phrase in these parts, and I personally believe we won't end up in a Kunstlerian nightmare (http://www.energybulletin.net/4856.html) -- but if we keep ignoring the problem, we might.
Posted by: Doug Blair at May 13, 2008 3:22:19 PM
A speculative bubble is when people are buying an asset because the price is rising. Not because there are some underlying fundamentals pushing the value up, but simply because they believe they can sell it tomorrow for more than they paid for it today. This is what happened in the 20s with stocks, what happened in the 90s with internet stocks in particular, and just recently with housing.
I don't think oil fits this at all.
Posted by: Noah Yetter at May 13, 2008 4:22:12 PM
PDVSA , venezuelan state owned company, fired 20,000 workers in 2002.2/3 of their workforce.The production fell to less tan 2 m b/day.Know its said they have 100.000 workers.Exreme competence.Read the mexican newspaper or see mexican tv and you will know about the exteme competence of Pemex in briberies , corruption and waste
Posted by: k at May 13, 2008 4:50:18 PM
venezuelan state owned company, fired 20,000 workers in 2002.2/3 of their workforce.The production fell to less tan 2 m b/day.
This was a quite rational thing for Venezuala and other oil producers to do in response to rising supplies of dollars and euros, as central banks focused their efforts on combatting first the dot-com crash and now the real estate crash. The oil in the ground is now worth far more than the dollars or euros they would have gotten for it. As long as owners of oil reserves can rationally expect central banks to keep inflating (and there is good reason to expect they will, for example because Ben Bernanke is now replaying the monetary methods of John Law), they profit from keeping oil in the ground and lose from investing money to pump it.
Posted by: nick at May 13, 2008 5:07:04 PM
http://www.nytimes.com/2008/05/14/business/14oil.html?_r=1&hp&oref=slogin
well there's your hoarding...
Posted by: Eugene at May 13, 2008 5:27:31 PM
I agree with Barry Eckles that Krugman is right and T is a bit confusing here. It's clear that there has been an outward shift in the demand curve due to accelerating growth in China and other developing nations. The supply situation seems more complicated to me. Oil production can be modelled as a real option. Maybe its true that some of the national oil companies aren't good at figuring out when to exercise their options to explore more, drill more, or pump more. But history suggests that the incompetent and/or corrupt state oil authorities are much more likely to err on the side of pumping too much rather than too little when prices spike upward like they have recently.
Posted by: Pat L at May 13, 2008 8:15:27 PM
Pat L:It's clear that there has been an outward shift in the demand curve due to accelerating growth in China and other developing nations.
Do you have good evidence for this, or are you just repeating what many others have been repeating? The most credible sources I've read say that demand has not departed from its long-term global trend: higher demand growth for commodities including oil in Asia has been offset by lower demand growth for commodities including oil in the U.S. and Europe.
Posted by: tasmania at May 13, 2008 8:41:27 PM
I think Krugman and Tyler have both made good observations here. But to referee their dispute, I would come down on Krugman's side, just for terminological reasons. (I think someone above had the same conclusion.)
When people talk about a speculative bubble, I think they have in mind an increase in demand that is motivated by the desire to sell in the future at a higher price. So that takes units of supply off the market, meaning that with the original demand curve, the new price must be higher.
But that's not what's happening right now. World output has been stagnant, but you certainly can't explain the huge jump in price recently based on reductions in crude sales.
Now it's true that Tyler raises an interesting point, since normally in economics any "change" is usually relative to anticipated movements. So if the normal course of events is for oil companies to expand output by 10% per year, and then all of a sudden they only expand 1%, that could be construed as hoarding.
But I don't think this is what people have in mind when they say there is right now an oil bubble caused by speculators.
Posted by: Bob Murphy at May 13, 2008 9:10:43 PM
o you have good evidence for this, or are you just repeating what many others have been repeating? The most credible sources I've read say that demand has not departed from its long-term global trend: higher demand growth for commodities including oil in Asia has been offset by lower demand growth for commodities including oil in the U.S. and Europe.
Just look at the EIA's historical figures (.xls) for worldwide petroleum consumption. They go up year after year, even as prices rise. So the demand curve for the world is shifting to the right.
Posted by: Bob Murphy at May 13, 2008 9:16:01 PM
Isn't it easy enough to argue that the relevant hoarding is of oil in the ground rather than oil in strategic reserves or panic stockpile
So why are they leaving it in the ground this time, but didn't in past "bubbles"? Surely, the technology for not-drilling was at least advanced enough in the 1970s. Some structural change? Offshore refining? Different tax consequences?
Posted by: Eric H at May 13, 2008 10:15:41 PM
So why are they leaving it in the ground this time, but didn't in past "bubbles"? Surely, the technology for not-drilling was at least advanced enough in the 1970s. Some structural change? Offshore refining? Different tax consequences?
How about a nasty war between Iran and Iraq that meant both sides needed cash NOW, and couldn't afford to stockpile any oil?
Posted by: doctorpat at May 13, 2008 10:56:00 PM
I think it has more to do with the value of the falling dollar. When the Fed decides to defend the dollar, as they should, I believe we'll see the price of oil come down. What we are seeing is a contraction of the dollar bubble.
Posted by: will at May 13, 2008 11:53:02 PM
I think it has more to do with the value of the falling dollar. When the Fed decides to defend the dollar, as they should, I believe we'll see the price of oil come down. What we are seeing is a contraction of the dollar bubble.
Posted by: will at May 13, 2008 11:54:37 PM
I don't have data about hoarding or speculation ...
but I used to talk a lot with petroleum geologists worldwide, probably helping sell $500M of computers to them in the 1990s.
They were buying because:
a) Good oilfields were getting harder to find, so they needed better seismic processing.
b) They were trying to extract larger percentages of oil from each field, hence wanted much better reservoir modeling.
c) i.e., the EROI was going down, see for example, Charlie Hall's Balloon Chart (in the middle of long post)
1930s oil in US: ~100:1 EROI
1970s oil: ~30:1
today: ~10:1
FACTS OF LIFE
a) Recall that US oil production peaked in 1970, despite the US having great technology and lots of capital. It didn't peak because people were hoarding it.
b) At some point in a big reservoir's life, people may have to inject CO2 or lots of water to keep it flowing, not cheap. EROI down.
c) Finally, if a well is *already* flowing at an optimal rate, increasing the flow, or "overproducing" can actually damage it and reduce the total oil obtained.
Hence, people don't normally do that, but they might turn on wells that are sitting idle, of which there are few,, especially as even Saudi appears to be tapped out of such capacity.
d) And it takes time to find oil and develop the fields, and the big, wonderful fields (like Al Ghawar in S. A.) were found many decades ago.
e) A friend of ours used to be Chairman of Shell, and he has clear opinions on Peak Oil.
f) I've visited national oil folks in China, Saudi Arabia, Abu Dhabi, Dubai, Brazil, at least, and I thought they were pretty competent, although this was the engineering side.
MORAL
Not all of the real world of oil is economics, at least some is geophysics, and it's pretty unforgiving.
Posted by: John Mashey at May 14, 2008 3:05:31 AM
I don't have data about hoarding or speculation ...
but I used to talk a lot with petroleum geologists worldwide, probably helping sell $500M of computers to them in the 1990s.
They were buying because:
a) Good oilfields were getting harder to find, so they needed better seismic processing.
b) They were trying to extract larger percentages of oil from each field, hence wanted much better reservoir modeling.
c) i.e., the EROI was going down, see for example, Charlie Hall's Balloon Chart (in the middle of long post)
1930s oil in US: ~100:1 EROI
1970s oil: ~30:1
today: ~10:1
FACTS OF LIFE
a) Recall that US oil production peaked in 1970, despite the US having great technology and lots of capital. It didn't peak because people were hoarding it.
b) At some point in a big reservoir's life, people may have to inject CO2 or lots of water to keep it flowing, not cheap. EROI down.
c) Finally, if a well is *already* flowing at an optimal rate, increasing the flow, or "overproducing" can actually damage it and reduce the total oil obtained.
Hence, people don't normally do that, but they might turn on wells that are sitting idle, of which there are few,, especially as even Saudi appears to be tapped out of such capacity.
d) And it takes time to find oil and develop the fields, and the big, wonderful fields (like Al Ghawar in S. A.) were found many decades ago.
e) A friend of ours used to be Chairman of Shell, and he has clear opinions on Peak Oil.
f) I've visited national oil folks in China, Saudi Arabia, Abu Dhabi, Dubai, Brazil, at least, and I thought they were pretty competent, although this was the engineering side.
MORAL
Not all of the real world of oil is economics, at least some is geophysics, and it's pretty unforgiving.
Posted by: John Mashey at May 14, 2008 3:05:47 AM
I asked Kevin Drum why fuel efficiency seems be going down a whole lot despite the incentive of higher gas prices.
He suggested it was because (despite explaining why I don't find these reasons adequate in my e-mail) that people were forgoing long, fuel efficient trips (how long are these trips that get 7 times normal efficiency?) and that it may not be declining because people may be increasing inventories of fuel.
Is it possible the speculation is manifesting on the other side of the refinery? I remember gas co-ops forming back when prices first really started going up. Is there a big gas market as well as oil market? What's it doing?
Posted by: aaron at May 14, 2008 12:44:52 PM
John Mashey,
EROI is highly simplistic and misleading. If we had an energy source with an EROI of 2:1, but it could be extracted with very little labor and capital, it would make a quite fine energy source. Indeed, the conversion of motion into electricity, fuel into motion, etc. often has an EROI of less than 2 (i.e. an efficiency of less than 50%) and is nevertheless an economical source of power. It's no different for converting power from nature in the first place -- it's nice to have more efficient conversion, all other things being equal, but the efficiency of the conversion does not usually make a good proxy measure for its economic cost. One cannot escape the complicated questions of labor, capital, regulation, and monetary strategy in establishing energy supply curves. EROI might make a good proxy measure for a single kind of energy (e.g. oil) where technology is rather static, but I'm not sure this is the case with oil. I don't think it makes sense at all to compare the EROI of different kinds of energy that might have very different capital and labor costs. One has to do the hard work and try to measure the capital and labor costs.
I do find this quote from the linked article interesting, however:
the empirical record shows that the rate at which oil and gas is found has little to do with the rate of drilling
This is consistent with the monetary function of oil. Indeed, one should expect that, if geology and technology are neglected, there is some inverse correlation between the two. In times of inflation (that is, increase in supply of normal currencies beyond demand for those currencies) oil reserve owners want to boost reserves, and in times of deflation they want to deplete them, on top of taking a regular cash flow. Thus in times of inflation (as now and in the 1970s) we see relatively less drilling and more discovery, and in times of deflation (in the 1980s and 1990s for example) we saw less discovery and more drilling.
None of this is to say that geology is unimportant, but one misses the biggest piece of the price puzzle by failing to realize that oil, like gold and most other commodities, has monetary functions and responds to the monetary behavior of the normal government currencies.
Posted by: nick at May 14, 2008 1:50:03 PM
I wrote: and in times of deflation (in the 1980s and 1990s for example) we saw less discovery and more drilling.
This should probably say "much less inflation" rather than "deflation." Nobody can really say where zero deflation/zero inflation (exact stability) occurs, that is where growth in demand for the dominant currencies matches the growth in the supply of those currencies, but more important is the relatively high inflation of the 1970s and now vs. in the 1980s and 1990s.
Posted by: nick at May 14, 2008 2:03:15 PM
Is it not a fact that if OPEC just produced more, which they are capable of doing, price would go down? I realize they are not keen on doing this, but destroying the economy of one of your largest customers is not in their long term interests.
Posted by: Casey Brown-Myers at May 14, 2008 3:08:57 PM
nick:
I never claimed EROI was the only factor. Certainly, Charlie Hall doesn't claim that either - see discussion for example. Charlie has a series running in The Oil Drum that look at EROI's in detail for various primary energy sources. If something's EROI is only 2:1, the capital+labor better be cheap. Even if they were, other factors may cause trouble, i.e., water limits for Colorado oil shale.
However, I hope you're right, and that oil (and energy in general) are just commodities like anything else. [Right now, I'm not convinced; the sort of work that Hall, or Bob Ayres, or Hillard Huntington do seem to argue otherwise.]
Casey: certainly, if OPEC can turn the spigots further, prices would go down.
When you say OPEC is capable of producing more, can I assume you mean "significantly more in total, and without causing damage (that I explained)"? (as opposed to minor temporary jiggles, and with growing countries producing enough more to compensate for those that have already peaked.
If so, can you give me some references to credible sources that support your belief? I'm certainly willing to look, and life would be simpler if it were convincing ... that the following are off:
The Last Oil Shock
(oil depletion atlas in particular).
Matt Simmons, "Twilight in the Desert" about Saudi Arabia, which is of course the one that counts the most.
Wikipedia OPEC entry says:
"As early as 2003, concerns that OPEC members had little excess pumping capacity sparked speculation that their influence on crude oil prices would begin to slip."
I assume you understand that it is in OPEC members' economic self-interest to assure customers that OPEC can increase production whenever necessary? OPEC says they might think about increasing production ... but they'll consider it at the next meeting, in the Fall.
Posted by: John Mashey at May 14, 2008 5:47:36 PM
how oil prices and gold prices relates?
Posted by: amber at May 22, 2008 3:29:45 PM
The 'free market' is an illusion a very effective propaganda spewed across the globe extolling the precepts from the gospel of the "The Free Market" preached by the Economic ministers of the faith.
No more interpreting of illusion is necessary. It's now time for action!
Review my articles:
A Green Future for Our Nation
Benefits of Nationalized Oil Industry
Nationalize the Oil Companies
Economic Society
At--> http://structuraleconissues.blogspot.com
For a better understanding of what where facing.
It is now time to make certain that everyone understands the truth, solutions, and what will happen if we fail to act now.
Posted by: Ray Pairan Jr at May 22, 2008 4:18:57 PM
The 'free market' is an illusion a very effective propaganda spewed across the globe extolling the precepts from the gospel of the "The Free Market" preached by the Economic ministers of the faith.
No more interpreting of illusion is necessary. It's now time for action!
Review my articles:
A Green Future for Our Nation
Benefits of Nationalized Oil Industry
Nationalize the Oil Companies
Economic Society
At--> http://structuraleconissues.blogspot.com
For a better understanding of what where facing.
It is now time to make certain that everyone understands the truth, solutions, and what will happen if we fail to act now.
Posted by: Ray Pairan Jr at May 22, 2008 4:19:10 PM
Great article! Nice Comments!
I would like to link to this on one of my pages.
Posted by: Jeff at Jul 14, 2008 7:55:47 AM
Great article! Nice Comments!
I would like to link to this on one of my pages.
Posted by: Jeff at Jul 14, 2008 7:56:09 AM
Great article! Nice Comments!
I would like to link to this on one of my pages.
Posted by: Jeff at Jul 14, 2008 7:56:15 AM
Great article! Nice Comments!
I would like to link to this on one of my pages.
Posted by: Jeff at Jul 14, 2008 7:56:22 AM
Sorry for double post. I used the back button!
Posted by: jeff at Jul 14, 2008 7:57:47 AM
