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2008-06-19 Home Front: Politix

Coastal Oil Drilling Becomes US Campaign Issue

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Posted by Fred 2008-06-19 00:00|| || Front Page|| [9 views ] Top

#1 Even the Pundits on CNN + MSNBC acknowledge that the DEMS want BIG GOVT. vv this oil drilling controversy.

Posted by JosephMendiola 2008-06-19 00:28|| 2008-06-19 00:28|| Front Page Top

#2 I've coverage of this issue on Fox over the couple of weeks and one important aspect didn't really come across.

In all likelyhood there is substantial oil there , but it would take years to produce, so won't affect petrol prices in the short to medium term.

However, proof of the oils existence can be used to fund massive developments (as Brazil has started to do) - in nuclear, coal liquidization, even 'shudder' solar.

Even a modest 2 million barels a day would produce $100 billion a year in revenue.

Posted by Phil_B 2008-06-19 01:12|| 2008-06-19 01:12|| Front Page Top

#3 philb - yes it WILL affect prices in the medium and short term.

Look at the markets. The peopel who are playign it specualtively, via margins and futures, are betting for a continuous rise in price due to constrained supplies and a weak dollar.

The minute you change that equatiosn the futures lose value and the margin calls loom for those who hold too long.

SO the markets move, and prices will stop the fast upward increase. Just by openign these places for drilling, it changes the equations on how fast and how far prices will go.

Once these peopel see the change coming, they'll find a better return eslwhere and sell. Once these sell orders come through, it will put a "top" on the increses - and that will pul the "momentum" traders out. Once they bail, the shorts will be all over it trying to make a buck by slaughtering the late longs who pulled out too late.

Eventually all this mess in the futures WILL flow back down to the intermediate markets and the cash markets.

And that will cause at least a "topping" effect to cut the rate of increase to nearly nothing, and may very well cause a drop in prices as more money comes out.

Look at the credit markets for an example ofhow the futures, speculators, and hedgers work to create and pop bubbles.

And its been 27 years - if not now, then when? Had we started 5 years ago in ANWR, we'd be coming online with full production. Has we started 10 years ago off the coasts, we be rolling it in now.

ANWR alone is estimated to bring in (via ripple effects) over 700,000 jobs to the US over-all (not just alaska), and boost tax revenues a ton.

Imagine what coastal drilling and mining the green river basin in CO-WY-ND-SD woudl do...

Posted by OldSpook 2008-06-19 01:30|| 2008-06-19 01:30|| Front Page Top

#4 Well, I am going to say something that O'Bama won't like. Everytime an opponent talks about "How" or "Why" something O'Bama stands for, O'Bama responds, "I will not let anyone lecture me on this issue!" (And I thought that is what we did, elect politicians to listen to us)

What I want O'Bama to answer is "How" we are going to "move away from Oil". I want a solid, probable solution. He doesn't even give decent recommendations with his stand on such issues.

Posted by Lecture Me? 2008-06-19 02:50|| 2008-06-19 02:50|| Front Page Top

#5 But, but, but---if we start drilling Saudis will stop my stipend.

Posted by Your representative 2008-06-19 02:58|| 2008-06-19 02:58|| Front Page Top

#6 Nobody knows how much oil could be produced from ANWR - and only a handful know for sure whether ANY could. The only proven hydrocarbon accumulation off the East Coast of the US or the Gulf Coast of Florida is one decent-sized natural gas deposit off Destin. The California coast undoubtedly has some undiscovered oil, but not likely in massive, easily-exploited fields that could make a significant or quick impact. I don't know anything about the off-limits Alaska coast but am not aware of any really optimistic reviews. There is natural gas on the North Slope, but no way to get it to market. There is certainly more undiscovered oil there too, but not likely in Prudhoe Bay class accumulations. In sum, all these places warrant further exploration and development but I doubt it would solve our problems. Do it, but understand the risks, limitations and long times (10+ years) to put most of it on production if it is found.

Posted by Glenmore 2008-06-19 03:10|| 2008-06-19 03:10|| Front Page Top

#7 Actually, the Dems will propose getting rid of the Options market in Petroleum, even though Clinton legalized it. There is some proof that Goldman Sachs' predictions of $200 oil, signalled a bubble effect. McCain will have to jump on market closure. Maybe options should be restricted to food and related products. Otherwise Obama could eat this up.

http://www.blogrunner.com/snapshot/D/0/0/an_oracle_of_oil/

http://www.nakedcapitalism.com/2008/01/200-oil-options-increase-ten-fold.html

Posted by McZoid 2008-06-19 04:42|| 2008-06-19 04:42|| Front Page Top

#8 OS, you are just wrong. It's not possible to have a bubble in a consumed commodity (absent physical storage). It's conspiracy thinking.

Legislating agianst 'speculation' in the oil or any other futures market is a spectacularly dumb idea.

The USA dominates these markets, employing large numbers of highly paid people. London, Singapore, Mumbai, and Shanghai would be gobsmacked by their unbelievable good luck if The USA drove itself out these markets

Posted by Phil_B 2008-06-19 07:17|| 2008-06-19 07:17|| Front Page Top

#9 I agree with the Dems on one thing they've said - we should stop the failed policies of the past.

The Democrat policy of prohibiting domestic oil drilling and exploration has got to go!

Posted by Crusoling Sinatra7514 2008-06-19 08:11|| 2008-06-19 08:11|| Front Page Top

#10 Drill for Oil -Hope and Change!
Drill for Oil -Hope and Change!
Drill for Oil -Hope and Change!

Posted by Crusoling Sinatra7514 2008-06-19 08:12|| 2008-06-19 08:12|| Front Page Top

#11 Is oil high, or the dollar low?

Posted by Bright Pebbles 2008-06-19 08:17|| 2008-06-19 08:17|| Front Page Top

#12
From McZoid's second link:

Oil forecasters say there's no chance of $200 crude, as the U.S., which consumes a quarter of the world's oil, slows. Prices will average $78 a barrel this year, 20 percent below the current level, and $75 in the fourth quarter, according to the median forecast of 27 analysts surveyed by Bloomberg. The last time prices fell that much was in 2001, when they dropped 26 percent.

If they speculated based on that forecast, they're well toasted in a bubble that's "not possible".

Bubbles are caused by fear, greed, and limited supply, consumable product or not. With most consumables, the supply adjusts quickly. But with oil, there are political and practical limitations, so it takes longer. Meanwhile, we have this bubble.

Posted by KBK 2008-06-19 08:31|| 2008-06-19 08:31|| Front Page Top

#13 Is oil high, or the dollar low?

Both. When the housing market bubble burst a lot of paper capital disappeared and investment fronts and banks started writing 'loses' [on which they had leveraged other actions] off. That was no small amount. So where is all this capital coming from to inflate the oil on the market? There's only so much capital. I doubt it was laying around stuff in some Swiss lock box accumulating dust [/sarcasm off]. It could be the Chinese who've been accumulating vast reserves both in capital and in oil. They're not so much interested in capitalism as they are in power, so they're willing to do a bad commercial or banking 'deal' as long as it keeps the peasants happy and them in power. Then again the Fed dumped loads of money attempting to 'recapitalize' the market after the loses in housing. However, it doesn't take a whole lot of effort by the investment fronts and banks to move monies on the books from one column to another. Or loan, on good o'boy rates to friends of the management. I suspect that all the Fed did was allow the usual suspects to shift 'x' amount in one category that was intended to operate commercial lending to their speculative branches who then received the infusion to play games in the oil market. Now the power exists to call margins. Why haven't they done so already? Better to fall 20 than 100 feet, delaying the call is not going to postpone the day reckoning so much as increase the pain. Everyone is caught dirty. The system has been compromised by those entrusted with it. They've rationalized that what is good for them is good for everyone or what will destroy them will hurt everyone. They're doing it for 'our own good'. Better to see the population as a whole bear the pain of oil speculation than allow the house of cards they've constructed and profited from or socialize among collapse. Calling margin will quickly reveal the culprits and their enablers, it will also be a sponge to the credit market which will constrict business activities across the board, most likely inducing the recession they've been staving off for the last six months.

Posted by Procopius2k 2008-06-19 09:17|| 2008-06-19 09:17|| Front Page Top

#14 it's not possible to have a bubble in a consumed commodity (absent physical storage). It's conspiracy thinking.

Umm, bullshit phil. You seem stuck in some sort of ignorance of futures and commodities markets, like McCain and Obama.

Listen up and learn.

FACT: Any place you have speculation and hedging a bubble can occur (and will eventually be deflated).

Financial institutions consider commodities positions as a core component of their portfolios. Hedge fund managers refer to these investors as "index speculators" because of their investing strategy: They allocate their dollars across key commodities futures, according to popular indexes such as the Standard & Poor's-Goldman Sachs Commodity Index and the Dow Jones-AIG Commodity Index.

When financial institutions load up on these futures, it drives up demand (for the futures) other (delivery) prices follow when the pricing data pushees back into the cash markets.

So thats hwo it works and why the money is there.

Now for the bubble:

According to the Department of Energy "annual Chinese demand for petroleum has surged over the last five years to 2.8 billion barrels from 1.88 billion barrels, an increase of 920 million barrels. Over the same five-year period, index speculators' demand for petroleum futures has increased by 848 million barrels."

So there's your bubble without storage. Or consumption.

No conspiracy theory needed. Simple market capitalism.

It goes back to basic capitalism and market forces. Like Milton Friedman in 1953. Friedman, pointed out that speculation has to be stabilizing if speculators are making money. If speculators know that the price of something is going to go up a month from now, they buy today. If they are correct, they make money, and the price change is smoothed by the higher demand today. If they are wrong, they lose money and leave the market allowing prices to moderate lower.

The reality is, if we can manage to allow offshore drilling the speculators will start selling crude-oil futures contracts - decreasing demand, and increasing supply of the futures ocntracts, thereby dropping the price. Price declines will filter backwards from the longer-term contracts to the cash market in the same fasion that the increases did. In other words, what can be bought will be sold. If expectations change on the hope that future oil supplies will rise, prices will adjust lower and it will happen fast.

This is what you, McCain and Obama seem not to understand: via futures markets, price changes (up AND down) are pulled forward in response to shifting oil-supply policies.

NOW do you understand?

Posted by OldSpook 2008-06-19 10:21|| 2008-06-19 10:21|| Front Page Top

#15 As to ANWR and "nobody knowing":

Studies of the ANWR coastal plain indicate it may contain between 6 and 16 billion barrels of recoverable oil. Advances in recovery could increase that number (some estimates this were based on are more than 10 years old and lower priced oil).

As for coastal oil, I agree that there is no "knowing" until we drill. But estimates are that several fields like the one recently discovered in Brazil are likely in some of the few formations that have been mapped off the east coast, and that is in addition to the productive formations in the gulf and off of Florida's coasts (which the Cubans have had help drilling while we stand idly by). So there is proven oil out there, we simply are not doing anything to exploit it. Opening nearly the entire gulf of mexico is a near certainty to yield more oil.

And then there are the shales in CO-WY-ND-SD that can produces the equivalent of as much as 800 billion barrels.

They primary obstacle for all these increases are government and environmentalists.

So the first thing the politicians should be looking at is removing governmental obstacles to this added petroleum supply in order to promote economic stability (c.f. above re: futures, pricing stability and oil supply policy). This is nto to say that is the only thing to do: while adding to petroleum production, we must develope alternatives and being replacing petroleum within a decade, be it nuke-electric-hydrogen (fuel cell), or coal liquifiaction.

The stark choice for we the people will be between the politicians that listen to us and do what is right for the nation (add to our supplies and stabilize the economy) and those politicians that are owned by Luddite "environmentalists" who would collapse our economy with their fanatic blindness to any solutions other than destroying capitalism in favor of some sort of "pristine" Neanderthal existence.

Posted by OldSpook 2008-06-19 10:30|| 2008-06-19 10:30|| Front Page Top

#16 It's not possible to have a bubble in a consumed commodity (absent physical storage).

Not true given derivatives markets, but also irrelevant to oil since many countries including the US and China do in fact store oil. Iran's doing it on tankers at the moment as is Venezuela, as well.

Posted by lotp 2008-06-19 10:36|| 2008-06-19 10:36|| Front Page Top

#17 True, lotp, but do you believe they are storing enough to raise the price of oil 30% for more than a quarter?

And why are they storing? China and the US are for strategic stockpiles and are akin to consumption, not speculative hoarding. And in any case, the US has stopped buying for its stockpile. Are Venezuela and Iran storing oil on ships to drive up the price or are they having trouble selling what they have already extracted? Ship rental gets pretty expensive. True, the reduced supply from these countries may be helping to drive prices up and you could characterize that as speculation, but not by Wall Street.

Certainly there can be a brief bubble in oil prices, but what we are seeing now is not the result of speculation. It is the result of increasing demand in China and India and perhaps the permanent or temporary plateauing of supply.

And the price of oil is not running up in isolation. The price of almost every commodity is increasing as is food. This is inflation, not speculation. The only reason the price of manufactured goods is not rising is that low cost labor is being substituted in the manufacturing process creating social as opposed to financial problems. There has been excessive expansion of the money supply since 1997 and the Asian liquidity crisis. It is likely to come to a stop shortly after the election and we will be in for one rough recession. If it's short it will be worth it.

But to think that the price of oil is being driven up at the pump by malefactors of wealth is to engage in wishful thinking.

Posted by Nimble Spemble 2008-06-19 10:58|| 2008-06-19 10:58|| Front Page Top

#18 From the Minerals Management Service (MMS), the government agency responsible for oil and gas leasing in the US offshore.

Alaskas offshore waters contain US reserves estimated at 27 billion barrels of oil and 132 trillion cubic feet of natural gas

significant oil and gas resources exist in the Gulf of Mexico in areas greater than 100 miles from shore approximately 45 billion barrels of oil and 232 trillion cubic feet of natural gas. Infrastructure exists in the region and industry has an excellent track record for safety and environmental protection.

Virginia legislature has expressed interest in opening some of the Virginia offshore waters to leasing. Estimates 4 billion barrels of oil and 37 trillion cubic feet of natural gas.

Estimates California's coastal waters hold 10 billion barrels of oil. (enough to completely supply California's needs for 15 years)

Estimates indicate there are currently 85.9 billion barrels of oil and 419.9 trillion cubic feet of natural gas that are technically recoverable from all federal offshore areas OCS. Add to that 22 billion more barrels and 226 trillion cu ft of natural gas in non-federal offshore areas. Totals: 105 billion barrels, 681 trillion cu ft.

Note that ALL of the above are "Undiscovered Conventionally Reservoired Fields" per the DoE spec. "Technically recoverable" resources are those that are producible using current technology.

(Note: the above numbers are via US MMS 2006 and the US DoE numbers from 2005).

One other note: remember this also involves natural gas. Look at your power bill. Going up by a HUGE amount real soon? Then DRILL NOW! 23 percent of electric power is produced by natural gas - and the US can produce HUGE amounts of this if we can get the government and enviros out of the way.

Regarding the estimates, they methodology in use is still the U.S. Security and Exchange Commission's congressionally mandated reporting system the "1978 Standard". It has come under fire for being "Texa-homa" centered in terms of production and is technologically obsolescent. From Society of Petroleum Engineers (SPE), the World Petroleum Congress (WPC), and the American Association of Petroleum Geologists (AAPG), the current SEC system remains rooted in the technology of the 1970s, without any consultative forum to address technological change in reserves reporting.

Given the above, it is probable that these estimates may be adjusted higher and prove-out larger.

So, you can listen to the greens and politicians, or you can listen to the markets, the bankers and economists that know this sector, and most of all, the engineers that know oil.

I put my money on the side that has the bankers and engineers.

Posted by OldSpook 2008-06-19 10:59|| 2008-06-19 10:59|| Front Page Top

#19 So thats how it works and why the money is there.

My question is whether it is 'real' money. When it is credited, it's paper. When people or institutions use margin to drive up or speculate in a market, be it housing or oil, they are not using real capital as much as paper capital inflated by that margin. Ten cents on the dollar gives the players far more means to attenuate the market than full payment. The game we pay for is the speculator is gaming with everyone's credit, particularly when the Fed recapitalizes the market will more money, inflating the currancy and decreasing the value of every holder of real money. If the market has real money, then there should be no problem with calling margin, because they're covered. Otherwise the 'money' is not there.

Posted by Procopius2k 2008-06-19 11:02|| 2008-06-19 11:02|| Front Page Top

#20 Nible - reread my post. Its very clear that speculators are driving up futures demand as a hedge against inflation. I reiterate:

According to the Department of Energy "annual Chinese demand for petroleum has surged over the last five years to 2.8 billion barrels from 1.88 billion barrels, an increase of 920 million barrels. Over the same five-year period, index speculators' demand for petroleum futures has increased by 848 million barrels."

There is your bubble. There is no clearer presentation than that as a market bubble.

Its NOT inflation, its a bubble.

Go reread what I posted. If you do nto understand fundamental market economics, then you are going to continue to run way off the mark as you are now.

Call your broker and have him explain it.

Posted by OldSpook 2008-06-19 11:03|| 2008-06-19 11:03|| Front Page Top

#21 And where did the speculators put their 848 million barrels of oil when the contracts closed?

Posted by Nimble Spemble 2008-06-19 11:26|| 2008-06-19 11:26|| Front Page Top

#22 In the hands of a buyer of the physical commodity ... at a great profit.

Posted by AzCat 2008-06-19 11:50|| 2008-06-19 11:50|| Front Page Top

#23 Basically, spot prices are now at $130-140.

scenario (i am using arbitrary numbers).

Months ago the futures were at $100 - that is, you could buy a contract that would allow you to later purchase the oil at $100 a barrel.

The speculator is betting that the price will go above that future contract he has, and the supplier knows that he has just made a profit of selling the future contract without actually selling the oil (thats the premium on top of the contract). The seller charges the buyer $10 for the contract.

The speculator now has spent $10, and owns a contract that guranatees him the right to buy the oil at $100 a barrel. Thus this is a pending market demand for 1 barrel of oil at $100.

Time passes, and oil shoots up over $120. The speculator is now "in the money", and begins calculating how much longer he will ride his contract. Its a NPV calculation of the money invested versus the expected value of the contract over price+premium.

A little more time passes, and the NPV makes sens for the speculator to sell - so he sells his contract to an oil consumer (refiner) for $130, which is $10 below the $140 price. The refiner gets a good break of $10 a barrel, the speculator gets $10 for a short term investment of $10, a 100% return. Far above the rate of inflation.

As long as the speculator sees a rate of return in the present value of his money that far exceeds inflation, he will continue to purchase and then sell contracts.

Speculators provide "price smoothing" and commodity liquidityin this fashion - they soften the price curve for consumers by taking on the risk and selling below market later. They also create demand because each contract is a barrel of oil that is already "spoken for" and thus not available for sale to the cash/spot market.

The more futures demand, the higher the price will go and the shorter the supply will go, absent any changes to the situation.

That is how a bubble is made.

Now - you know the tune, lets change the tempo.

Speculators get wind of a possible increase in supply. Even a tiny one, even "way out there".

They do the NPV calculations on the potential investment in a futures contract at a range of given prices.

If supply just threatens to moderate the continued increase in prices, the futures contracts of the higher priced oil simply are less valuable over time, because they run the risk that the price might not climb enough, nor climb fast enough, to be worth while.

So they purchase less of them at higher prices, and if they purchase more, it will be lower priced (less risky) futures. This in turn makes higher priced futures that are currently held lose value. Meaning that people holding them will want to sell them sooner, and will sell at a lower margin in order to unload them and go to something less risky. So you have a price drop pretty rapid in the futures market - they are far more liquid than the cash markets. With the price drop, the speculators will leave the market because the returns will be lower, and less of a hedge over inflations. This means less oil tied up in contracts, and more oil hitting the spot market for true supply and demand.

That in turn means that the end consumer pays LESS for oil because he is paying the speculators less, and there is more oil for the spot/cash markets, instead of being tied up in contracts - meaning more supply therefore lower cost.

The bubble deflates as the speculators bail for better returns, and the prices come into line with actual consumer demand and producer supply.

Now there is even more to it: most of the speculators are leveraged. That is, they BORROW the original $10 to buy the contract with. So they are paying interest on the money. Meaning they have to have even better than inflation and market rate returns - they have to cover interest cost of the money invest as well. So the returns are required to be even higher.

Now they are even MORE sensitive to a potential risk - because a sudden price drop doesn't have them out money - it has them facing a margin call from a banker, for money that is usually a multiple of what they have in cash. And that will force a huge liquidation in assets and a market crash if too many speculators default on a given investment bank. Given the carnage that happened in the mortgage industry, there is hypersensitivity by the banks now.

If there is even a whiff of price moderation and risk, the BANKS will quickly force these people to reduce the amount of exposure they have by liquidating their futures to much lower levels in the petroleum biz.

So even as small a thing as lifting a moratorium and beginning exploratory drilling takes palce, you'll see a relatively quick and possibly sharp, drop in the futures market, to be followed by drops in the spot cash markets, and thus the overall price.

(and this doesn't even account for the short sellers who can pound a falling price set hard to force bigger drops, which can cause panic selling from speculators and hedge funds)

So there you have it peopel: a bubble, how it got there, and how it can fade far more quickly than people may think.

Posted by OldSpook 2008-06-19 12:32|| 2008-06-19 12:32|| Front Page Top

#24 I messed up the math - I had different figure in my head.

the premium of $10 is guaranteed profit for the contract sellet.

the sale at $130 is a $20 profit, meaning a 200% return on the investment in only a matter of months, and it still saves the consumer $10 a barrel.

And the section on leverage still stands correctly.

Think of it this way.

You have $100 to invest.

Put it into a CD, and in a year you'll have $103.

Put it into a money market fund and you'll likely have $105 in a year.

Put it into the stock market, and typically (historically) you'll have $107 in a year.

Now if you want to play fast and loose:

Oil is 100, and you speculate that there will be a runup, given supplies look to be staying very tight for the foreseeable future and demand is still strong.

So you take you $100 and put it as collateral for a loan of $1000 10% per anum.

Take that $1000 and buy 200 futures for $105 oil at $5 each.

In 6 months, oil goes to $120.

You re-sell the futures at a strike price of 105 with $5 for your premium and $5 for your profit = a contract for $115. The buyers will snap this up because its far cheaper than the cash price.

They pay in effect, $115 for a barrel, 10 to you and $105 to the oil supplier (who makes money again, I might note).

You now have 2000 on a $1000 10% loan. Pay the loan off, and the $50 in interest to date, leavin you with $950 plus your original $100 you paid in as collateral.

You have, via speculation, turned $100 into $1050 in 6 months.

NOW you see why so many are doing it?

The actual numbers in terms of premium (futures market priced) are far smaller, but the volumes are astoundingly large, so there are large sums of money out there - and large loans form investment banks backing much of it in hedge funds.

Now how willing would you be to risk that you default on the $1000 loan, lose your collateral, and be forced to cut back other investments to pay the bad loan -- if you knew that the US was going to allow drilling, that supply would increase, and that prices might not rise fast enough and far enough?

Now do you see how all that is needed to pop your bubble is for the price increase to SLOW DOWN, not drop?

And evne th threat of more US production is enough to slow the rate of increase to the point where the futures market will react like a bubble, and pop or deflate.

And remember - these are made up numbers - the real-world margins are far thinner and far more risky.

Posted by OldSpook 2008-06-19 12:58|| 2008-06-19 12:58|| Front Page Top

#25 NS: The US and China are not storing oil for speculative reasons but for national security use. In China's case that does equate directly to consumption.

Iran and Venezuela are deliberately distorting the market IMO and don't mind the irrational loss of value since it's their citizens who ultimately pay, not Shorty and Chavez.

Rising demand is indeed real. The impact of the lower dollar is also a factor right now. The oil producers are seeing to extract as much profit as they can from the chaotic situation, with Iran and Venezuela being particularly egregious in open market manipulation.

Behind this there's also the failing fields in Mexico and the Saudi kingdom, among other places. The world economy & political playing field is breaking up and shifting massively and a lot of players want to profit from &/or manage that shift.

All of which leaves room for speculators. But they're not the entire story by any means IMO. The massive liquidity pumped into the international finance system by very low interest rates, needed to fund the wars since we were doing it pretty much alone, is a key enabler.

Posted by lotp 2008-06-19 13:22|| 2008-06-19 13:22|| Front Page Top

#26 lotp - the interest rates and relatively easy credit for hedge funds (backup up by government bailouts) create the environment that speculators thrive in - their cost of money is low, and they can leverage huge sums because of the credit breaks they get.

Simply requiring specualtors to put more skin in the game by restricting the amount of leverage available for thier activities fromthe investment banks would cause the bubble from speculation to pop.

And this could be done by simply regulating the investment banks level of liquidity required by law, and passing a law forbidding hte Fed to bail them out of yet another hole.

Malinvestments MUST be liquidated in order for capital markets to function properly. The lack of real consequences for the banks and speculators is what is damaging the economy and creating these speculative bubbles. Nobody gets left "holding the bag" - they all get bailouts from the Fed. By bailing out these people, its has distorted the markets and allowed bad money and a lack of consequences for bad decisions to distort the market.

Time to let some of the big hedgers fail as they should, and place the investment bankers behind them on notice that they will be liquidated in federal receivership should they run into issues.

"No more bailouts, liquidations instead" as a stated policy of the SEC and Feds would be enough to stop it without any further legislation.

That in itself will fix a very sick part of the market economy that has been dragging us down in more than one sector.

At that point, supply-demand will be the real driver, and supply side measures like increased drilling would have a tangible positive impact - especially when combined with demand side measures the marketplace is already starting to push together: hybrids, efficiencies.

Not to mention that energy is fungible, especially as we turn more and more to electricity instead of combustion.

And even combustion petroleum has alternative - a lot of noise is coming from Biotech in terms of bio-engineered production of petroleum from plant sources, as well as petro-chemistry research and development of oil shale conversion, and coal liquification and conversion (Including the USAF sponsoring these plants for aviation fuel production).

For the most part, all we have to do is let the markets work (and fail when they should), and get the government the hell out of the way of production.

Posted by OldSpook 2008-06-19 16:04|| 2008-06-19 16:04|| Front Page Top

#27 How about this...
If democrats insist on no solutions.
Then democrats may not drive cars & trucks fly planes ride in trains ... anything that uses fuel.

Give them bicycles and tell them to pedal.

Posted by 3dc 2008-06-19 18:15|| 2008-06-19 18:15|| Front Page Top

#28 Good to see you guys coming around to my point of view. I agree that higher margin requirements are a good idea because they would reduce the number of dumb retail speculators who play the commodities market.

But phil's point remains; It's not possible to have a bubble in a consumed commodity (absent physical storage). It's conspiracy thinking.
with the critical point being absent physical storage.

And that's why I asked one simple question that has not been addressed despite the death of billions of electrons, where did the speculators put their 848 million barrels of oil when the contracts closed? Whoever is long has to take delivery. And we aren't hearing about a tsunami of fails in futures contracts.

If the speculators had bought all this oil and were sitting on it after the contract closed, they would have to take delivery and store it somewhere. If they did, the inventory numbers would show a huge increase in the inventory of extracted crude. But they don't. So the oil is being consumed, not hoarded by speculators.

Unless...and here my conspiratorial side comes out, the players are storing it but it's not included in the inventory number. Now, who could do that?

As I pointed out months ago when the dollar was attacked, the Chinese are flush with dollars and I believe they were behind the run. I believe they may also be behind the run up in oil prices, or at least aggravating it. They would have the capacity to store large amounts of crude without us knowing unless we really worked to find out. And I doubt the CIA retains even that minimal level of interest or competence.

I believe we'll see more and more financial dislocations before the election. And we haven't seen the last of the mortgage problems by a long shot. A lot of mortgage rates will readjust in the next 12 months and the mortgagees will be underwater. We have not dealt with the problem properly at all.

So I see more and more problems and they will not be due to speculators because financial speculators are not setting the price of oil; fundamental forces of demand and supply are.

And I think the price of oil will be under $40 a barrel by the end of 2009. That is why we should implement an import fee to keep the cost of imported oil above $100 a barrel so that the bottom does not fall out on all the domestic shale, OCS, nuke investments that will otherwise be abandoned in 2010 when it is clear they will never pay off with gas at $1.50 per gallon.

Posted by Nimble Spemble 2008-06-19 19:42|| 2008-06-19 19:42|| Front Page Top

#29 Michelle Malkin: Lift the drilling ban. Just do it now Mr. President

There are two bans on drillingâone by Congress and one by an White House executive order put in place by President Bushâs father. Why wonât the son revoke that order NOW if he truly believes expanding American oil production by increasing access to the Outer Continental Shelf is an urgent priority.

Posted by 3dc 2008-06-19 20:24|| 2008-06-19 20:24|| Front Page Top

#30 NS, setting a price floor as a matter of national security?

I've considered that myself, and Im still not comfortable -- but it may be a decent way out as long as the tarrifs are directed properly. That's the rub.

Then again, you coudl have Obama elected and Maxine Waters and her ilk will simply nationalize and destroy the oil industry, and we will be forced to do thigns the hard way in terms of replaceing petroleum.

Posted by OldSpook 2008-06-19 21:14|| 2008-06-19 21:14|| Front Page Top

#31 as long as the tarrifs are directed properly.

Not sure what you mean by this. I see the issue being excluding Canada from any tariff. Every other barrel of imported oil gets pushed up to the floor price. And all aspects of energy are now national security issues.

The other thing we need to think about is what happens if, when we lease the OCS, the Chinese submit the highest bid?

I'm not worried if Obama and Maxine win. I live near lots of Amish and they will help me accommodate to the new regime.

Posted by Nimble Spemble 2008-06-19 21:22|| 2008-06-19 21:22|| Front Page Top

#32 Apparently there is some arbitrage buying of oil to sell at a higher futures price, which must be stored somewhere.

But as NS says, Why isn't it showing in oil inventories? Probably because the net effect of higher futures prices is a drawdown in inventory.

I also agree with NS, governments must set a floor price for oil. We are highly likely to see a crash in the near future seriously harming alternatives. Although I happen to think the oil price will go right back up again.

If you want the reason for increased demand, look at global car sales over the last few years.

http://www.scotiacapital.com/English/bns_econ/bns_auto.pdf

Posted by Phil_B 2008-06-19 21:32|| 2008-06-19 21:32|| Front Page Top

#33 Good morning. Tag, you're it.

Posted by Nimble Spemble 2008-06-19 21:46|| 2008-06-19 21:46|| Front Page Top

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