OIL PROS ADMIT CHEAP OIL IS HISTORY BUT DO NOT SAY WHY

An Algerian oil industry official was asked why he thought oil prices have skyrocketed in the last year. His answer: "The reasons for the oil prices are a mystery…"

Asked the same question, Abdullah bin Hamad al-Attiyah, Energy Minister of Qatar, spoke of “…strange market fluctuations…”

One thing went curiously unmentioned: Oil market speculation.

Speculation has not gone unnoticed in Washington, D.C., where the U.S. Senate is debating the Stop Excessive Energy Speculation Act of 2008 because experts have testified to Congress that speculation is probably responsible for a third or more of current high oil prices.

Oil industry experts like to “tut, tut” accusations that market speculation has anything to do with high prices. “The foolish impression of amateurs,” they say. “There are oil cargoes that cannot find buyers,” they observe dismissively.

Wait, wait, not so quick. That’s just the point. The activity in the markets is about SPECULATION, not HEDGING, so actual oil, because it is of an inferior grade, goes unpurchased by paper speculators buying only the high quality grades in futures markets.

Competition from New Energies? New Energies generate electricity and do not fuel vehicles. Pointing at New Energies as a culprit in driving oil prices up is just another of those ruses to confuse the issue.

The only tie between skyrocketing oil prices and New Energies: An increasing clamor for plug-in vehicles that is not now shifting but will eventually shift consumption from oil to electricity.

There are very real supply-demand factors that make cheap oil a dream of yesteryear. New reserves are available and more are being discovered but calculations show the new reserves and newly discovered reserves are inadequate to replace the reserves being exhausted by the world’s 85 million+ barrels/day habit. Some doubt the likelihood of meeting the 110 million+ barrels/day demand anticipated within a quarter century.

The new reserves are also located in places (like deep and/or remote ocean waters) or buried in forms (like the Canadian and Venezuelan sand deposits or the Rocky Mountain shale deposits) that will require very high dollar (and emissions) costs to develop.

Supply-demand factors are inexorably driving oil prices up. That's what brought investors into an oil trading commodities market designed to allow oil consumers to protect themselves with hedge investments. The impact of pension fund, endowment fund and institutional investors requires the Commodity Futures Trading Commission (CFTC) be given more power to limit such investing.

Senator Harry Reid (D-Nev), Senate Majority Leader and bill sponsor: “Right now, Wall Street traders can raise oil and gas prices simply by logging onto their computers and executing a few trades…We’re not saying that all speculation is bad…But without proper market oversight, speculation has gotten out of hand, and that is one reason for record gas prices.”

Most observers see Reid's Senate "speculation regulation" bill as part of a large-scale partisan negotiation aimed at reconciling Democratic support for New Energy and Republican support for the fossil fuel industries.

Most economists and students of the oil industry, unanimously including those who testified to Congress, believe a significant part of high oil prices come from speculation. Supporters of increased oil and gas drilling and other fossil fuel initiatives dogmatically insist the Democrats must remember it is not the only reason.

Senator Mitch McConnell (R-Ken), Senate minority leader: “No reputable economist thinks speculators alone are the reason for the spike in gas prices…”

Negotiations between the parties may not resolve the problem. It entirely depends on whether party leaders expect the issues or successful resolution of them to be of more use in this fall’s elections.

click to enlarge

Era of Cheap Energy is Over, Oil Experts Say
Sinikka Tarvainen, July 1, 2008 (Deutsche Presse Agentur via RigZone)
and
Anti-Energy Speculation Bill Stirs Fear
Diana B. Henriques, July 18, 2008 (NY Times)

WHO
Jeroen van der Veer, CEO, Royal Dutch Shell; Tony Hayward, CEO, BP; Abdullah bin Hamad al-Attiyah, Energy Minister, Qatar; Fu Chengyu, president, Chinese National Offshore Oil Corporation; the International Energy Agency (IEA); the Organization of Petroleum Exporting Countries (OPEC); Senator Harry Reid (D-Nev), Senate Majority Leader; Senator Mitch McConnell (R-Ken), Senate minority leader

WHAT
- At the World Petroleum Congress, oil industry affirmed what energy industry watchers have been saying for some time: The era of cheap energy is over.
- The Stop Excessive Energy Speculation Act of 2008 would create tools to limit the harmful impact on oil commodities market prices of speculative investors.

From Matt Simmons' most recent presentation. (click to enlarge)

WHEN
- The World Petroleum Congress ran from June 30 to July 3.
- Demand in emerging economies, pressuring prices up now, will be equal to 25% of today’s demand in less than a quarter century.
- The Senate is bill is being debated and negotiated at present.

WHERE
- The World Petroleum Congress was held in Madrid, Spain.
- Significant but expensive new oil supplies: Offshore Gulf of Mexico, offshore Brazil, deepwater Caspian Sea, Russian Siberia, war-torn Iraq, Rocky Mountain oil shale, Venezuelan and Canadian oil sands.

WHY
- The oil bosses differed on the causes of high oil prices and fluctuations in oil prices. None mentioned speculation in commodities markets.
- Royal Dutch Shell’s van de Veer spoke of future “limited” access to “easy oil.”
- BP’s Hayward said the era of “cheap oil” was over.
- Oil officials from all over the world mentioned the litany of usual suspects : The falling dollar, the lack of infrastructure reinvestment, inadequate refinery capacity, growing fuel taxes, competition from New Energy, growing demand from emerging economies and conflicts in oil producing regions.
- The Reid bill widens CFTC and other federal regulators’ ability to (1) limit privately negotiated derivatives (swaps), (2) limit participation of speculators/noncommercial energy traders in private transactions and public futures markets, (3) distinguish “legitimate” and “nonlegitimate” hedging and limit the latter.

From Matt Simmons' most recent presentation. (click to enlarge)

QUOTES
- James Angel, professor/financial markets, Georgetown University, on the bill: “It’s a not-too-bad response…How it is implemented will be the test.”
- Researchers, weekly oil market review, Barclays Capital: “[L]awmakers are no longer largely neutral bystanders to the oil market but have instead become a source of uncertainty.”