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06/28/2011

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NEH

There is a little more to the issue of releases from the Worlds Strategic Oil Reserves and "profiteering" by the Nations which hold Reserves. That is, the specter of the World's economy rolling over back into recession. Consumer confidence is extremely sensitive to price increases in energy costs and consumption. Such that higher energy prices translates into higher prices across the board and reduces the perceived well being of the Consumer which in turn drives down consumption and hence production. Resulting in recession. The release of reserves is intended to drive down energy costs, stabilize other costs and in the process, increase Consumer confidence and hence purchases driving the Economy forward out of Recession. At least that seems to be the idea.

As for the "Libyan issue" and their impact on World Oil Markets they only represent approx. 2% of total world production. At 48 gallons per barrel of oil this represents less than a gallon, 0.96 gallons, to be exact. This doesn't even cover the losses that occur in production. So the Libyan issue is not of any real importance, other than it shows that the market is essentially irrational and can be manipulated. Now, in regards to the "Arab Spring" and the possibly disruption of the rest of the 98% of supply, this could be become a problem driving speculators to load up on oil contracts driving prices ever higher and in the end eroding Consumer confidence to the point where a Recession becomes a real possibility...

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Demand for oil changes over time because of recessions that reduce world output and hence demand for oil, and also because of world economic growth, especially in the developing world.

TANSTAAFL

In truth, a barrel of oil contains 42 gallons, not 48.

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When the IEA countries on June 23 agreed to sell 60 million barrels (half by the US) from their oil reserves over the subsequent 30 days, it basically acted as a speculator on oil prices.

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NEH

Tanstaffl, You're right. A barrel of oil is 42 gal's. My mistake. So Libya's impact is even less, at about 0.84 gal. per barrel. And so, the argument still holds...

Jack

One IS reluctant to denounce the writings of prize winning economists as Hrsht but every once in a while it seems the only rational option:

"Fundamentals in the oil market, that is, the supply and demand for oil, explain the vast majority of the large fluctuations in oil prices."

SHOW me ANY shortfall of supply that would warrant bidding up prices five fold in such a brief time.

And........... "Oil production is not easily increased in the short run, especially with Opec controlling about 35% of the world supply of oil."

........ are we to take this as a "fundamental?" or one of the several examples of price manipulation?"

As for the elastisity -- it is true that in the short run it's difficult for most consumers to respond to price gouging. But! over time I am confident that US economic creativity (enhanced by the leadership and vision of the Obama admin) can and WILL show the world that conservation (ala the rapid increase in auto sales of "fuel sippers" Chevy Volt tech and substitution will constrain US demand, while in emerging nations (China et al) simply not be able to afford $4 gasoline will constrain demand from those quarters.

"OPEC" in past years seemed to be aware of and tailor their production in so as not to rile their wasteful US oil addicts, which leads one to look closely at the (obviously) manipulitive effects of our own "futures" market.

An observation: While prices (seemingly stablized over $50) has spurred lots of costly shale frakking projects, here in Alaska, a tripling (at least) in prices has hardly created the effort from the oligopoly that controls the N. Slope that one would would have predicted. Instead, awash in an embarrassment of profits, with the value of reserves fattening their balance sheets, they appear to be holding back production in hopes of an (oil soaked) Repub majority here being hustled into rolling back the slight increase in Alaska's owner share of its oil.

Libya? If they shut down entirely despite their nation (like most oil producting states) being heavily dependent on oil income it would amount to 2% of world consumption. In recent years they've been producing more than the agreed upon OPEC cartel amounts.

http://www.eia.gov/cabs/libya/pdf.pdf

"Fear of "unrest" and supply constriction expanding to Saudi Arabia? Doubtful; they've been a lot more mature and sensible in oil policy for many decades.......... and what would be the result?

In the short run, a grand opp for our price manipulators to run prices yet higher, thus crippling any chance of the US coming out of DEEP recession and tanking the economies of the rest of the world, with a bit longer term political impetus to become less dependent. ie. Rapidly adopt the "Boone Pickens's" switch to NG powered "eighteen wheelers" and a RUSH to send the most wasteful fleet of gashogs to the crusher in favor of hybrids, gas sipping economy cars, along with the rapid adoption of NG powered cars, hopefully led by the Obama admin which already has the "vision thing" and seemingly does not OWE our oil industry.

Ha! for those considering a new rig, for about the same money a Chevy Volt perhaps equipped with a "Screw OPEC" sticker is going to be a lot cooler ride to the golf course than a 12 MPG Expedition or a Cad CTS that can more than double the national speed limit.

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Great post, the market will corrects the demand/supply and price of the oil and it seems unnecessary for the IEA to release the oil.

I am also convinced of your view that the oil price at $110/barrel is also working well for the economy, the intervention of IEA will not benefit in the long run as most of the government interference to the economy.

Jack

Best -- you seem well-trained and contentedly naive. Thanks for stopping by.

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This seems like a complicated issue for all sides

Jack

Ahh! Breaking news! Mortgage scammer sent to prison for 30 years.

(Like many US sentences it seems too long for a 58 year old --- perhaps 8-10 which is a long time, and not being allowed back into finance, could, with direction and parole do some good on the outside?)

Anyway good to see a few being brought to justice:

http://www.loansafe.org/virginia-mortgage-broker-facing-30-years-prison

http://www.google.com/search?source=ig&hl=en&rlz=1G1GGLQ_ENUS404&q=mortgage+broker+sent+to+prison&aq=5v&aqi=g-v2&aql=&oq=mortgage+broker+sent#sclient=psy&hl=en&rlz=1G1GGLQ_ENUS404&source=hp&q=mortgage+broker+sent+to+prison+30+years&pbx=1&oq=mortgage+broker+sent+to+prison+30+years&aq=f&aqi=&aql=f&gs_sm=e&gs_upl=31652l33971l0l9l9l0l0l0l0l248l1843l0.3.6l9&bav=on.2,or.r_gc.r_pw.&fp=a74058c2d3dbfa94&biw=1280&bih=685

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