I Am A Little Dumbfounded

I wrote a post today explaining why the oil markets, which in the end are the most important markets in the world if we consider economic growth, are utterly corrupt. As a consequence, those markets now and in the future will impede the growth which humans apparently require to accommodate growing populations and afford those new humans the greatest comfort possible. This crude oil market hosedness, along with actual scarcity, will eventually, and inevitably, result in the deterioration of those precious standards of living we cling to, even for most of those who consider themselves well-off at present.

Have we forgotten the price spike of 2008? That spike was more related to supply & demand fundamentals than not, but it seems like anything could happen now.

The craziness is in the graph. Look at the wild price swings in recent years. Click to enlarge. Source

Nobody said anything about that post. There were zero comments on that post.

Now, I understand that most of my regular readers have little to say (comment-wise) about what I write on DOTE, but, I mean — c'mon on!

I just told all of you that the oil markets are fucked, and in the post I explained in very precise terms why that is so. And nobody, I mean nobody, has anything to say about that?

I am a little dumbfounded by this.

— Dave

Comments

[Warren]

What is there to say but I agree. I have learned a lot reading your post sometimes it is just a typical American view of oh my God what have we and the world done. Which is ok. Other times it has amazingly informative.

[John Theodorou]

I think many feel that whilst the issue of peak oil is huge, there are other more pressing disasters - like economic meltdown, which are more likely to get civilisation first, rendering peak oil moot as something to worry about.

[Checkthemath]

OK, I'll bite.

I will miss your market updates, because you have a tremendous expertise in this subject—both the real-world oil supply situation and the unfortunate brokenness-of-the-market aspect—so I found it comforting to get an idea of where things stand. Note that I don't mean "why the price is what it is", since the answer is generally that someone is manipulating it again this week; I mean where it looks like supply is, and other such factors that should influence the price. Your awareness of the news and discussions around this subject area is strong, and therefore saves a lot of us from having to review the same mass of material that you do.

I didn't comment because I accept that your point is correct that the pricing mechanism is broken. That seems true of all of the financial and commodity markets as far as I can tell; it's just a big, thoroughly rigged, casino. In the case of commodities this is a particular disaster because it affects the real world use and extraction of commodities, and the development and deployment of alternatives, and adoption of alternative living strategies for people and small communities, who can't tell what the heck is going on, and are pushed by skewed economics to do the wrong things.

I respect your decision to post only on big developments and not waste you time pointing out the corrupted market as a regular feature.

Finally, as a daily reader of your blog, I would like to gently point out that I get the impression that you sometimes land on commenters with both feet, and that I suspect this may dampen the number of comments over time. It feels like your growing anger and frustration over the massive wrong-headedness of our species' decision-making spills over into 'corrections' of what might be minor points of disagreement or nuances for discussion, which ends up being a conversation-stopper. I have no statistical analysis or specific examples to back this up, sad to say. I mean this to be a constructive comment-–I am empathetic over your frustration, and concerned over what toll it may be taking on you. In your attempt to point out to everyone what you have learned about the human condition, you are forced to review and comment daily on examples of the egregiously annoying folly in the 'public sphere'. So even though you fully accept that we are a species and wysiwyg, you can't actually let go of it. That's a pretty pickle. Speaking for myself, I have had to disengage from a lot of current events in order to maintain my health.

All the best, and appreciation for your work. Sorry for the wall of text.

[Dave Cohen]

OK, Checkthemath.

That's all fair comment. I accept all that.

A few days ago, I lifted all restrictions on comments. I thought somebody would have something to say about the oil markets being broken, as I described in some detail. If these markets are broken, unwarranted oil price spikes alone can bring down this precious global economy that people yammer about all the time.

Nobody said a thing.

best,

-- Dave

[NoHype]

Sometimes it takes a while to chew on things before knowing what to say.

After reading your post, I found myself wondering whether a broken oil market is a bad thing. I started thinking that in an ideal world, we'd tax it so heavily as to "break" any link to a market mechanism. But then, that would just create a huge pool of money in a different spot. It would still attract all the flies.

Frankly, I can't think of an "ideal" situation vis-a-vis oil as it relates to human nature. Once it was discovered as a viable substitute for slavery -- only magnified many times over -- the genie was out of the bottle.

[Alexander Ač]

Hi Dave,

I have read your analysis as late as now. I have a little problem with what you write there regarding:

"...and the dollar is being devalued with a renewed enthusiasm, as we've been subject to in recent years"

Yes, the dollar index has declined between 2006-2008 (from 90 to 72), but remained flat since then (on average at about 80), e.g. here: http://www.fxstreet.com/rates-charts/usdollar-index/

-- kind regards,

Alexander

[Gretchen]

I have always heeded the words of my great granny. She said the markets were rigged way back at the turn of the century, well before the Great Depression. Don't trust them any more than you would trust a hospital.
And she's right. Every week or so we have a new story about how Libor rates are rigged, the real estate markets are rigged, gold rates are rigged, the whole darn stock market is rigged, the fix is in and has been in for a very long time so...why wouldn't the oil markets be rigged as well? Today, the VIX is in. LOL Only a few people have the inside scoop, those same perennial faves, the creatures who run the TBTFs.

Just sit tight and remember George, It's a club, and you're not in it! Feel blessed. :)

[adam]

Dave, did you see my comment in the Saturday Oil Report? I'm watching those markets too, though perhaps more as a hobby and not with the same level of depth. What did I say? I said it resembled the stock market.

Now, the stock market is transparently rigged right now. The oil market is also under a lot of outside influence. So... it's rigged, at least to some extent. I personally think that there is now an oil price floor and ceiling, floor being "or that oil never gets pumped and we're screwed", ceiling being "the economy tanks outright". But not all of the movement in the market is due to supply and demand. No doubt some of the extra movement is due to manipulation. It seems to me the manipulation of the market is not for high volatility, though. Or if it is, it can only cause volatility that goes so far - the price has been all over the place this year, but it has stopped short of either spiking or crashing the way it did in 2008.

You said Brent was a broken measure partly because it was reflecting local conditions - well, I think that's true of WTI too, and it's natural and inevitable. Any oil price is going to reflect local conditions to some extent, except perhaps an average of all worldwide prices. That's not "broken" in my book. I think the oil price is useful, if only to see how screwed everyone is right now, because it does affect the price people pay for gas, transport, and goods.

Ultimately, I disagree with you about the market being completely detatched from supply and demand - I think it is constrained by supply and demand to move within certain boundaries. But what causes it to move how it moves within those boundaries is less clear now than in the past. Okay. You explain part of the high price as due to QE and financial actions. Okay. What am I supposed to say?

You said you would talk about it if it was relevant, which I take it to mean "I will talk about oil prices if they act really, really weird or start to affect everything else disproportionately". Sounds good to me.

[H Read]

I don't know enough about the oil markets to add anything useful. And, I suspect many of your readers feel the same way.

What I would say is that as our society gets more complex, we should expect this phenomenon to show up in all aspects of modern society including markets. As an example, I saw a comment that says that if Facebook is worth $90B, then Apple should be worth around $2.7T (or thereabouts). Illustrating the imperfection of the market and now we have introduced high frequency trading to the mix - an activity of no economic value.

To learn that the oil market no longer functions well for its original purpose is not perhaps a surprise to regular readers.

[elvinator]

used to be that fubar was as bad as it gets. now we need different levels of fubar, like we do with defcon.

[Ken Barrows]

Does the market enter into calculations at all? Say that without speculation that oil prices would be 50% lower. If prices were 50% lower, what would that do to production rates?

[james]

I agree with Checkthemath. But I would also add that a lot of readers of DOTE are probably familiar with TOD also. The fact is, many experts posting their research on TOD have been out-and-out wrong: oil production has surged to a new high (almost 76 mbpd versus the max 74million previously reached in 2005/8). So what do we conclude? It seems like we've been proved wrong, and maybe there's just "opinion overload" when it comes to oil production and price estimates.

[Dave Cohen]

@james

Where did you get that "almost 76 mbpd" number?

I want a link to a credible source.

-- Dave

[NoHype]

@james

I think I agree with where Dave is heading with his question. When I read that this or that scientist or researcher has been "debunked" based on some esoteric "mistake" in their predictions (usually based on some arbitrary expiration date), I get extremely suspicious of the motives of the debunker. The scientists and researcher I know make forecasts, track them and adjust their models accordingly. The best ones go to great lengths to explain that forecasts are just extrapolated futures of models. No matter how loudly they proclaim these disclaimers, there's always someone waiting in the wings, marked calendar in hand, screaming about a supposed prediction that wasn't met. It sounds like splitting hairs to most people (prediction vs. forecast), and that's what the debunkers (cons) count on.

[Dave Cohen]

OK, I found that credible source.

http://earlywarn.blogspot.com/2012/08/trend-in-global-crude-and-condensate.html

Crude plus condensate production did in fact get into the high 75 million barrels-per-day range earlier this year.

This is not surprising because the Saudis are pumping more. I've estimated in the past that world production capacity is in the 76-77 range.

-- Dave

[NoHype]

@Dave

Because everything else is centrally planned an manipulated these days, it's no surprise that commodities, especially oil, would be too. The question becomes why higher?

If we assume that New York and London still hold sway over world financial markets (for the purpose of this thought exercise, I am assuming that it's true), then we can conclude that price movements will be manipulated in favor of Western capitalist interests.

How do high oil prices favor Western capitalists in the face of a contracting overall economy?
1. Higher shared profits for all enterprises associated with oil production, their financiers and the wholly-owned governments that control the raw material.
2. Forced efficiency at the consumer level. This allows current profits (in raw dollars) to remain stable, while preserving future profits further into the future.
3. Increased "market" pressure for conversion to LNG, which has an infrastructure in place (with heavy investment from Western capitalists) but is as of yet heavily underutilized.
4. Has the "happy" consequence of boxing in the Chinese government to force extreme efficiencies into its domestic economy -- one of the few governments in the world with the ability to do so, but has resisted up until now because of the desire to meet official growth targets. If you will, it's a back-door austerity policy forced onto the second largest economy in the world (which leaves more capital available for financialized skimming operations).

That last point isn't quite cooked yet because I can't see a way to successfully box in the Chinese leadership without them being able to slip out of it. But it doesn't mean there aren't some swaggering asshats in NYC and London who wouldn't try.

[ralph m]

Dave, your blog is one of a handful that I try to check up on regularly, so thanks for providing a perspective that is impossible to find in commercial media, including mainstream public radio and TV.

I'm just an average working stiff trying to figure out why the world my children will inherit will not be the one I foresaw even 10, let alone 20 years ago. Keeping this in mind, my own personal research on what connects so many apparently disparate problems around the world seems to all come back to natural resources -- increasing demand vs. declining availability and quality.

So, even with oil - which may be the most important resource in the ground, I can't help seeing the corruption and misrepresentation of international oil markets as a sideline issue! As oil declines and we turn to increasingly expensive and dirty sources to try to keep the present system running, why should oil be any different than the rest of corrupt international markets that the big players are gaming with split second trades and inside information.

They are playing the same game with grain and other food commodity prices, which directly affects the lives of millions of poor people around the world. I expect nothing better from them, and they are all-powerful today, as governments around the world are afraid to take action against them even if they wish to.

[Dave Cohen]

Re: the oil markets

from The Oil & Gas Journal (subscription only)

http://www.ogj.com/articles/2012/08/iea-sees-oil-market-as-sufficiently-supplied.html?cmpid=EnlDailyAugust202012

International Energy Agency Executive Director Maria van der Hoeven said she sees no reason for a release from the US Strategic Petroleum Reserve (SPR).

The IEA “bases our actions on data and reality,” she told reporters after an Aug. 17 speech at Rice University’s Baker Institute, adding, "The market is sufficiently supplied."

Her comments came a day after Reuters reported that the White House was “dusting off” plans for potentially tapping the SPR.

Van der Hoeven said she had not discussed a potential release with members of the Paris-based IEA, which coordinates the use of consumer nations’ strategic inventories.

[Malcolm Kettering]

I guess I didn't comment personally because while I'm no expert at all on fossil fuels or the commodity markets, it just didn't seem surprising at all that someone objectively concluded that the markets are broken or rigged. Nothing to see here, keep moving, another example of the decline. There are so many examples, day in and day out, can't comment on each and every one. But thanks a TON for all your work in keeping this blog going, believe me even if we don't comment, we are reading it and it is helpful.

[james]

Dave,
The EIA website has c&c production consistently above 75mbpd, hitting a high of 75.8mbpd. Yes, it's a result of KSA pumping its heart out, plus gains from elsewhere such as the US and Iraq. Of course Iran is down by almost 1mbpd. But the point is that production is way past the 2005 and 2008 highs, and yet there is a deafening silence from the oil-peak crowd (such as TOD). I think we all hoped that "the highs were in" 7 years ago, but now find we're back at square 1, and with absolutely no response from all the experts who said (as recently as a few months ago) that oil production was in a 72-74 mbpd range which can only break to the downside !

[Andy]

It was a suprise to me that you hadn't come to that conclusion long ago. Glad to see you got there eventually. Cheers for the entertaining blog. We are stuffed, but what can you do? Who cares anyway?

[solenoid valve]

You have a very good site, well constructed and very interesting i have bookmarked you hopefully you keep posting new stuff.Fine information, thanks to the author.

[Chris]

Dave, I am doing my best to understand! Your information is always interesting and informative. I plan on what I can do if there is a catastrophe.