Tightening Oil Markets Will Bring the Speculators Back

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Tightening Oil Markets Will Bring the Speculators Back

Posted by Jeff Rubin on October 27th, 2010 under SmallerWorldTags: oil prices, speculation, triple-digit oil prices • 22 Comments

With oil prices now already above $80 per barrel and likely to hit triple-digit levels within months, you can expect to hear a lot more about the role of speculators in the marketplace. It’s always easier to find a convenient whipping boy than to recognize that depletion and the prospect of ever more costly fuel in the future are the real problems.

For many people, the fact that oil prices fell below $40 per barrel during the depths of the last recession meant that oil had no business ever trading at triple-digit levels in the first place. For them, $147-per-barrel oil was just a speculative bubble that, like all bubbles, inevitably burst.

Few could deny that speculators weren’t long oil when it soared to almost $150 per barrel, just as they were short oil when prices came crashing down. But focusing on the role of speculators is very much putting the cart before the horse.

What folks don’t mention is that when oil prices eventually crashed during the recession, so did oil demand—and not just speculative demand, but real economic demand. That’s what happens when essentially oil-powered economies experience severe contractions. In 2009, global oil demand fell for the first time since 1983—a testament to the severity of the last recession.

While drivers may have liked the pump prices that came along with the recession, oil producers certainly didn’t. Investments in future production, from Brazilian deep-water to Canadian tar sands, were slashed literally overnight as the price of oil fell well below the cost of developing new supply.

As I’ve said before, peak oil isn’t a problem if the economy it’s powering is shrinking. Triple-digit oil prices are only a problem if we want the economy they’re fuelling to grow. And most of us do.

As I’ve also said previously, the first thing you identify in an economic recovery, even the most anemic one, is that the economy starts burning more oil. The next thing is that oil prices start rising rapidly. Already they’re at more than double the levels of the last recession’s lows, and that’s with most major oil-consuming economies (including the world’s largest oil guzzler, the US) still operating well below their pre-recession levels.

Movements in oil prices have never been linear in the past, and there’s no reason to expect them to be so in the future. The interaction between genuine market forces and financial speculation is a fact of life in virtually all commodity markets.

Speculators have been in the oil market before, and guess what? They’ll soon be back. And it will be the same pull as ever—that of a world ever more desperate for the increasingly expensive fuel that got them on the price bandwagon last cycle and that will soon draw them back again.

Susan

Great article Jeff! This will be very interesting to see how this plays out in the next few months. I'm with you on this theory … we are running out of easy oil.
http://www.2000Watts.org Petrole_Enegie

I like your post. You are right on target: “easier to blame investors than to recognize that depletion and the prospect of ever more costly fuel in the future are the real problems”.

In the media, OPEC members also tend to paint speculators as the “bad guys”. But no doubt, deep in their hearts, they love them!

For the general public, “speculators” allow us to keep our behavior and blame others.
What will be our live without them?
Whatmeworry

Nobody's going anywhwere… down the road. So burn your fair share right now with a few extra trips to the sun. Look after yourself, and the world will do the same.
JB

Another important factor to mention is the fact that most oil exporting countries are heavily subsidizing the price of gazoline and diesel in their own jurisdictions. This has for effect to artificially increase oil consumption internally and to further decrease the amount of oil available for exportation…

The less oil is available for export the more rapidly the price shoots up and the more money oil importers get to continue to subsidize their increasing internal use of oil and general economic growth…

Hence the current “international” price of oil is not an effective mechanism to control international oil consumption because it does not apply to everyone: in other words the current “market mechanism” is far from being efficient in particular because it does not provide a level playing field…

In fact, the current “international oil order” is contributing to rapidly build-up further tensions between oil importers and oil exporters, which one day might degenerate into something “nasty” like the practical implementation of the “Carter Doctrine”…

JB
Manders, Steve

In January 1999, oil was $9.67 a barrel, In 2000, it averaged $20, in 2005 it averaged $40, in 2010 with everything running smoothly, it is averaging $80 a barrel. There is a pattern here and we have not hit post peak oil yet. Global oil production has been flat since 2004. What is happening now is that the price is rising to limit demand to the rate of production. Price is no longer able to stimulate higher production. All the new technology and oil finds are only able to maintain production, after depletion of existing wells. WE ARE AT PEAK OIL NOW ! Once the speculators, oil exporting nations, and oil companies fully realize this, then real hoarding and speculating will begin in earnest. The world is awash with 3 billion barrels of oil in storage, it is not for sale, it is being hoarded right now. I fully suspect that speculators will impact us more than post peak oil will. It happened in 2008 when oil hit $143 a barrel, but when the post peak shortage did not occur, the oil future contracts had to be sold off at any pirce, because the speculators were not able to take delivery of the real oil. We have had our preview of the start of post peak oil. Peak oil is not a peak, it turns out to be a plateau, now 5 years old. This is a unique situation never seen before.
Whatmeworry

Thank goodness for windmills.
rojelio

Did anyone predict such a plateau? Are there any good forecasts for how long this plateau is sustainable?
rojelio

Your windmill would be made out of Popsicle sticks if not for the use of oil.
Whatmeworry

Solar cells to the rescue as well.
Rojelio

I love my solar panels. However, I noticed that the steel pole had to be delivered from Korea using bunker fuel, I needed a diesel powered backhoe to dig stuff, the panels were delivered by a burly man in a large diesel fueled truck. The various parts shipped from everywhere were likewise delivered by truck……I have read that the manufacturing process for PV requires oil…
Whatmeworry

You should hand dig like in the good old days. I use wood from the woodlot for heat and thick wool sweaters. I don't use artificial light…early to bed in the winter and up late in the summer.
Dhouston

speculators may cause short term blips in the price like the 147 dollar spike but longer term the price looks to be on a slow steady climb up. Unless we hit some huge discovery or everybody stops driving.
rojelio

Now that you mention it, I did do quite a bit of hand digging in hard Montana rocky river bottom dirt to get the pole in. That sucked. Probably a taste of our future though. In comes the backhoe to the rescue. And here I am the solar guy and the black smoke coming from the backhoe didn't phase me.

Anyway, I don't see your point. So what if I dig like a dog while wearing an itchy wool sweater and intermittently dipping my balls in scalding water? Those panels still wouldn't be in place without a lot of oil.
rojelio

What's your opinion of this 2 minute video/article suggesting that there is a massive arms race taking place in the middle east right now?
http://www.youtube.com/watch?v=bM_50Kn2XKA

When do we see China getting more involved over there?
Whatmeworry

Like David Suziki said about 20 years ago or so we have to employ “the power of one”. He then did his part and got on a flight to his next talk. Gore buys a 10000 sq ft mansion after pumping his book ,many years later. The point is all these wealthy “leaders ” leave it to the rest of us to the heavy lifting. Pushing solar cells that last 25 years but need 100 years to offset the manufactoring polution is nuts. I burn stuff. And if I hit oil on the back forty I'll burn that too.
Whatmeworry

I've got a hand dug bunker on the back 40. I enlarged it from the 60's model. Good idea in these times.
rojelio

While I was digging, I kept fantasizing about hitting oil like Jed Clampet but it never happened. The only way out of this current mess is through the upcoming depression and hopefully into the renaissance.
rojelio

Did you check that out? There appears to be a massive multi-billion dollar arms buildup in the oil nations right now, not to mention a new improved nuclear Iran. Holy crap. I'm going to hole myself and the family up in the hills for awhile.
Whatmeworry

I play Foggy Mountain Breakdown while digging…. for good luck.
Bob

I do hope to make a buck on my energy investments,but we need to start thinking about energy in a new way. We should be analyzing the energy cost of everything how much energy to build a car,what does it take to grow my food. Are students educated to understand the relationship between their way of life and energy? Things in the store need an energy cost on the label. It's not about the economy duh its about energy ,welcome to the real world.
Whatmeworry

Quit thinking about it…just burn it as you need it. Your investment will pay for it. Promote Alberta open pit energy development and you will be okay 10 generations out.
Hassaankhalid

To Mr. Rubin: In your article “Financial crisis or energy shock?”, I didn't quite understand what happened in Cushing, Oklahoma in the first place that the price of oil jumped from $35 a barrel to $ 70 / barrel that started the whole cascade of increasing energy inflation from less than 1% to 35%, which caused the headline consumer price inflation rate to go from 2 to 6% and that in turn, caused the federal funds rate to become around 6%. Could u please shed a little light on that? If anyone else wants to explain, please go ahead. I really want to know.

Recent Blog Post

What the leaders need to understand about Canada’s shifting economy

Tightening Oil Markets Will Bring the Speculators Back