June 27, 2008 | posted by Michael Baxter in Oil | comments (0) |

Shokri Ghanem, chairman of Libya’s National Oil Corporation, put his spoke in.  The world is oversupplied with oil he said, and in any case, Libya is so put out by US action in Iran that it is considering reducing its supply of oil.   

So the day has come when Libya plans economic sanctions against the US.

Meanwhile, OPEC president Chakib Khelil, speaking on French television, said he thought the price of oil could hit $150 or even $170 a barrel.

And yet, more evidence emerged to suggest oil will fall back, eventually.

In the UK, bus and train company Stagecoach talked about a “Renaissance” on the railways.  The last year has seen a 3.6 per cent jump in the number of passengers using its buses, but more to the point, it enjoyed a 13.6 per cent rise in like-for-like sales on its rail franchisees.

Maybe Jimmy Savile was right: “This is the age of the train.”

Then, Morgan Stanley suggested the high price of oil could put an end to global imbalances.

The argument goes like this.    The Chinese and Indian growth story has been based on exports, which in turn have relied upon Western borrowing.

But, as the price of oil goes up, the cost of transporting goods rises too.  “In the short run, this is clearly a negative shock to Asia, and for Asian assets, including currencies,” said Morgan Stanley’s Stephen Jen.  “In the long run, however, this shock could accelerate the move away from exports.”

But surely Mr Jen’s argument has another implication.    Just as the high cost of petrol has been forcing us onto the buses and trains, it is also likely to lead to less flow of goods across the seas.

These are just two examples of why demand for oil is set to fall. 

There are plenty of other reasons too.  The fall in GM shares to a 33-year low yesterday, shows how much customers want fuel efficiency now.

Ironically, though, if energy producers believe oil is a bubble and will crash in price, they are less likely to spend money on ramping supply and on finding alternatives.   This will in turn keep price high. If they believe the high price of oil is here to stay, they will invest in alternatives and oil will then fall in price.

For that reason, oil in excess of $130 must appear to become entrenched, before it can fall.

Cycles are like that.    Booms go too far when people foolishly believe it can carry on for ever.  Crashes occur when people equally foolishly think there is no hope.

Yet, ironically, it is the foolishness of markets that creates innovation.    
 

June 26, 2008 | posted by Michael Baxter in Oil | comments (0) |

When Ken Livingstone was in New York a few years ago he was asked why London was doing so well.  He replied: “Two words, Sarbanes Oxley.”

London’s financial markets are not keen on regulation.  Okay, there is regulation, but it’s nothing like the draconian measures seen in the US.    And that is why London is such a success.

Sometimes it seems as if London’s unique selling point is US politicians.    They overreact so.   They put the kybosh on Middle Eastern investors buying US assets, so they buy British assets instead.    Enron and WorldCom go bust, so Congress imposes a straitjacket on US corporations.  The result: chances of another Enron are diminished, but then the money flowing into New York’s stock exchanges diminishes too, and it flows into London instead.

Of course this is not unique to US politicians.  Overreactions seem to be the way us humans do things.     Someone leaves the stable door open, the horse bolts, so Farmer Giles gets a new solid steel door, with a state-of-the-art security system, when all he really needed was a less-forgetful stable boy. 

But now, the focus is on oil speculators.     Are they to blame?  OPEC puts the high price of oil down to speculation.     In the US, senators are spitting feathers. And London is in the spotlight.

So, are speculators to blame for the price of oil?   And while we are busy blaming them for oil, why not see if we can think of some other things to blame them for, such as the price of food, the credit crunch, England’s failure to qualify for the European Championship, all that rain we have been having lately; oh, and why not blame them for sterling getting kicked out of the ERM in 1992. 

Sorry, I forgot.  These days, people seem to think the UK’s ejection from the ERM was a good thing.    George Soros, once vilified as the man who beat the Bank of England, is now a hero for hastening the day the UK was able to step out of the straitjacket that was the ERM.

Yesterday, on Capitol Hill, Daniel Yergin, who is one of the leading energy analysts throughout the entire US of A, spoke to the US Joint Economic Committee.  “In such circumstances as these, there is a tendency to seek a single explanation,” he said.  “History, however, demonstrates that changes of this scale and significance result not from a single cause, but rather from a confluence of factors.”

“Phew,” said the speculators, but then Mr Yergin added: “Financial markets are today playing an increasingly important role in price formation – responding to, accentuating, and exaggerating supply and demand, geopolitics and other trends… As prices go up, this psychology becomes self-reinforcing – at least until the market turns.”

Others put it more strongly.  London Metal Exchange Chief Executive Officer Martin Abbott told Bloomberg: “It would be very foolish of any government to stifle participation in markets.”  He added: “Why would an elected politician have a better idea of what the price is than the summation of the entire world’s oil industry trading across an open exchange?… For a government to try and determine a good price for something is nonsense.”

Writing in the FT, Martin Wolf was just as dismissive. He talked about this: “silly idea that price jumps [in] oil or food are the result of ‘wicked’ speculation’ – a fantasy promoted by dangerous populists across the globe.”

Writing in The Times, Carl Mortished said: “Those pilgrim puritans are at it again, threatening to ban, regulate and smother all forms of risk-taking. After adultery, booze, ciggies and online poker, Americans have invented a new vice and its home is New York’s Mercantile Exchange.”

Warren Buffett once said: “Financial derivatives are weapons of mass financial destruction.”   But futures markets also enable business people to insure against risk.

More to the point, speculators don’t lean against the wind.   They only bet on prices going up if they think underlying factors will drive price up. They only go short if they think there is a good reason for price to fall.

As such, they can provide a counterbalance to the rubbish put forward to vested interest groups.

If you had followed spread betting trends, you would have known the City expected a house price crash when the property industry itself was still saying prices would go up this year.

When the government tried to protect sterling’s unsustainable exchange rate, Soros knew it wouldn’t work. 
 
What do you do when there is bad news ahead?  Bury it?  Pretend it is not there?  That is what governments try to do. Speculators merely tell the truth, and they speak the truth with their wallets; and the truth is then there to anyone that wants to listen.

June 23, 2008 | posted by Michael Baxter in Oil | comments (0) |

So, Gordon dropped in on OPEC this weekend.

After collecting his luggage from Jeddah airport he said, “There must be a new deal between the oil producers and consumers. I am going to make it absolutely clear that we are going to reduce our dependence on oil. I want the oil-producing countries also to diversify out of oil and I want us to get a more balanced energy market.”

But Chakib Khelil, the top man at OPEC said, “Asking OPEC member countries to increase their offer is illogical and irrational.”

But who is right?  Some recent data from the latest BP Statistical Review helps illuminate the true picture of the global oil business.

GB, of course, reckons it’s all down to supply not keeping up with demand; that OPEC needs to do more. If it doesn’t, goes the warning, the West will reduce its reliance on oil.

There’s no doubt, spikes followed by big crashes in the price of oil are hugely damaging to the global economy.  It is all very well Brown talking about ending boom and bust, if oil, the commodity that seems to underpin the global economy, goes through these regular peaks and troughs.

But then again, what can OPEC do?  Maybe we are just running out of the black stuff. Maybe we just can’t keep up with surging demand.  Maybe these subsidies which some developing nations are putting on oil is distorting the market.  Consumers in those countries are not making the cut-backs they should, because they are not paying the true market price for the black stuff.

That’s what GB thinks.  The subsidies in countries such as India and China “hurt the poor,” he said.

Saudi Arabia is responding to Gordon, and is putting a few hundred thousand more barrels a day into his begging bowl.

But the rest of OPEC seem unmoved.   OPEC’s Mr Khelil, by contrast, blames a shortfall in refinery capacity, speculation and geopolitical tension.

But what do the numbers say?

Last week, BP released its annual statistical review of the oil industry, and it makes a fascinating study.

First off, it is true that oil consumption is rising fast.  From 1968 to 2007, oil consumption doubled.     But has production kept pace?  Answer no, but it only lags behind by a whisker.  While it took 38 years for oil consumption to double, it took 39 years for production to double.  Supply lags behind demand, but by a tiny amount.

Secondly, what about peak oil?  Well, the world’s proven oil reserves  have jumped from 667 billion barrels in 1980 to 1237 in 2007.  So that is a fair rate of increase, and by the way, in percentage terms, much faster than the change in consumption.

More worryingly, between 2006 and 2007 both proven oil reserves and production fell – but only by a fraction.    It has happened many times before, so don’t read too much into the fall in one year.

And what about India and China?  Yes it is true, both have seen a massive rise in their consumption of oil.

Since 1965, India’s oil consumption has increased by about 11-fold.  In China, the increase was nearer 30-fold.  

The US, however, remains by far and away the world’s biggest consumer of oil.  In 2007, US oil consumption was around double the level in China.

Asia as a whole does, however, now consume more oil than the US, around half as much again, in fact.

We don’t need to tell you that the population of Asia is many times greater than the US, so oil consumption per capita in Asia is still tiny, compared to the US.

As for the UK, China’s consumption of oil overtook us in the mid 1980s, and India’s around ten years ago. Today, China consumes about four times more oil than us, and India about half as much again.

So what conclusions can we draw?

There is no doubt that the subsidies in Asia don’t help.  But, North America and what BP calls Eurasia, that’s Europe and much of the former Soviet Union, account for 52 per cent of global oil consumption in 2007.

The US accounted for 23.9 per cent.

A small reduction in demand in the US and Europe will have a big impact on the global balance between production and consumption.

Looking further forward, the key will be whether the slight dip in production and proven reserves seen in 2007 becomes a trend, or is a one-off. The answer to that question will determine the price of oil in the longer-term.

June 5, 2008 | posted by Michael Baxter in Oil | comments (2) |

The Honda Civic has the answer.     India Oil illustrates the threat.

In the US in May the biggest-selling auto was that fuel efficient car from Honda.  Available with a hybrid option, no less than 53,299 Civics were sold in the month, making it the best-selling car in the US.  It was the first time since 1991 that a pickup truck was not number one.

Yet the decline of the pickup does not stop there.  The Toyota Corollas and Camrys, and Honda Accord, all enjoyed greater sales too.

You know the reason why: it is the high price of oil.  US consumers want more gas per buck.

And yet in other countries, the full cost of higher oil is not yet being felt.

In India, for example, gas is a third cheaper than in the US, and as you know US gas is a lot cheaper than in Blighty.

According to Business Week, India Oil, the biggest oil refiner in India, is close to bankruptcy.  Why? Because the state owned company loses money every time it sells gas – and apparently India’s government-owned oil companies are expected to lose between them US$58.4 billion this year.

And that is why oil is staying high.  It is not just India, oil is subsidised in many countries throughout Asia, but there are signs it is changing.

In India the government has chosen to reduce its subsidies on oil by 11 per cent.  It’s not the first time this has happened, the government lowered subsidies in February too.

Indian oil minister Murli Deora said the government was “committed to protecting the interest of the common man as well as ensuring the financial health of the public-sector oil marketing companies.”

Mr Deora added, “Due to a relentless increase in international oil prices, it has now become absolutely necessary for the consumer, who is an important stakeholder, to also shoulder a small part of increased burden.”

But the move is hugely controversial.  Opposition spokesmen Rajiv Pratap Rudy said if an increase in fuel prices “… is inevitable, then the exit of the prime minister and his government is inevitable as well.”

But India is not alone.  In fact, the real fireworks came from Malaysia.  The government there is to increase gas prices by 40 per cent.  Malaysian Prime Minister Abdullah Ahmad Badawi said, “We cannot naturally keep subsidising at the current rate…We must reduce wastage. If we can change our lifestyles, we will not suffer a terrible situation…The long term plan is to increase … [gas] to market price.”

Indonesia, Taiwan, Pakistan and Sri Lanka have all taken similar steps recently.

But, for the time being, the dragon is not moving.    China can afford to stay put, at least for the time being, and it is thought there will be no relaxation of gas subsidies in China until after the Olympics.

We can complain about China, and there is no doubt the policy of subsidising oil introduces distortions into the market.  But frankly, the policy is not that different from the EU Common Agricultural Policy (CAP).  Okay, in China the idea is to help the consumer, CAP subsidies are there for producers.  But the two subsidies are equally damaging.

Of course, China is a wealthy developing country and has the luxury of being able to afford to do this.  In impoverished countries like the US and UK this option does not exist!

In reality, though, China remains a poor country.  It seems unlikely she can afford this subsidy indefinitely, and in any case, it is questionable whether it is really a good thing for the local economy anyway.

If the subsidy was lifted, the government could spend the proceeds elsewhere – and in time, this is surely what she will do.

But until then, the move to fuel-efficient cars in the US, and the reduction in tariffs in countries such as India and Malaysia, may just not be enough.

The likelihood is that the price of oil will only fall significantly when China lifts, at least partially, her gas subsidies. 

May 23, 2008 | posted by Michael Baxter in Oil | comments (0) |

Oil is through the roof, even the IEA is puzzled, and the peak oil theory is back in the headlines.

But we still say this is a bubble – see yesterday’s article – besides, only bubbles can explain sudden spikes like the ones we are seeing at present.

Mind you, we should be learning our lesson now, and turning our attention to the real ray of hope – the sun.

Now the Paris-based International Energy Agency (IEA) has really set the alarms ringing.

Yesterday, Fatih Birol, the chief economist there, said, “But what has happened in the last few years has not been in line with economic theory. The price of oil went up sharply between 2004 and 2006 and demand actually increased. That may seem bizarre but it is the result of new buyers coming in, such as China and the Middle Eastern economies where fuel is subsidised by government and rises are not reflected on the consumer side.”

So, it is all down to too much demand then?

Mind you, this morning, the Independent led with an article asking whether we are running out of black gold.

Yet there is supposedly more oil lurking in the tar sands of Alberta Canada than has ever been found, anywhere in the world to date.

We will run out of oil one day, but it seems that since investment into exploration has been so low over recent years it is far too hasty to say that time is imminent.

Mind you, the longer oil stays up, the more likely it is we will develop alternatives that really will be cheaper in the long run.

Recently, Scientific American magazine ran an article suggesting that by 2050 solar energy will provide sufficient power so that the US will be completely free of foreign oil.

The Scientific American article said that the energy in sunlight striking the earth for 40 minutes is the equivalent of global energy consumption for a year.

The real scandal though is that it is taking so long to exploit this resource.

But these days, technology is changing so fast, all technological industries seem to obey rules just like Moore’s Law.

The potential not only to tap into this vast solar resource, but to do so quickly, is there.    The greater the investment, the faster will be the rate of technological progress, and the sooner will come the time when the resource can be exploited rapidly and cheaply.

Trouble is, governments must be willing to think 10 or more years ahead.

May 21, 2008 | posted by Michael Baxter in Oil | comments (0) |

To you and me it will soon be summertime, but for oil analysts it’s got another name: the driving season.

It is that time of the year when Americans jump into their massive road wagons, fill up the tank with petrol and hit the road, drinking up gas as hundreds of miles of tarmac disappear behind them. At least that is how it used to be.

As a result, this is a time of the year when oil often goes up in price.         Oil is like that, it follows the seasons. There’s the driving season, and then the hurricane season, then things tend to go quiet, providing that there isn’t a war against terror season, until the following year.

But of late, oil has been no respecter of these conventions.    One day it seems to go up in price for no better reason than  it’s Monday, and then the following day it rises because, well, because it was Tuesday.

Yesterday it was one of those Tuesday-driven oil hikes – but it was enough: enough to push oil all the way up to $129 a barrel, yet another all-time high.    But here is the real worry: today is Wednesday, will those mid-week blues send oil over the $130 mark for the first time ever?

Well, actually, additional reasons were given for the latest hike.    The latest news came from OPEC, when it said it was not planning any supplementary meeting to discuss rising oil output, so that means the next meeting won’t be until September. 

But then the other day, Saudi Arabia said it was upping output by 300,000 barrels a day – but even then the price went up.

It seems that if the news is good oil goes up in price, if it is bad it goes up too. 

The Chinese earthquake has also been cited as a reason for oil going up, as damage to local hydro-electricity energy plants will lead to a shortage of home-grown energy.

Yesterday also saw the revelation of the news that the US was now importing less oil than before. According to the US Department of Energy, US oil imports as a percentage of total consumption are expected to fall from 60 to 50 per cent by 2015, before then rising to 54 per cent in 2030.

So the US is trying its hardest to break its addiction to oil, and as it emerges that it is having some success, oil shoots up in price.   Does that remind you of anything?

Of course, a raft of reports have been published predicting oil will rise.  One moment headlines are made with a prediction of oil at $146, then it’s $150, and now the latest is saying $200 a barrel.  

No doubt these stories are right, and oil has got much further to rise in the SHORT-RUN.  

The oil bandwagon is getting busy too.  Yesterday, Norman Baker, the Liberal Democrats’ shadow transport secretary slammed government transport policy because it was based on the assumption oil will be trading at half the current price at the end of the next decade.  “It is absurd to assume that the price of oil will be $70 a barrel in 2020. Nobody outside the government thinks that will be the case,” he said.

Clearly, then, the Lib Dems are experts on commodities – it will be interesting to get their view on the FTSE 100 in 2020.

Right now, oil is far too expensive.  People just can’t afford it.    Alternatives will be found, fuel-efficient cars will become ever more popular, true renewable energy (not that bio-fuel nonsense) – solar, wind, wave and tide – will become more efficient.

If oil is anything like $200 in 2020 – in current prices that is, then we will have messed up energy policy big time.