OPEC and Friends Want Oil Prices to Behave Like a Hot Air Balloon, Not A Bubble
Here is a line of thinking that I have heard several times recently - oil prices have increased so rapidly recently that the market has become overheated and will pop like a bubble. Comparisons to Dutch tulips, Dot Com stocks, and housing prices abound on TV, on the radio, on the web, and around water coolers. 
There is one major difference that causes me some grave concern - oil, unlike all of those other investment manias that exploded, is a commodity with visible, experienced hands on the controls.
The reason that I am concerned is that I believe that high oil prices are hurting nearly everyone and the pain will increase as time goes on. The hands on the controls, however, are feeling no pain.
The Organization of Oil Exporting Countries (OPEC) is an internationally recognized cartel established in September, 1960 that holds well publicized meetings on a regular basis to discuss production allocations that are specifically designed to maintain a market price that members agree best meets their internal and external needs. Many of the country representatives to that meeting have spent lengthy careers thinking deeply about oil prices and how best to manage them to benefit the people who send them to the meetings and pay their generous salaries.
Oil market controllers have experienced a number of ups and downs and worked diligently to master the many price influencing tools at their disposal. Those tools may be a bit blunt, but they can be effective if wielded with skill by experienced manipulators. OPEC supplies about 40% of the total world’s oil and has an impact that is disproportionate even against that large total. Its decision are closely watched and often widely respected by large suppliers that are not members. All oil suppliers recognize that they have a very special commodity that responds to even tiny differences between daily supply and daily demand.
During the decades that I have been interested in energy as a study topic, I have heard or read hundreds of reports in oil industry trade publications that indicate the respect given to OPEC as a disciplined cartel that does all suppliers a service by keeping prices at profitable levels.
Though traders can store oil, the volume of daily consumption is so vast that even a 1% over supply situation can fill up storage areas in just a matter of months while a 1% deficit can result in significant shortages in some locations. Like a hot air balloon, there is a potential for a disastrous crash with an inexperienced or poorly coordinated crew, but there is also the potential for a very pleasant ride for those who know what they are doing.
Unfortunately, the basket under an oil fed hot air balloon is not very large and the number of people who benefit from an oil price balloon that never comes back to earth will be rather small. I see few prospects, however, that those of us left on earth will be invited to share in the benefits of the ride any time soon. It is way too much fun for the people in the basket to collect massive quantities of money from the rest of us who seemingly have no means of forcing that balloon to return to earth.
Recently, an oil minister from an OPEC member told the world that his country saw no reason to increase supplies since demand destruction was already working to put supply and demand into balance and a Russian oil and gas executive gleefully predicted that oil prices would reach $250 per barrel in 2009.
At my own water cooler, the objection that I get to my line of thinking is that oil prices experienced a collapse during the mid 1980s and remained low for about 15 years. They tell me that proves that a period of high prices will almost inevitably be followed by a period of low prices caused by the combination of new supplies encouraged by high prices and reduced demand caused by a reaction to the high prices. Their interpretation of oil price history is that the conservation efforts install a long term change in consumer habits. Apparently they think that OPEC recognizes this and will reduce prices in time to avoid a long term loss of market share.
The difficulty that I have in accepting this interpretation is that low energy prices through the 1980s and 1990s were driven not by a reduction in demand, but by a relentless increase in the available supply of useful energy. Most of the new supply came into the market from sources outside of OPEC.
Total energy use did not fall after the oil shocks of the 1970s, but the annual rate of increase slowed. Total supply actually increased substantially as new production areas like the North Slope of Alaska and the North Sea came on line at the same time as new nuclear power plants added the energy equivalent of 12 million barrels of oil per day to the world supply.
Today there are no major production areas that are beginning operation and there are not any massive new nuclear plant programs with plants ready to connect to the grid. The time delays required under current laws are going to make it difficult to change supply rapidly enough to make much difference for at least a few years.
We are in for a long slog of high prices - unless the world’s political leadership takes action to enable massive new supplies to reach the market more quickly than is currently predicted. Jawboning might just work, but it is a long shot. It just might be that the balloon will remain aloft for a long time without popping or even leaking very much.
Photo credit:Hot Air Balloon - used under Creative Commons license from aoife mac
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We certainly don’t have to be in a long slog of high prices. This issue surrounding the current gasoline pump price is nothing more than a manipulation. We’ve seen it before in 1981, 1991, 2001, and now in 2007-08. There are proven supply domestically and activity in those domestic fields indicate a desire by the oil companies to un-cap and re-work those dormant wells to take advantage of the current barrel prices. Our Congress is even now considering allowing China access to some of our offshore fields.
We need to educate ourselves on this issue. Most Americans do not realize that more than 24% of the total gasoline production in the U.S. comes from sources other than crude. Therefore, we need to ask where is the justification for gasoline prices being so influenced by crude oil barrel pricing. Our Congress knows this is going on but they instead choose to parade the oil industry CEO’s in a mock investigation to pacify us.
This 24% that I referenced above comes directly from domestic natural gas wells. According to the U.S. Energy Information Administration, in 2006 the USA used 9.253 million barrels of gasoline each day. There were 811 million barrels of natural gas liquids produced in the USA in 2006, including both condensate extracted at the lease (the field facility) - 182 million barrels - and liquids extracted in later processing - 629 million barrels. This is equal to 2.222 million barrels per day, which is around 24% of the gasoline consumption figure. The lease condensate production alone is equal to 0.499 million barrels a day, 5% of the consumption figure.
This natural gas condensate is a low-density mixture of hydrocarbon liquids that are present as gaseous components in the raw natural gas produced from many natural gas fields. It condenses out of the raw gas if the temperature is reduced to below the hydrocarbon dew point temperature of the raw gas. The natural gas condensate is also referred to as simply condensate, or gas condensate, or sometimes natural gasoline. This natural gasoline is what we filled our company pick-ups and cars with from storage tanks at the field facility. This gasoline was produced in the field in a small gathering facility where there was basically no refining required.
This current administration is telling the public that we need to open ANWR up for exploration to help ease the supply/pricing issue. I can’t imagine the additional expense of exploration, drilling, extracting and transporting under those harsh conditions wouldn’t somehow be passed along to the consumer in a higher price at the pump thus more profit. Why would we even need to bear those expenses anyway when production from established fields is currently so low. Of the already established 38.6 million acres of offshore territories only approximately 8 million acres are currently being produced. Of the already established 42.8 million acres of onshore territory only 12.3 million acres are being produced.
Source(s):
http://en.wikipedia.org/wiki/Natural_gas_condensate
http://globalwarming.house.gov/pubs
http://www.eia.doe.gov/pub/oil_gas/natural_gas/data_publications/crude_oil_natural_gas_reserves/current/pdf/ch5.pdf
http://www.eia.doe.gov/basics/quickoil.html
http://tonto.eia.doe.gov/dnav/pet/pet_pnp_inpt2_dc_nus_mbbl_a.htm
Joe:
I buy your argument that there are supplies outside of OPEC and perhaps even in the US that are not currently being produced. However, it seems that bringing them back into production will be a slow enough process in the big scheme of things that it will have little effect on overall prices.
The natural gas condensates that you mention - are they actually turned into gasoline or some other petroleum product?
Your basic point and mine are the same - our current prices are definitely not an accident. They are being controlled by people with a good deal of experience in both up and down markets. Those people LIKE high prices, especially since they are pumping about all they can pump without making enormous capital investments.
we should remove are troops shut down are air force in the midle east and see just how long they will servive with out us we protect them and then the gouge us on oil/.ww2 was over high prices in germany and oil in japan
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Unfortunately for us living in San Diego hot air balloons are a bad metaphor because the likelihood of a disastrous crash with an inexperienced or poorly coordinated crew is quite high. Which really is the more likely outcome of the current state of affairs. Another realization from your metaphor should be that rather than relying on ancient technology like hot air balloons, new and innovative technologies are needed to ween us off our dependence on oil.
One thing for sure. the price of oil will never go down if we don’t drill.
Also is the U.S. environment anymore important than that of the rest of the world?
SUNDAY NO OIL/SNOIL
It’s time to fight back, time to stop the exploitive and predatory practices of the oil companies and their investment bank cronies. The whole world has been held hostage by greedy, oil rich countries, and their partners the big oil companies. This year these businesses have made more profits than any other companies or industry in all of history. And all of it at our expense!
It has been difficult to find solutions to this problem, politicians have been slow and ineffective to respond, and the oil companies have been rapacious. When asked at a congressional hearing; since they had made such enormous profits, why hadn’t they passed on that to the consumers and lowered the price of oil? Blank stares, they had no clue! Now they want to drill, not in the places where they already have approved permits, but in sensitive areas which we have protected for decades. No guys, this crisis is not an opportunity for you to rape our environment and steal more of our money. You’ve gotta be stopped!
The international investment community speculates on the price and value of oil. It has markets around the world that factor in geopolitical events and their impact on the price of oil. Oil has risen based on tensions in the Middle East, Hugo Chavez’s threats, dissident tribesmen in Nigeria, hurricanes in the Gulf of Mexico, take your pick. Big oil’s argument is that the emerging countries are creating peak oil demand and there is only so much oil left on the planet. Supply and demand control the market.
But is that true? “Americans are being taken advantage of not only by OPEC but by speculators right here in our own country,” says Senator Ted Stevens. Jesus Reyes Heroles, the chief executive officer of Petroleos Mexicanos says, “Excluding the effect of speculation, oil would be around $80 a barrel.” The CEO of British Petroleum stated on NPR that the real price of oil is around $40 a barrel.
We’re just finding out how these markets have been manipulated. “ Optiver Holding BV, a Dutch trading fund, allegedly manipulated and attempted to manipulate energy markets on the New York Mercantile Exchange, At least five of those attempts were successful, “causing artificial prices,” according to Bloomberg.com.
OPEC and the big oil companies think that we are helpless as they arrogantly continue to pick our pockets. But you know, they’re right about one thing; the price of oil is determined by supply and demand.
We are the largest consumer of oil on the planet, and 75% of all the oil that we use goes for transportation; fuel in our trucks and cars. The rest goes for heating and electric generation. This winter due to the price of heating oil, many of us will be making an obscene choice, heat or eat!
When we don’t consume oil it is immediately reflected in the price of oil, the price goes down. So let’s all take a few days off from driving and reduce that demand.
Starting on August 17 let’s just stay home, walk, ride our bikes, canoe, whatever, but don’t get in your vehicles. Not using your car for a day in the summer is easier than not turning on your heat in the winter, so we need to start now. You can stock up on your milk, bread, beer and newspapers on Saturday, but on Sunday, none of us ride in our cars. That includes trucks and boats too.
It would be great to get everyone in a whole town to participate, but wouldn’t be awesome to have a whole state, a country, the whole globe, stay home on Sunday? Yes we can people, we can do this. Just send this email to 10 people and have them send it to 10 more. Make sure that newspapers and web sites get a copy, send it to politicians, clergy, businesses, activists, students seniors, everyone. If you have friends abroad make sure that they get a copy. It’s important that this movement goes international. Write letters to the editor and put up posters. Organize! Then sit down with your family, friends and neighbors and plan and prepare for SNOIL. (Sunday No Oil.) You might rediscover your community and your family and best of all you will make a real dent in our oil consumption. And the price of oil and gas will go down! Supply and demand controls the market remember? If we’re serious and committed we can stop these predators from destroying our economy and impoverishing us. http://www.snoil.com