29-09-2008, 04:34 PM
Turns out it is not THAT hard to manage the price of even a global, fungible commodity like crude oil. The key levers are the Saudis, the majors and the futures market. In the 1980s, the record is now clear, we leaned on the Saudis to cut thier price with netback pricing and to boost production. The oil majors inexplicably boosted their output in the early 1980s in what would now be considered an irrational spending spree. And the NYMEX crude contract came into existence in 1983, characterised in its early years by persistent "short" selling of paper barrels by little-known players. The result was to drive down crude prices from $40/bbl to the low teens and hold them there for a decade to deprive the Soviets of hard currency.
Add to that a spate of US government actions to boost vehicle fuel efficiency, stop using fuel oil to make electricity, slow the SPR fill rate. There was also a global PR effort to make people think the world had plenty of reserves (big write-ups by the Saudis and others).
Since 1998, the levers all seem to be pushed in the other direction, which I say is aimed at slowing economic growth in China (a big oil import, of course). There is unprecendeted restraint and production discipline by the Saudis and OPEC, the majors (after a spate of mega=mergers) are skimping on cap-ex and have not grown the liquids output at all despite soaring prices. Then there has been a torrent of buying of "paper" barrels on the NYMEX and the unregulatoed ICE. This has been fueled by a series of US regulatory moves which have enabled and encouraged pension and other managed money to plow into commodities.
That's it in a nutshell. The actual mechanics and evidence are explained in mind-numbing detail in the book. Kris Millegan, the publisher, would be thrilled if a few more people would put in orders.
Since it went to press in early July, crude prices have peaked and tumbled sharply. But rather than undermine the thesis, I think it reinforces the basic argument that crude prices have been moving out of all relation to actual supply/demand fundamentals and have mainly been a function of geopolitics (which, coincidentally, XOM's Lee Raymond himself has stated over and over in his congressional testimony). The recent downdraft coincided exactly with Russia's renewed uppityness and invasion of Georgia. I would argue it has been a 2x4 upside Putin's head to remind him just how nasty a world of low oil prices can be. Conversely, China "caved" a bit in May and June, making nice with Japan on the E China Sea dispute and easing threats against Taiwain. The PRC also relented and has let its currency rise faster against the dollar. These have been the top three agenda items for US policymakers.
My hunch is that if Moscow persists in its waywardness, you could see crude fall by half again to under $50. It could theoretically go to (or below) marginal production costs, which for the majors is maybe about $20 or $25 and half that for the Saudis. The world has amply crude supply.
I'd appreciate all thoughtful feedback on this, but would ask that people read the book and consider its proofs before unloading on me.
Cheers. JN
Add to that a spate of US government actions to boost vehicle fuel efficiency, stop using fuel oil to make electricity, slow the SPR fill rate. There was also a global PR effort to make people think the world had plenty of reserves (big write-ups by the Saudis and others).
Since 1998, the levers all seem to be pushed in the other direction, which I say is aimed at slowing economic growth in China (a big oil import, of course). There is unprecendeted restraint and production discipline by the Saudis and OPEC, the majors (after a spate of mega=mergers) are skimping on cap-ex and have not grown the liquids output at all despite soaring prices. Then there has been a torrent of buying of "paper" barrels on the NYMEX and the unregulatoed ICE. This has been fueled by a series of US regulatory moves which have enabled and encouraged pension and other managed money to plow into commodities.
That's it in a nutshell. The actual mechanics and evidence are explained in mind-numbing detail in the book. Kris Millegan, the publisher, would be thrilled if a few more people would put in orders.
Since it went to press in early July, crude prices have peaked and tumbled sharply. But rather than undermine the thesis, I think it reinforces the basic argument that crude prices have been moving out of all relation to actual supply/demand fundamentals and have mainly been a function of geopolitics (which, coincidentally, XOM's Lee Raymond himself has stated over and over in his congressional testimony). The recent downdraft coincided exactly with Russia's renewed uppityness and invasion of Georgia. I would argue it has been a 2x4 upside Putin's head to remind him just how nasty a world of low oil prices can be. Conversely, China "caved" a bit in May and June, making nice with Japan on the E China Sea dispute and easing threats against Taiwain. The PRC also relented and has let its currency rise faster against the dollar. These have been the top three agenda items for US policymakers.
My hunch is that if Moscow persists in its waywardness, you could see crude fall by half again to under $50. It could theoretically go to (or below) marginal production costs, which for the majors is maybe about $20 or $25 and half that for the Saudis. The world has amply crude supply.
I'd appreciate all thoughtful feedback on this, but would ask that people read the book and consider its proofs before unloading on me.
Cheers. JN