No subject

spot
market for crude oil is neither very liquid nor transparent. It is made =
more
complicated by all the different kinds of crude out there, and that it
appears that the overwhelming majority of crude is locked in for =
delivery to
specific purchasers, even the overwhelming majority of export crude, =
which
makes sense since refineries have to be "tuned," so to speak, to the
specific feed stock. The contracts in many cases don't specify a price =
but
rather a reference to some benchmark, but there you have the problem =
that
the benchmark price is determined in just a tiny corner of the market =
with
low volumes and little transparency.=20

And apparently there is at least some flexibility in the exact =
relationship
to the benchmark being used, as an article I posted here a couple of =
weeks
ago about Saudi prices revealed, with a widening spread between their =
sour
crude exports and the benchmarks. Someone else posted that the way it =
works
is the crude is sometimes sold when it is already on its way to this =
part of
the world, and might wind up in Jersey even though it was originally =
thought
to be going to the gulf or somewhere else. So is the uncommitted crude =
oil
mostly sold through this private bargaining between buyers and sellers? =
In
such a case THAT would be the real "spot market" that a futures market =
would
need to converge to at contract expiration, but it is completely opaque. =
So
how real is the "official" spot market? What role does it play? Is it =
just a
dumping ground for odd lots, leftovers? An emergency supply source when =
your
Saudi shipment is running two days late and you need to keep the =
refinery
going?

IF supplies were plentiful, overflowing, it would be hard to manipulate =
even
such a market on the upside, because there are better and more efficient
spot markets for crude oil products, like gasoline, diesel, and so on, =
and
the oversupply situation would be discovered there. Refiners would =
refuse to
pay $125 a barrel if they could only get enough for their refined =
products
to pay $100 a barrel for crude. But it is known that demand for =
petroleum
products is relatively insensitive to price. This means under conditions =
of
relatively tight supply, you might be able to operate in the spot market
(and probably also in the futures market, to increase your gains, but =
the
spot market is key) to drive up the price quite a bit. Initially all =
these
price increases (resulting from a rise in the benchmarks which in turn
determine the price of many contracted shipments) would be passed on to
buyers of refinery products at probably normal volume levels, and it =
would
take some time for resistance to price increases to show up as decreased
demand for end products.=20

What I don't know, and this is the most important thing, is what the =
actual
volume of the spot market really is, and what role it plays in the =
overall
industry, so that one might have an idea of what it would it take to =
create
a bidding war that would drive up prices. If you're a big oil company =
with
tankers coming over from the Saudis all the time, and you normally use
95-97% of what they deliver, and sell the rest to others through this
market, if you keep your refinery feed stock tanks all the way full, and
hold off unloading a supertanker for a few days, is that enough to put a
crimp in the market? Or if you ask your normal supplier to send a little
less, and buy a bunch of crude on this market, what impact will it have?

But notice the underlying assumption of all this -- it takes for granted
what I believe we know for a fact about world crude oil production:=20

a) that it hasn't increased significantly in four years=20

b) that had prices remained the same, demand would have kept increasing =
in
line with economic growth around the world, far outstripping supply.=20

c) that there seems to be a developing mismatch between the kinds of =
crude
oil that are more readily available (sour crudes) and the kinds of crude =
oil
refineries are preferentially set up to handle (sweet, low sulfur =
crudes),
and there seems to be a need for more "sour" refining capacity, which
involves multi-million dollar, multi-year retrofits of existing "sweet"
refining capacity, and=20

d) that a large amount of crude oil production is already spoken for at
below-market prices (i.e., all the petroleum producing countries that =
sell
gasoline and so on cheaply internally, as well as through bilateral
stable-price deals like Venezuela has established with some countries), =
and
another large portion is committed to specific buyers although at =
floating
prices.

On the other hand, ALSO remember this: if someone does succeed in =
creating a
divergence between current real prices in the broad market, and prices =
on a
low volume, illiquid "spot" market, anyone with access to physical crude =
oil
of the right type (light sweet, whether from Nigeria, Texas, Norway or
Colombia) and an insiders knowledge of the industry can make a killing
through arbitrage between the closing price of an oil contract in the
futures market and the REAL market price at the time the contract =
closes.
EVEN IF, looked at in isolation, the official "spot market" looks thin =
and
easy to manipulate, there is a real HUGE capitalist oil market teeming =
with
sharks surrounding it.

->Sartesian says:=20

"4. To say supply and demand govern price movements is to say basically
nothing-- it says nothing about the fact that 80% of the territory held
under lease by the petroleum majors for exploration and developed is
unexplored, undeveloped.  It says nothing about the fact that petroleum
inventories have not  been depleted as 'demand' theoretically outstrips
'supply.'"

Contrary to all economic thinking I'm familiar with, Sartesian denies =
supply
and demand causes market fluctuations or long-term trends. So can he =
please
explain how markets actually work, in his view, in the nitty gritty, in =
the
real world? BTW, I will add that, as best as I understand it, Marx's law =
of
value and labor theory of value was not a negation of "supply and =
demand"
but an explanation of what lay behind it, i.e., if supply and demand
determine prices, what determines supply and demand?=20

"Profitability!" I hear Sartesian shout. Right. But my argument is NOT =
that
some absolutely autonomous entity called supply and demand independently =
of
all surrounding economic and material conditions in causing these price
changes. I *understand* the business cycle.=20

Sartesian insists that I need to confess that demand is socially =
"mediated."
But that's not the problem. Demand is "social" so much so that I most
usually use the term in the sense of "effective" demand, meaning, demand
made through cash money, an offer to buy, and money is PURELY social.=20

The problem I've tried to get people to focus on is that SUPPLY
--specifically crude oil supply-- isn't JUST "social," it is physically
"mediated" to use Sartesian's verbiage. The kind of oil deposits that =
the
industry is comfortable that it can profitably extract are NO LONGER =
being
found in quantities sufficient to maintain the growth pattern of the
industry. That is WHY production hasn't been growing. And since =
apparently
production of non-conventional crude has been growing, I think the =
evidence
is accumulating that we have in fact hit "peak oil" for conventional oil
production -- with one caveat. The (roughly) quadrupling of prices this =
has
brought MAY allow new techniques to be applied to "conventional" fields =
to
increase the total recovery from them, and perhaps even for a time the =
RATE
of recovery (which is what the peak oil theses addresses). This is =
probably
the peak of conventional oil production, production by conventional =
methods,
and quite likely, but not necessarily 100% certainly, the peak of =
production
from conventional fields.

True, it's not the "classical" peak oil theses, especially as it tends =
to
get vulgarized. It is one "mediated" by an understanding of economics =
AND
the experience of bumping against the friction and relative limits on =
crude
oil production in recent years, where it is no longer simply a matter of
getting a different source of supply and perhaps making a tweak or two =
to
the refining process to take into account the slightly different feed
stocks, as it was when the U.S. hit its own "peak oil" decades ago.

One of the things we have seen is that the shortfall seems most acute in =
the
easiest-to-refine type of crude oil, light sweet crude, and therefore =
the
differential in price between "sour" and "sweet" crudes has been =
increasing.


As to unexplored and undeveloped petroleum leases that Sartesian echoes =
the
liberals in citing, I would cite what T. Boone Pickens said -- that the
geology is simply not there, meaning that the small likelihood of a find
that is commercially exploitable doesn't justify the exploration cost. =
Of
course, that calculation changes as the long-term price projections of =
the
majors change. It is one thing to roll the dice on a small chance of =
finding
a deposit of $15 a barrel oil, quite another if that barrel is expected =
to
fetch $150.=20

On inventories, you have to take into account that the price of =
petroleum
products has skyrocketed. EFFECTIVE demand has been reduced through this
traditional mechanism. Also, while U.S. inventories may be important if
you're arbitraging gasoline or diesel to make a few dollars on each =
42,000
gallon futures contract, I don't think these figures have much to tell =
us
about the bigger picture.=20

->Sartesian says:=20

"6. JB brings up the stock market collapse and its replacement by the =
war on
terror.  I encourage everyone to review and investigate this collapse, =
to
try and trace back its origins-- and with a little due diligence we will =
all
find that collapse not in any shortage, or in any number of planes =
crashing
into any number of towers, but in overproduction and a decline in the =
return
of investment precipitated by accelerated capital expansion during the
1992-2000 period."

This brings up a number of other issues that are entirely afield from =
the
main thrust of this post, so I will take it up separately.

Joaqu=EDn