News Congressional Hearing on the Effect of Speculation On the Price of Oil

[Astronuc]

The London Loophole

U.S. oil regulators work on London
http://marketplace.publicradio.org/display/web/2008/06/18/us_british_oil_regulation/

The American oil regulator told Congress it will try to impose its regulations on a London contract.
. . . .

the American regulator, the CFTC, has just told Congress that it's going to attempt to impose its regulations on this contract traded in London. Because the feeling is that U.S.-based oil traders are evading the American regulations, dealing directly with London.
. . . .

Of course it requires approval by the British regulatory authority, which is apparently reluctant to put constraints on the British market.

 

[Art]

I didn't forget. I just wanted to drive home the point that if you were to pump crude oil into your car, you would start off at about $3.10 a gallon! Refining, distribution, TAXES and profit add only about a dollar.

Aren't you forgetting most of that initial $3.10 is pure profit for the oil companies?

I read somewhere one of the price drivers in the US is the shortage of light, sweet crude oil. There is plenty of heavy, sour oil available on world markets but to refine this is more complicated and would require expensive retooling by US refiners.

 

[Astronuc]

In the article -
Bush Will Seek to End Offshore Oil Drilling Ban
http://www.nytimes.com/2008/06/18/washington/18drill.html

it states:

No one knows for certain how much oil is in the moratorium area, but the federal Energy Information Administration estimates that roughly 75 billion barrels of oil in the United States are off-limits for development, and that 21 percent of this oil — or 16 billion barrels — is covered by the offshore moratorium.

https://www.cia.gov/library/publications/the-world-factbook/print/us.html

According to the CIA Country Brief (World Factbook) on the US, the oil consumption is about 20.8 million bbl/day! So if ANWR has 15 billion bbl, that's good for 721 days (about 2 yrs) equivalent. Of course, there is other oil, so really that would stretch out.

For the entire 75 billion bbls cited in the NY Times article, at present consumption, it would be gone 3606 days or ~ 9.9 years, barring other supplies. Matching those supplies elsewhere would simply extend the consumption to 20 years, barring alternative fuels.

Two decades would pass quickly, and my kids' generation would be stuck in the same dire situation we now face. I don't want to leave the next generation and subsequent ones to suffer from the folly of this generation or previous ones.

 

[DrClapeyron]

So if ANWR has 15 billion bbl, that's good for 721 days (about 2 yrs) equivalent.

You would have to assume that there would be no oil loss from pumping. If there are 15 billion bbl, I would imagine that only half could be pumped under optimal conditions.

 

[mheslep]

In the article -
Bush Will Seek to End Offshore Oil Drilling Ban
http://www.nytimes.com/2008/06/18/washington/18drill.html

it states:https://www.cia.gov/library/publications/the-world-factbook/print/us.html

According to the CIA Country Brief (World Factbook) on the US, the oil consumption is about 20.8 million bbl/day! So if ANWR has 15 billion bbl, that's good for 721 days (about 2 yrs) equivalent. Of course, there is other oil, so really that would stretch out.

For the entire 75 billion bbls cited in the NY Times article, at present consumption, it would be gone 3606 days or ~ 9.9 years, barring other supplies. Matching those supplies elsewhere would simply extend the consumption to 20 years, barring alternative fuels.

Two decades would pass quickly, and my kids' generation would be stuck in the same dire situation we now face. I don't want to leave the next generation and subsequent ones to suffer from the folly of this generation or previous ones.

Certainly the US wouldn't want ANWR as a sole source nor could it be. Consider instead that ANWR provided just 4 million bbl/day, i.e. double the best ever flow rate of the Trans-Alaska pipeline. That would cut imports from 13m bbl/day to 9 and places the country back under 50% imported oil. That could be sustained for 10 years out of ANWR alone, and would have the desirable effect of rapidly cutting the price of oil back down to something manageable, and improves the geopolitical energy security problem. Meanwhile, investment into renewable and liquefied/gasified coal energy goes on, as the nation then has the GDP to fund research and deploy results instead of going broke on imported oil prices. Why must one be done exclusive of the other? I doubt you want your kids generation paying half of their income on 95% imported oil, all because Pappy Astronuc bet the ranch all-or-nothing on renewable fuels.

 

[wildman]

So if ANWR has 15 billion bbl, that's good for 721 days (about 2 yrs) equivalent. Of course, there is other oil, so really that would stretch out.

For the entire 75 billion bbls cited in the NY Times article, at present consumption, it would be gone 3606 days or ~ 9.9 years, barring other supplies. Matching those supplies elsewhere would simply extend the consumption to 20 years, barring alternative fuels.

Two decades would pass quickly, and my kids' generation would be stuck in the same dire situation we now face. I don't want to leave the next generation and subsequent ones to suffer from the folly of this generation or previous ones.

Oil can't be pumped out all at once. Large fields take 30-60 years to pump out. That means that even if we develop all the above fields, it still would be a fraction of the oil we consume. The party is over.

 

[wildman]

Certainly the US wouldn't want ANWR as a sole source nor could it be. Consider instead that ANWR provided just 4 million bbl/day, i.e. double the best ever flow rate of the Trans-Alaska pipeline. :

It is doubtful that ANWR will produce more than 1.5 million a day. Astronuc is right, we need to get off oil and now. Better to leave ANWR in reserve.

 

[Gokul43201]

Certainly the US wouldn't want ANWR as a sole source nor could it be. Consider instead that ANWR provided just 4 million bbl/day, i.e. double the best ever flow rate of the Trans-Alaska pipeline. That would cut imports from 13m bbl/day to 9 and places the country back under 50% imported oil. That could be sustained for 10 years out of ANWR alone, and would have the desirable effect of rapidly cutting the price of oil back down to something manageable, and improves the geopolitical energy security problem.

Not sure what you mean by "rapidly", but I should warn you to not get impatient over the next decade or two or three.

According to the DOE's Energy Information Administration:

The projections in the OCS access case indicate that access to the Pacific, Atlantic, and eastern Gulf regions would not have a significant impact on domestic crude oil and natural gas production or prices before 2030.

http://www.eia.doe.gov/oiaf/aeo/otheranalysis/ongr.html

 

[mheslep]

Not sure what you mean by "rapidly", but I should warn you to not get impatient over the next decade or two or three.

According to the DOE's Energy Information Administration:

http://www.eia.doe.gov/oiaf/aeo/otheranalysis/ongr.html

Yes understood it would take some time, I mean when it eventually comes online, which it would be now if Clinton had not vetoed it in the 90's. Let's not make the same mistake again.

 

[mheslep]

It is doubtful that ANWR will produce more than 1.5 million a day.

Yes I read about 1.5; to make a dent the offshore fields need to be drilled too.

Astronuc is right, we need to get off oil and now.

Nice sentiment. Other than making blog posts, what's the plan for doing that 'now'?

 

[mheslep]

Not sure what you mean by "rapidly", but I should warn you to not get impatient over the next decade or two or three.

There's is also the economic theory that says just announcing ANWR and offshore drilling would immediately drop the price of oil as the market recalculates price based on increased future supply.

 

[edward]

Presuming that speculation is one of the driving forces behind oil and gas prices.

I would be curious to see what would happen with the speculation if we could cut the speed limit down to 60mph for a short period, say just 30 to 60 days.

At least it wouldn't take 10 years to find out if it helps.

 

[DrClapeyron]

There's is also the economic theory that says just announcing ANWR and offshore drilling would immediately drop the price of oil as the market recalculates price based on increased future supply.

That would have a very long term impact, not short term. Drilling in a remote wilderness with no existing infrastructure and zero capital growth is not the same as renting a drilling platform off the coast of Texas where the infrastructure is heavily invested and capital growth increasing. Even offshore Texas fields take years to produce once oil is found.

All you have in ANWR are carribou and wolves. When congress announced it would drill in Prudhoe in the early 1970's it had no effect on markets, albeit there were no futures for oil back then. Oil produced from new fields isn't cheap either, the oil is tremedously more expensive than the oil from a mature field; so tax breaks are the rule not the exception.

ANWR is the poster child of the conservative politicians while windfall tax profits the poster child of the liberal politicians. Neither solution will have much effect, so just sit back and let the markets adjust.

 

[mheslep]

That would have a very long term impact, not short term. Drilling in a remote wilderness with no existing infrastructure and zero capital growth is not the same as renting a drilling platform off the coast of Texas where the infrastructure is heavily invested and capital growth increasing. Even offshore Texas fields take years to produce once oil is found.

All you have in ANWR are carribou and wolves. When congress announced it would drill in Prudhoe in the early 1970's it had no effect on markets, albeit there were no futures for oil back then. Oil produced from new fields isn't cheap either, the oil is tremedously more expensive than the oil from a mature field; so tax breaks are the rule not the exception.
...

Not at all. ANWR is not starting from scratch infrastructure in the way that Prudhoe did, because of Prudhoe. See here for instance:
http://www.anwr.org/anwrcol1.GIF. ANWR drilling targets on the coastal plain are ~100 miles away from Prudhoe and its existing pipeline/highways, and ANWR is not all carribou: Kaktovik is in ANWR on the coast. Regards, long vs short term effects, that is going to be significantly effected by elasticity of demand and the world is still running ahead of supply. Still ANWR by itself is not going to cause a big change, but add it to E/W offshore and together you have a $1 perhaps drop for a gallon of gas.

 

[DrClapeyron]

100 miles from Prudhoe is still thousands of miles from the nearest industrial center. You'd have to go to Korea to find rigs, ships and other heavy equipment or have everything routed from Houston, through Panama on up to ANWR. The only time such a project could be employed outside of an oil supply shock is if Canada were to also invest heavily in exploration in the upper most remote regions of its territory near Alaska.

 

[Gokul43201]

There's is also the economic theory that says just announcing ANWR and offshore drilling would immediately drop the price of oil as the market recalculates price based on increased future supply.

Speculators reacting today to something that is a decade away? By itself, if nothing else happened, that doesn't sound like it will be a significant effect. But add to this the economic theory that says oil production from ANWR will result in reduced production in other countries...and that squashes most of the expected gain in price. I believe the EIA calculated a peak price reduction (for light crude) of less than 1%...to be expected about 2 decades from now. That's hardly a few pennies on the gallon.

 

[wildman]

Yes I read about 1.5; to make a dent the offshore fields need to be drilled too.

The problem is that there isn't enough oil even in the offshore fields. That doesn't mean not to drill them, just don't think that is all we have to do. Americans have been sticking their heads in a hole in the ground ignoring the coming crisis. Drilling more (while it doesn't hurt) won't get us out of this fix. There just isn't enough oil. And the oil that there is is expensive and deep. The net oil in a lot of the 100 billion barrels in the Gulf isn't that great because of the high cost of energy to drill in very deep water. Remember, it isn't total oil that is of interest. It is NET oil.

Getting off oil is not just a nice sentiment. It is necessary or we are scr_wed.

 

[mheslep]

Speculators reacting today to something that is a decade away? By itself, if nothing else happened, that doesn't sound like it will be a significant effect. But add to this the economic theory that says oil production from ANWR will result in reduced production in other countries...and that squashes most of the expected gain in price. I believe the EIA calculated a peak price reduction (for light crude) of less than 1%...to be expected about 2 decades from now. That's hardly a few pennies on the gallon.

Sure, 5, 10, 20 years. A significant factor in the value of a commodity today is the expected quantity of supply in the future, reflected back to today's price by net present value calculation. The time lines relevant to someone calculating todays price are based on the time lines involved in changing the supply and the demand. That way if it is known, for instance, that the world supply of some commodity will be totally exhausted in 10 years at current demand, a price signal is sent _now_ that reflects that looming depletion, and of course vice versa if it is expected that the supply will increase in 10 years.

 

[mheslep]

100 miles from Prudhoe is still thousands of miles from the nearest industrial center. You'd have to go to Korea to find rigs, ships and other heavy equipment or have everything routed from Houston, through Panama on up to ANWR...

Yes but that is all trivial compared to the scope of what had to be done to get into Prudhoe - pipeline, ice roads, etc; access is no longer a barrier (on that scale).

 

[mheslep]

The problem is that there isn't enough oil even in the offshore fields. That doesn't mean not to drill them, just don't think that is all we have to do.

I not aware of any political leadership that says 'that is all we have to do'

Getting off oil is not just a nice sentiment. It is necessary or we are scr_wed.

Wildman you said get off oil 'and now', that's to what I was referring. Again, can you cite a plan for getting off oil 'now'.

 

[mheslep]

... But add to this the economic theory that says oil production from ANWR will result in reduced production in other countries...and that squashes most of the expected gain in price. ...

Yes I see that argument posed quite a bit now. I havn't looked carefully, but it seems to me that if the 800 lb gorilla producer argument really held true then nobody would ever mine/drill/farm for some resource unless they were the world's largest producer, as then logically the larger producer could always just reduce its production rate and defeat your efforts to depress price. Visibly, this is not universally true. I suspect not mainly because the large producer most often maximizes income at high production unless a glut state is reached. The only impact the large producer can have is to cause short term spikes to punish or attempt to bankrupt smaller producers, which can't be done here.

 

[Gokul43201]

Yes I see that argument posed quite a bit now.

Here it is, being posed by the EIA(DOE):

With respect to the world oil price impact, projected ANWR oil production constitutes between 0.4 and 1.2 percent of total world oil consumption in 2030, based on the low and high resource cases, respectively.17 Consequently, ANWR oil production is not projected to have a large impact on world oil prices. Relative to the AEO2008 reference case, ANWR oil production is projected to have its largest oil price reduction impacts as follows: a reduction in low-sulfur, light (LSL) crude oil18 prices of $0.41 per barrel (2006 dollars) in 2026 in the low oil resource case, $0.75 per barrel in 2025 in the mean oil resource case, and $1.44 per barrel in 2027 in the high oil resource case. Assuming that world oil markets continue to work as they do today, the Organization of Petroleum Exporting Countries (OPEC) could neutralize any potential price impact of ANWR oil production by reducing its oil exports by an equal amount.

http://www.eia.doe.gov/oiaf/servicerpt/anwr/results.html

 

[mheslep]

Here it is, being posed by the EIA(DOE):

http://www.eia.doe.gov/oiaf/servicerpt/anwr/results.html

...Assuming that world oil markets continue to work as they do today, the Organization of Petroleum Exporting Countries (OPEC) could neutralize any potential price impact of ANWR oil production by reducing its oil exports by an equal amount.

Yes no doubt they could. The interesting argument is whether they would. I argued above it is counter to their interests to do so as they'd lose income. I observe that major commodity suppliers only cut production when supply greatly surpasses demand causing a possible glut and price collapse, such as with US farmers paid to leave fields fallow; that is not going to happen with oil given world demand.

 

[quadraphonics]

Sure, 5, 10, 20 years. A significant factor in the value of a commodity today is the expected quantity of supply in the future, reflected back to today's price by net present value calculation. The time lines relevant to someone calculating todays price are based on the time lines involved in changing the supply and the demand. That way if it is known, for instance, that the world supply of some commodity will be totally exhausted in 10 years at current demand, a price signal is sent _now_ that reflects that looming depletion, and of course vice versa if it is expected that the supply will increase in 10 years.

What you're missing is that the speculators are not bidding up on the premise that oil supply is going to run out in 10 years. They're bidding up on the premise that *demand* for oil is going to continue to ramp up over the next decades, due to China and India (not to mention the US). Increasing world oil production by a couple of percent is not going to alter that fact. It might produce a momentary slowdown in the increase of the price of oil, but on the other hand the signal it would send to consumers (don't worry about cutting back, just keep consuming) would tend to reinforce the specualtive pressures.

 

[mheslep]

What you're missing is that the speculators are not bidding up on the premise that oil supply is going to run out in 10 years.

I used that boundary case to show clearly how future demand / supply expectations are factored into today's prices, not to imply any serious market movers think the world supply will exhaust in 10 years.

They're bidding up on the premise that *demand* for oil is going to continue to ramp up over the next decades, due to China and India (not to mention the US). Increasing world oil production by a couple of percent is not going to alter that fact. It might produce a momentary slowdown in the increase of the price of oil, but on the other hand the signal it would send to consumers (don't worry about cutting back, just keep consuming)

Yes demand will go up but new supply will come on line like the large Brazilian offshore. I suspect the US is actually looking at a price hike up to $6-$9/gal in 5 yrs w/ no drilling, versus perhaps maintaining small price increases by opening ANWR and offshore. Certainly the current price is not telling anyone be happy, don't worry.

...would tend to reinforce the specualtive pressures.

The main speculative pressure is due to the weak dollar and inflation, not consumer spending habits which have indeed changed without oil price effect.

 

[edward]

People are apparently starting to conserve.

With gas prices at record levels above $4 a gallon, Americans are driving less and abandoning gas-guzzling vehicles, according to government data. Americans drove 1.4 billion fewer highway miles in April compared with the same month last year, and 400 million fewer miles than they did in March, according to the Transportation Department.

http://www.startribune.com/business/20586524.html?location_refer=Business

 

[edward]

The oil Futures Exchange has been labled The Dark Market.

http://www.businessandmedia.org/articles/2008/20080618102504.aspx

Edit: short video clip on link.

 

[mheslep]

People are apparently starting to conserve.



http://www.startribune.com/business/20586524.html?location_refer=Business

I don't know if conserve is the appropriate verb, but certainly gas use has declined.
http://www.greencarcongress.com/images/2008/04/30/cagg.png

 

[mheslep]

Some other opinions: $10-15/barrel

...However, one of the sidebars suggested another consequence of drilling. Speculators have been blamed for driving up oil prices, but as Alaskan Republican Rep. Don Young pointed out, drilling in ANWR would scare off some of the speculators driving gas prices up.

Young, ranking Republican on the House Natural Resources Committee, introduced a measure Wednesday to allow development in the coastal plain of ANWR.

“The way you address high gasoline prices is to increase supply,” he said.

Rolling out legislation to open ANWR has become Young’s personal never-ending task in the House, but this time he’s hoping consumer anger over record prices at the pump will spur moderate members of both parties to support the measure.

“If we passed ANWR, it would drop $10 to $15 off the price of a barrel of oil because speculators would see that we’re serious about increasing domestic production,” he said.

http://newsminer.com/news/2008/may/22/gop-ready-roll-out-energy-plans/

 

[wildman]

I not aware of any political leadership that says 'that is all we have to do'
Wildman you said get off oil 'and now', that's to what I was referring. Again, can you cite a plan for getting off oil 'now'.

Well duh! By "now" I mean we need to start working on the problem in a serious way now. The problem with most of the "drill more" people is that is all they want to do. They don't want to finance research, they don't want to encourage conservation, they don't want to do anything but drill, drill, drill. That is a plan alright. It is a plan for disaster. There isn't enough oil.

I am not sure what should be done, but the plan you are pushing will fail so you don’t have a plan either.

Here is a possible set of ideas. I don’t know if they will work, but we need to start thinking creatively.

The first thing we need to do is guarantee a bottom to oil prices so they Arabs can’t manipulate the price of energy in this country. Say $100 a barrel. If it drops below that level, we add taxes to the imported oil. (Domestic oil would not be taxed). That will give private companies a guarantee that they will not be taken for a big loss if they invest in energy like what happened in the 70’s. The people who invested in oil shale at that time had the rug pulled right out from under them. We need to prevent that from happening again. Keep in mind that the Arabs (unlike the rest of the World) are not yet at peak oil (maybe) and can therefore manipulate the price (if what I think is true). This is also the real reason a lot of the oil in the Gulf of Mexico hasn't been drilled. It is too expensive and the oil companies are afraid of be undercut by the Arabs.

Next, we need to change the tax laws to encourage conservation. Do you realize there is a law that gives people who purchase Hummers a big tax break? This is nuts. Tax the sale of new gas guzzlers and return the tax to the people who purchase hybrids or other gas saving cars.

Then greatly increase spending for research and development in the energy sector. This can come out of some of the money we are spending for defense right now. After all, the real reason we are in Iraq is the oil. It wouldn’t take too many days spending in Iraq to greatly increase energy research. Energy is security. After all, 9-11 was financed with Saudi oil money. No oil, no money, no terrorists.

There are lots of great ideas. They just need to be given the funding they need and private energy companies just need to be protected from predatory practices .