OIL MARKETS: IDEOLOGY vs SANITY

[ZombieGak]

In another thread someone brought up the possibility that if Iran cut half its production, oil markets would panic and it would devastate the US economy with $100 a barrel oil.

But does Iran REALLY have that power? Or would we'd be done in by our own radical belief that markets are always beneficial and can solve all problems? Add to the problem of a dysfunctional market, we've built an entire economy on the foundation of "cheap oil" which we hoped to secure though military/political interventions in the Persian Gulf.

I believe it's insane to rest our future on oil markets which are prone to panic. We've seen the downside of relying on this model which brought on the recessions of 74, 80, 82 and 91.

Some can talk about inelastic demand and all the other market babble they want... but there's something radically wrong with a market that can QUADRUPLE prices because just because of a 4-5% shortfall in supply.

"The effects of even a small drop in production can be devastating. For instance, during the 1970s oil shocks, shortfalls in production as small as 5% caused the price of oil to nearly quadruple. The same thing happened in California a few years ago with natural gas: a production drop of less than 5% caused prices to skyrocket by 400%."

Source: http://www.lifeaftertheoilcrash.net/Home.html

The REAL problem here is the oil producers are organized and know the buyers are not. Given evidence of even a tiny shortfall, these buyers will panic and bid up the prices beyond all reason.

Is THIS the future we want with the Exxon's of the world raking in $10 billion in profits each quarter while we consumers struggle just to avoid freezing in the dark?

So what other economic models can we look at? An oil buyers cartel? Regulating the oil industry so it puts all its profits back into production/alternative energy as opposed to buying restaurant chains? Somewhere on the web someone proposed a plan to transition the world though Peak Oil. I'll have to track it down.

[ZombieGak]

1. one proposal for an oil buyers cartel

The original proposal for an oil buyers cartel was made back in the 70's. This is another example...

From: http://www.feasta.org/documents/energy/three_crises.pdf
An oil buyers' cartel
Feasta suggests that the best way to limit oil price rises would be for the
oil-buying countries to establish a buyers’ cartel which would negotiate
with the producers’ cartel – which is, of course, OPEC. Together they
would agree a price for whatever amount of oil could be produced each
year and the buyers’ cartel would then allocate that oil among its
member countries.
The buyers’ cartel would not be able to confine its activities to oil,
however. It would have to take in the other two main fossil fuels, gas
and coal, as well, for the following reasons.

[Bushwick Bill]

5. Well, there's always this.

http://www.postcarbon.org/

[ZombieGak]

13. the Oil Depletion Protocol sounds interesting....

But since there's no information about it yet at that site... it can't be the plan I read last year.

[Nederland]

2. Not going to happen

Iran cutting its oil production by one half would basically mean cutting its GDP by nearly half. It would hurt them far more than it would hurt us.

[ZombieGak]

3. at today's prices....

Yes.... if oil prices were to remain the same as TODAY, Iran would lose half its current income.

But if oil costs $20 a barrel to produce... and that's a VERY high estimate... at $60 a barrel it's already making 100% profit than it was at $40. So with a dysfunctional oil market bidding up prices... Iran could cut production, cause a panic, and probably make the same it is now. The problem OPEC has long feared is that if the prices go too high, then the west will look for alternatives.

But this thread was not about Iran... but the dysfunctionality of oil markets and the ideological blinders we all wear that allows them to forever escape scrutiny... even if these price over-reactions have created numerous economic recessions.

[Nederland]

4. It's not a matter of profit

It's a matter of who suffers most from the action. Prices have already tripled in the past three years and the US economy has been basically unaffected (low unemployment, healthy GDP, low inflation, etc.) The countries that really get hurt by rising oil prices are the emerging economies of India and China that have large manufacturing economies that require a great deal of energy to produce their products and can afford it the least. Those are the countries that will suffer the most, not the US and Europe.

[Strelnikov_]

6. MEW Potential Has Diminished. Next Spike Will Be Felt

Low unemployment, healthy GDP, low inflation? OK.

America Will Fall Harder If Oil Prices Rise Again

http://www.nytimes.com/financialtimes/business/FT200602...

The continued strong growth contrasts sharply with the economic weakness that occurred after almost every previous significant rise in the oil price. How do we explain this remarkable difference? And what are the implications for the likely response to a future rise in oil prices?

The key to the economy's strength in 2004 and 2005 was that household saving declined dramatically while the price of oil rose. Household saving fell from 2.5 per cent of after-tax income in the third quarter of 2003 to a remarkable minus 1.8 per cent two years later. This 4.3 per cent shift of after-tax income was equal to a rise in consumer spending equal to 3 per cent of GDP. In dollar terms, saving fell from a $205bn annual rate in the third quarter of 2003 to dissaving at a rate of $159bn two years later. This shift of $364bn in the annual rate of saving far outstripped the fall in income caused by the higher cost of oil. This fall in saving allowed households to raise consumption spending on non-oil goods and services while paying for the higher cost of imported oil.

. . .

The powerful effect of mortgage refinancing on consumer spending was a very happy coincidence for the American economy at a time when oil prices were depressing consumers' real incomes. If oil prices were to rise again in 2006 or 2007, the adverse effect on consumers' real incomes would not be offset by increased mortgage refinancing. Mortgage refinancing has now peaked and is declining. The Federal Reserve is raising interest rates again to counter the inflationary pressures that remain from the rise in energy costs. And individuals no longer have the large amounts of household equity against which to borrow.

A rise in the oil price could happen again at any time. There is little spare capacity in global oil production and oil demand is rising rapidly in China and other Asian countries. A shock that reduced the production or shipping of oil could drive its price sharply higher. Speculative forces could compound this problem. The US was lucky after 2003 to escape the contractionary effect of an oil price rise even without an explicit change in monetary or fiscal policy. It would not be so lucky if a big oil price increase happened again now.

[Strelnikov_]

10. Corrected Link

http://www.nytimes.com/financialtimes/business/FT20060202_21730_52992.html?_r=2&oref=slogin&oref=slogin

[ZombieGak]

7. yes we've adapted since the 80's...

Yes we've adapted since the 1980's so the US is less vulnerable to oil shocks as it was then.

But it's hardly immune. And even if it were... are we to tolerate oil companies extracting unwarranted profits from the US public as OPEC did in the 70's? What are we getting for our outlay? How is Exxon's latest $10 billion in profit helping us free ourselves from our oil addiction?

Are you suggesting that just because the US is better prepared for oil shocks... we can glibly allow dysfunctional and panic-prone oil markets to deliver them?

[Nederland]

11. No

I'm suggesting that at all. I am suggesting that cutting production would hurt Iran more than the US.

[Strelnikov_]

8. Command Economy For Energy Infrastructure

We will be there sooner than you think.

[ZombieGak]

12. you may be correct......

But one can only wonder to whose benefit it will be run. Any official US energy plan... GOP or Democrat, and our foreign interventionism already can give us clues.

[berni_mccoy]

9. Losing Iran's Oil WOULD cause $100/barrel prices

This comes directly from our own analysts in the gov't: http://news.yahoo.com/s/nm/20060117/wl_nm/energy_iran_oil_dc

The problem isn't a supply-demand issue: it's a global market issue. And the global market doesn't behave by standard economic rules of supply and demand. The Commodity Exchanges factor in RISK, FEAR and HOARDING into the prices of petroleum based commodities. Look what happend to the refined petrol products as a result of Katrina. Prices skyrocketed, not based on supply/demand issues, but based on REACTIONARY TRADING. And that was a local market fluctuation. If Iran stops delivering its oil to the WORLD market (it could still deliver it to select customers, say, Russia and China), then you can bet, the same kind of MARKET REACTION would occur and prices would soar. There are currently OPTIONS on the futures market betting on that POTENTIAL OUTCOME.

Just look at the graph in my sig and see how the Iraq War has affected the prices of shares of companies in the Oil and Defense Industries. When just the shares become the commodity, you've lost a true reflection of a traditional economically driven price on commodities.