Tuesday, April 12, 2011

Speculation or Shortage?

The Redding Record-Searchlight carried a column by Bob Williams titled "Who will stop the oil speculators?"  He claims that some analysts say up to 60% of the price of gasoline is due to speculation.  Unfortunately, this figure is way off.  It costs close to $80 per barrel to produce oil in the new fields being developed now.  Sure, there are a lot of older fields that can produce oil for $20 to $40 per barrel.  But production from these fields is declining by 8% per year, according to the International Energy Association.  If the price of oil went down to $40 per barrel for an extended time, no new fields would be developed and we would soon have a real oil shortage, driving the price right back up. 
As I write, the price of oil on the WTI index is $105.70, and $122.86 on the Brent index.  The price has gone down about $7 per barrel since the weekend.  The difference between that and a reasonable $80 price can be attributed about 30% to actual supply reductions due to the Libyan war, and 70% to fears (or speculation) that the situation in the middle east will get worse, not better. A speculator is someone making a bet on the future price of oil.  He can bet that the price will go up, or bet that it will go down.  When he bets that the price will go up, there is usually a good reason.   However, speculators do not control the price of delivered oil.  Williams mentions the peak futures price of $146 in 2008.  However, the actual delivered price never got much over $110 per barrel.  The speculators who bet on $146 per barrel lost a lot of money. 

That said, the SEC or CFTA could reduce the volatility of the oil market by substantially increasing the margin, or down payment, that speculators have to put up to buy futures, according to energy analyst  Robert Rapier

My big concern is that the media, by featuring columns like that of Williams, is ignoring the reality of peak oil.  Oil discoveries have lagged behind consumption for the past 20 years.  Production from mature oil fields such as Saudi Arabia's Ghawar, Mexico's Cantarrel, and Alaska's Prudhoe Bay, is declining by 8 percent per year.  The ANWR field, if developed, contains only enough oil to supply the world for 4 months.  Production from Canadian tar sands may eventually increase from the current level of 1.5 million barrels per day to 3-4 million barrels per day over the next 10 years.  But this would only offset one year's decline in production from current oil fields.  The Bakken shale field in North Dakota is a very limited resource consisting of small pockets, although it currently produces about 2.5% of US consumption.  The green river shale, which technically is not oil but kerogen, will never be produced commercially because the energy requirements to produce it exceed the energy  gained once it is transformed into useful liquids.  There was an experimental program called "Market Basket" to conduct small underground nuclear explosions to produce shale oil.  Unfortunately, the resulting products were far too radioactive. 

I need to edit this post with more links, but gardening season is beginning, and it will have to wait.