THE GLOBAL OIL CASINO BENEFITS ONLY ITS PLAYERS
By Leah McGrath Goodman
Financial Times (London)
April 6, 2011
Tensions in the Middle East and north Africa, we are told, lie behind the recent increase in global fuel prices, which Wednesday hit a 2 ½-year high. Yet while Brent crude this week stayed above $120 a barrel, in Tripoli petrol hovered at around 34p a gallon. And that is not a typo. The popular reason for why those closest to the fighting, in this case, suffer less than those farther afield, is Libya’s hefty subsidies. The less popular reason is that world energy markets have been carefully designed to profit from the slightest supply hiccup, even if there is little evidence of actual shortages.
The energy-trading fraternity has never let the facts get in the way of a good supply scare. True, this historically fragile market is vulnerable to price swings as demand threatens to climb faster than production. But there is more to it than that. Indeed, what President Barack Obama did not mention last week in his energy security speech about the faults of the global energy market could fill a Saudi oilfield.
[Summary: The daily volume of exchanges on the oil futures market is about $600bn. The central market is the Chicago Mercantile Exchange [owned by CME Group Inc.]. The oil futures markets attracted speculators from the start, and although "global [oil] production hit an all-time high in February," speculation (faciliated by lax rules allowing traders to put almost no money down but with their risk limited to 5-10% and tax breaks like the "bona fide hedging exemption" first granted to Goldman Sachs in 1991 that allows traders to "make large commodity bets that previously were forbidden without taking delivery of the underlying product") must be behind recent oil increases, since "higher supply typically cools prices." --J.R.]
In short, this is a market that has done what it has pleased for too long. However, the U.K., Europe, and the U.S. are considering complicated new rules that threaten to cure the disease with more poison -- paving the way for regulatory arbitrage among the major global exchanges. Instead, these regions might consider a simpler solution. Rather than limiting speculation outright, they should require that speculators put forward more of their own money when placing bets. Raising margins, or the downpayments on trades, has long been ruled out by Wall Street as the nuclear option. There is a good reason for that: it would work.
--The writer is the author of The Asylum: The Renegades Who Hijacked The World’s Oil Market. She is a fellow at the Center for Environmental Journalism at the University of Colorado.
Deron Lovaas's blog
OIL DEPENDENCE READING LIST: HOW DID WE GET HERE?
By Deron Lovaas
Natural Resources Defense Council
March 28, 2011
I read a lot of books about oil. There have been masterful overviews of the industry such as Yergin's The Prize and Maugeri's The Age of Oil. There are also smart, user-friendly volumes such as Tertzakian's 1000 Barrels a Second and Margonelli's Oil on the Brain. And Hollywood has of course also produced its share of takes on the industry with films such as "Syriana" and "There Will Be Blood."
Lately I've been digging into the history of the industry, and for those interested I recommend taking a look at a few relatively new additions to the field.
One of the fun reads is The Asylum: The Renegades Who Hijacked the World's Oil Market by Leah McGrath Goodman, which is a history of the famous (and infamous) oil-futures marketplace, the NYMEX. This is a rollicking, fast-paced, decades-long tale of a marketplace that sprang out of -- no kidding -- a potato futures market. The pit where most trading took place is still active in New York City, but in just the past few years much of it has moved online, and is handled by computers able to rapidly process reams of data (note that this move hasn't yielded more stable prices in fact one could argue the opposite case). The reporter, who worked for many years as a Dow Jones reporter covering the market, has many solid relationships with the traders who built the NYMEX and this adds a lot of color to the narrative. When the instability of supply and relentless demand drives up price levels and volatility, many of these traders do very well indeed. And when that happens, the partying really kicks into high gear.
I have just started another book about the industry, The Big Rich: The Rise and Fall of the Greatest Texas Oil Fortunes by Bryan Burrough. This is a big book (22 hours of reading as an unabridged audiobook), as befits its topic. As I have written, we have drilled a lot of wells in the U.S., with more than a half-million currently producing oil. Texas alone has about a million wells, dry and producing. This book is the story of the dramatic expansion of this industry over the course of the twentieth-century, through the rise in fortunes of four big oil men. So far the book has covered the rise of H.L. Hunt, and it is a story of persistent embrace of risk and eventual success (one of the characters who eventually strikes it very rich indeed is nicknamed "DH" for "Dry Hole" because of a particularly long run of failure at drilling). His is also a life of intrigue, as he takes care of two growing families a hundred miles apart, each of which is unaware of the other. It is an engrossing, wild series of tales about the rise of these industry giants.
The other book I finished a couple of weeks ago is Michael Klare's latest, Rising Powers, Shrinking Planet: The New Geopolitics of Energy. [UFPPC's Digging Deeper book group read this back in August 2008; for a synopsis, see here. --J.R.] One of his previous books (he's prolific, having penned 13 volumes so far), Blood and Oil, was one of the more enlightening reads for me, showing as it did how deeply rooted our oil addiction is in public policy decisions by past (and current) presidents. This new book is also exhaustively researched and global in scope. Klare does an excellent job of laying out the tremendous challenges we face due to petro-politics pitting a limited number of large oil producers against a limited number of large oil consumers. I urge you heed his warnings about our energy future (click here for a lecture by him on the book). While I quibble with some of his prognoses vis-à-vis technological solutions to our predicament (I am not optimistic about hydrogen gas as a transportation energy carrier, for example), it is difficult to find a more astute and thorough diagnostician.
While these books aren't exactly light beach reading, they are useful, careful, and intelligently crafted. And if you want to move beyond the stupid bumper stickers and (as someone in The Big Rich might have said) cow manure that muddle the crucial debate about our energy future, they are well-worth the effort.
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