There are currently two major oil markets: NYMEX in New York and IPE in London, both trading exclusively in US dollars. Saddam talked about trading oil in Euros because of dollar weakness, and the US promptly invaded Iraq. Iran has plans for a Euro-traded oil market, due to go on line next year…and the US is probably going to invade them. But assuming the new Tehran Oil Exchange goes ahead as planned, I expect being able to trade oil in Euros will significantly weaken the US dollar (possibly precipitating the hyperinflation scenario we all talk about…which is no doubt why the US will invade Iran soon)

I agree with most of the article except the following statement:

Professional speculators merely try to anticipate future demand, which depends on the subjective preferences of consumers.

In fact, professional speculators also have to anticipate the subjective bets of other speculators, and speculation itself can drive up the price of a commodity – especially under a fiat money regime with fractional reserve banking.

I agree with Pierre that oil is much more plentiful than most people think and that high prices are not a problem. The “we’re running out of oil” scare that has been rearing its head on and off over the past several decades should be a non-issue. Even if prices stay high for a while, they will be brought back down to earth by increased production and/or substitution. If there is a temporary crisis, all we can hope for is that the government won’t resort to the price controls and rationing schemes it tried in the 70s. Also, what I think is ridiculous is when people advocate that the government spend tax money researching alternative energy sources so that people won’t have to keep paying high oil prices. This conveys complete ignorance of how markets work. There is obviously no need for any public funds to be put towards research of this kind and they can only have a harmful effect. The market will take care of these things in its own good time.

Rising prices send a market signal that something has to be done, on the part of producers and consumers. To producers, the signal is to make more fuel-efficient cars. To consumers, the signal is to buy more fuel-efficient cars, drive with more consistency, and look for alternaties (walking, bike-riding, or even using a motorcycle).

Hi Bruno:

It is true, when you say “speculation itself can drive up the price of a commodity”. However, profitable (accurate) speculation does not influence the direction prices move in the market, but rather
1. Quickens the price changes, and
2. Rounds off the peaks and valleys of the price extremes.
It performs the former by increasing speculative demand thereby increasing the prices sooner, before the market would otherwise have begun to move in the anticipated direction. It performs the latter by providing added speculative demand when demand and prices are low, and also by later providing an increased supply when demand and prices are high as market prices peak and the speculators sell to collect their speculative profits.

Inaccurate speculation has the opposite effect, but fortunately, such incapable speculators loose rather than gain and are eliminated from the market.

Successful speculators are a good thing and they don’t affect overall price trends, rather they quicken and smooth them.

I don’t think that the Alberta oil sands are a good example of how a free market reacts to opportunities, considering that a few billions of dollars of Canadian taxpayers’ money have been thrown at this project.

Among other absurdities, the Canadian government is subsidizing oil development projects at the same time it is punishing oil consumers in the name of saving the world from CO2 under the Kyoto Accord.

Just to demonstrate that you can’t please all the people all the time, check out the environmentalists whining about corporate welfare – not because they don’t like corporate welfare, but because they want it to be directed at their own pet projects. I suppose that they could call their welfare “wise stewardship”.

Hi Paul,

Speculation does indeed quicken price changes but it doesn’t necessarily smooth the peaks and valleys, in fact it can easily have the opposite effect. If I’m a commodity trader and go long on NYMEX oil futures contracts with November delivery, this may cause the price of the contract to go up, which may in turn cause other people to jump in and do the same, etc, driving the price up. The process becomes self reinforcing, and ultimately self defeating. The Friedmanite argument that speculation is inherently stabilising fails to consider this essential feedback process.
This is why a long time ago when an investor wanted to sell a large number of shares on the market they turned to the services of “professional speculators”, until the practice was made illegal in the 1930′s. If you wanted to sell $1000 in Standard Oil shares, you just called your broker. But if you wanted to sell $100,000 that was much trickier, because of this feedback process. The more shares you sell, the more the market price drops, the less you make.

Hi Bruno:

I think where we may disagree is on the degree of influence the “buy high, sell low” loosing speculators have on the market as they succumb to this “feedback process”. I think that if they are persistently guessing wrong and therefore increasing the market peaks and deepening the valleys, they will get disheartened or go broke, or for some other similar reason, desist in their market dabbling.

The professional/successful speculators, the ones who win and come back to speculate another day can persist in their speculating because, on average, they buy when the market is low and sell when it is high. There’s no other way to make a living at it. It is these speculators who influence the market and they are the ones who smooth it out.

Finally, I think you’ll find that the argument that speculation is inherently stabilizing is consistent with the Austrian view, as Rothbard puts it in MES,

“…This speculation is not simple wickedness, however; it has a definite function, namely, that of allocating the scarce depletable resource to those uses at those times when consumer demand for them will be greatest. The speculator, waiting to use the resources until a future date, benefits consumers by shifting their use to a time when they will be more in demand than at present.”

Dear Paul,

No, I haven’t calculated oil prices in other currencies. If we found one currency whose value in USD has doubled during the same period in which oil prices doubled, it would mean that the price of oil would have remained constant in that currency. For the same sort of reason, I would expect the price of oil to have increased less in Canadian dollars than in USD.

Indeed, this is consistent with your last paragraph. If nothing else changes in the world,changes in currency rates will follow currency inflation among different countries. It would still be true that relative prices between oil and widgets remain the same among countries, though and that, therefore, the real/relative price of oil has moved in the same way in different countries.

Agree?

I think we’re agreeing, Pierre. And thanks for the idea, Peter. I have to wonder at my lack of ambition to do more than click on a link to someone else’s work, but i can see it’s getting near the point where i may have to do some original work of my own in this area.

This also reminds me of my weakness in the question of international market arbitrage. I have always assumed that an oil price ratio in any given currency should reflect very closely the exchange ratio of that currency plus or minus some shipping and tax and tariff differentials. This may yet turn out to be true. I can’t see why it should be any other way.

One reason why I prefer using monetary aggregates to CPI for deflating past prices:

This post details the impact of CPI “improvements” over the years on COLA, which saves the government billions of dollars annually on programs whose benefits are Cost Of Living Adjusted to CPI.

Many government programs have costs that are geared to a Cost Of Living Adjustment, which is determined by the CPI. If the government could reduce the CPI from the actual level of price increases, they would save billions of dollars. The three adjustments used to do this, in order of increasing impact on depressing CPI vs actual cost of living, are (1) chain-weighting/substitution, (2) hedonic adjustment, and (3) owners’ equivalent rents instead of housing prices, the biggest impact, done in January 1983.

Mr. Retiree likes steak, and eats it for dinner three nights a week. The price of beef increases faster than the price of chicken over the months and years, and so does the CPI component for food. But because the price of beef increases faster than the price of chicken, the CPI applies chain-weighting substitution to imply that more persons will switch to chicken from beef. Conceptually this is “correct” according to “economists.” But here in the real world, Mr. Retiree sees that the cost of living is increasing faster than his pension, and that increased cost is why he no longer eats steak three nights a week – he can no longer afford it. To change the components or weighting of the “fixed basket of goods” because one good has gone up more than others, understates the actual change in prices for that “fixed basket of goods.” Whose experience is correct? The ivory tower academic’s who wants to “correct” for “economizing behavior,” or the retiree’s experience of prices for a “fixed basket of goods” that rise faster than their COLA? Cui bono? I would argue that the government benefits from this change, on the backs of those who must eat chicken because they can no longer afford steak.

Mr. Retiree needs a new car, seeing as his old one was damaged/stolen/worn out/whatever. It’s been a while, say 1994 since his last car purchase. Over that time, several “improvements” in quality have been made, most of them mandatory by government fiat, such as dual airbags, OBD II emissions systems, side-impact protection certification, etc. Of course, these raise the nominal price in dollars of a new vehicle. However, since the CPI has been hedonically adjusted to “correct” for the “improved” quality of the vehicle, the CPI for new vehicles is basically unchanged since 1996! Tell that to Mr. Retiree, who has the same income component on his COLA pension for transportation expense as he did in 1996! The same argument could be used for 200-channel HD-ready TVs which no longer have manual controls but only remotes (is that really an improvement if you happen to misplace the remote?), washing machines that use 30% less water, etc., I just happen to be more familiar with the hedonic adjustments for automobiles due to my line of work. Again, Mr. Retiree’s cost of living has increased faster than his CPI-tracking COLA. Cui bono? I would argue that the government benefits from this change, on the backs of those who must buy improved products.

Let’s turn to homeownership last. Now, an economist, especially a BLS one, would say that the cost of owning a home is the opportunity cost of renting that same house! Of course, here in the real world we know that the cost of a home is PITI + maintenance. Assuming relocation, Mr. Retiree will lose some equity even if he trades to an equivalent house, and the PI portion of the equation will be higher than accounted for by CPI. Even without relocation, as the resale value of his home increases, the property tax portion of his payment increases, and so does the valuation needed on his insurance policy. Because of the boom in housing, getting good “fix-it” help is difficult, and Mr. Retiree can’t do the things he used to do, like fix toilets, etc. So the cost of maintenance goes up. But what happens to rental rates in a housing boom? Since the percentage of the population that owns a home is at an all-time high, and the percentage of homes purchased for “investment” purposes is also at an all-time high, it’s fair to assume two things. First, the pool of potential tenants is diminished, while the pool of potential landlords and rental properties is increased. It’s “that old supply and demand thing,” I think someone said. So rental rates fall as housing prices increase. Again, cui bono? I would argue that the government benefits from this change, on the backs of those who own rather than rent.

In summary, the CPI as “improved” over the decades is less reflective of the actual cost of living then it used to be. It’s also clear from charting year over year changes in CPI that the CPI has been remarkably stable and low, ever since these “improvements” started to get added. In examining cui bono, it’s clear that the government has a strong incentive, due to COLA, to generate a CPI that is lower than the actual average increase in prices. This is, of course, in addition to any political benefit they get from being able to inflate while attracting less attention then they otherwise would. Finally, since they have the ideological cover of the academic class for the “improvements” they can pursue a real agenda that is separate from their stated on, without incurring Rothbardian cartel theory penalties.

Special note to economists and others who choose to deflate costs using CPI, PCE, Implicit Price Deflator, and to investors who like to use GDP to compare market valuations: Since the government’s indices have changed over time, your work is not accurate. While there are inherent inaccuracies, stemming from implicit and explicit assumptions, with using any measure, such as the monetary aggregates which I prefer to use, if one uses CPI, PCE, or “real GDP” you induce two additional inaccuracies, one of which stems from inconsistent calculation over time, and the other, from an intentional deviation of CPI from the actual cost of living.

The highlights as I see ‘em:

This should push up the relative price of oil. This means smaller quantities will be demanded. Thus the demand for US$ will fall off.

-Sudha Shenoy

I disagree. The main reason higher oil prices create lower demand is because some people won’t pay the higher price. Among those that do pay it, they require more dollars, and likely more dollars than the ones no longer required by oil-quitters. Eventually more people will stop paying the higher price, and that will reduce demand for US$, but the suggestion that fewer US$ will be demanded because oil’s price is higher argues that the effect is greater than its cause. I suppose that it might be greater, and if it is, I would think it’s because of bad speculation, which I discuss below.

Inaccurate speculation has the opposite effect, but fortunately, such incapable speculators loose [sic] rather than gain and are eliminated from the market.
Successful speculators are a good thing and they don’t affect overall price trends, rather they quicken and smooth them.

-Paul Edwards:

This is an excellent point. I put it to myself a few months ago like so: If you make money speculating, then you’re smoothing the price. If you lose money, you’re randomizing the price. In fact, I look at losing money in the market as a kind of costly education about how the market works.

The drawback of high oil prices is the propensity of government to dump &-billions into worthless alternative forms of energy.

-Harry Valentine

This is interesting to me because I’ve been working on an idea from Kung Fu. Use your enemy’s strength to defeat him. The enemy, in my opinion, is not our rulers – they’re simply acting in their own self-interest, as people ought to. The enemy is the widespread expectation that others should help pay for certain things. That expectation justifies and necessitates the use of force to collect those payments – hence taxation. Using this “strength” – the widespread expectation, that is – against the “enemy” means profiting from government contracts and the like.

While I sell a screw driver to Uncle Sam for $450, there may be an opportunity for me to explain that “people like me” have it easy because we take advantage of your expectation that others help you pay for this screw driver. If I get no such opportunity, I still get my $440 profit. Where does this behavior turn immoral if it isn’t already? Or, more to my taste, where does this behavior begin to have negative effects on my life? I don’t know. I say that happens whenever I forego an opportunity to explain to people that their expectations of others are profiting me at their expense.

or that one of the Canadian oil fields is on fire… The terms of trade of Canada will improve, …

… It is important, when considering economic problems, to get behind the veil of money and think in terms of relative prices.

-Pierre Lemieux

Two separate quotes from the same post. The first is interesting because “How can a burning oil-field improve the terms of trade for a country?” I have an answer too. The market reaction never exactly right, and if it is too little, then it goes further. In other words, the flow of widgets to Canada (to be used in the collection of oil) will increase at least enough to fix the burning oil field, but will go a little further than that. Every movement in the market is eventually an over-correction, and that is how a burning oil field improves the country’s trade terms. It’s also what keeps individual humans and groups and everything heading toward balance.

Getting behind the veil of money reminds of a project proposal about which anyone can email me if they’re interested in discussing it:
I propose that a database of historical trading data (what is traded for what isn’t that important as long as the trade is pretty widespread) be connected to software that allows the user to view, for example:
* The gallons-of-milk cost of an ounce of gold
* The pounds-of-copper cost of a bushel of wheat
* The pork-belly cost of a barrel of oil
etc.
over some period of time.

If such a system were available to commodity traders and provided information on the last, say, 5000 minutes of trading for several commodities, I bet it would be worth millions of dollars.

Dave.

I think the author overlooked several circumstances in regards to the petroleum industry.

The author overlooks the expectations of the populations of both India and Communist China of qualitatively increasing lifestyles. Irrespective of the intents and agendas of the Ruling Class within those nations, a quote of a Communist Chinese worker sums my contention.

When queried by a visiting potential investor, [see perhaps http://www.321gold.com or http://www.financialsense.com ], a Chinese worker said something pursuant to the following. “Why do you think I sell my body so cheaply”. The worker was most emphatically not female, and not a sex worker. Furthermore, the exodus from countryside to urban industrial centers is not just happenstance.

Why this digression. For a large albiet “third world” country, petroleum in large non-quantifiable amounts are going to be needed to “lubricate” the transitional process, via-a-vis, third world>>>first world. I simply don’t see large scale innovative initiative within the harsh collectivist state of Communist China.

For different societal reasons, I don’t see large scale technological innovation flourishing either. Just for just starters, take into regard, the millenia long chaste system within that country of one thousand languages and one billion plus inhabitants.

Think of plastics for medical equipment, military manufacture, and other processes. Also consider how steel is manufactured and as to what sort of infrastructure is needed to advance a contry to first world status.
\
I think, and I may be wrong, that the author indirectly refers to “Hubbles Peak Oil”, when discussing the present day references of vanishing oil. He is ,however, correct, that in the past, the petroleum industry has been less than forthcoming in regards to proven and inferred reserve inventories.

Should it prove that the author is, however indirectly, addressing the current concern of the Peak Oil hypothesis, then I think that same has not interupted the underlying assumption concerning data of this theory correctly.

When one reads mining and petroleum industry source material, one does NOT find extant, the notion that the world is running out of oil. Nowhere does one read this .

What one DOES read is that the commercially viable recovery of petroleum from the immeasureable world petroleum resources shall be arrived at, in the very near future. Thin or non existant profit margins shall be the norm rather than the exception.

At this Mises web-site, the notion of a profit, should not only be known of, but be most enthusiatically embraced.

The author places in the forefront, the notion that human ingenuity always has, and always shall be viable in ensuring petroleum [and enrgy in general] resources, irrespective the geological challenge presented in securing same.

The author also posits that the simple supply/demand curve shall be the agent of change in regards to petroleum demand. Perhaps in first world nations. However the present/former first world nations are rapidly degenerating, through the vehicles of fiat monetarism, welfare transfer payments [personal and corporate], the rise of authoritan government and other factors. These factors have great force toward providing dis-incentiveness in regard to technological innovation.

In summation, as with all other past historical human endeavors, time shall most certainly prove the author’s contentions, correct, or not.

Respects,

JZ

I lean towards the side that thinks peak oil is a real possibility, however, it is possible that there have been no large oil field discoveries in the last 15-20 years because the price of oil has been so depressed over most of that time. I think it entirely possible that the current (and higher?) prices has and will lead to more exploration that will produce such finds. Only Time will tell.

Within a few months it will become clear whether or not the Saudis are able to ramp up production as they have promised. If they cannot, then we are at Peak Oil and prices will escalate very quickly. Most other oil production regions are in well-defined declines. Increased prices may mean that some stripper wells stay in operation a bit longer but won’t significantly affect production volumes. When the energy needed to extract the oil exceeds the energy in the oil extracted pumping stops.

We may also have a few more wars. I presume the US Admin knows what the actual situation is and that’s why we’re in Iraq (is there any other reason for being there?). China also knows or is assuming that oil is limited and that’s why they are in places like Brazil buying reserves at much higher than the going rates. (ps: Is there anyway to organize a pool on this site?)

Assuming that Peak Oil is correct and we have only a fixed and declining supply of this energy source, what will happen to the world’s economies and currencies? Might there be a “shock effect” as opposed to a gradual adjustment. Might investors avoid the US because it is so heavily dependent on cheap oil and they expect some sort of collapse?

Anyway, thinking about Peak Oil takes my mind off of other issues like the debt overhang and global warming. This is a good time for Cassandras.

“PS. I am amazed to hear that anyone would think the government knew what the actual situation was!”

And then you give references to the EIA?!. The EIA projects a doubling of oil demand/supply before supply peaks in 2037. They place most of the increased future supply on the Saudis. This is wholly unrealistic. They apparently take each country’s word regarding volume of producable reserves (probably some rule that we can’t offend our suppliers by questioning their estimates).

My guess is that during their secret meetings, the oil companies tipped off Cheney regarding the impending crisis and that is why we’re in Iraq right now.

Anyway, we’ll probably know within a couple months. Time to hoard bicyle tires.

To Ralph, nowhere did I mention EIA PROJECTIONS. I listed ACTUAL PRODUCTION NUMBERS. I am refuting your claim that “Most other oil production regions are in well-defined declines” which is simply not true, production is higher today than it was five years ago, for a large number of significant producers.

If you have a problem with the ACTUAL PRODUCTION NUMBERS from EIA, please, by all means, provide a link to the site which details ACTUAL PRODUCTION NUMBERS that are more accurate than EIA.

Hi every body,

I want you to help me

I have project about why the oil price is increasing….

I hope you help me in my project

Thanks alot

The article notes:
“Proved world reserves of oil, which were 762 billion barrels in 1984, are now estimated at 1,189 billion barrels.”

From here:
http://tinyurl.com/d5yvc

Can be found the source linked in support of the speculation above.

The Chart from the source linked in the article does not report data past 2004.

It is now 2005

From the same Google search is this:

http://tinyurl.com/9yx6g

Reporting this:

“Don’t worry about oil running out; it won’t for very many years,” the Oxford PhD told the bankers in a message that he will repeat to businessmen, academics and investment analysts at a conference in Edinburgh next week. “The issue is the long downward slope that opens on the other side of peak production. Oil and gas dominate our lives, and their decline will change the world in radical and unpredictable ways,” he says.

Logic would include the realization that, if, oil reserves peak, then, oil supply will decline.

If some people know about the Peak of oil reserves while others do not know, then, an obvious advantage exists.

If a person acts in their own best interest as completely as possible to the exclusion of all others, then, said person can manipulate the information in a manner to retain, as completely as possible, the advantage.

“every individual will attempt to secure his own requirements as completely as possible to the exclusion of others.” (Carl Menger)

Ideologies based upon the excluding of others end up like this:

http://tinyurl.com/4g3bs

A Malthusian catastrophe, sometimes known as a Malthusian check, is a return to subsistence-level conditions as a result of agricultural (or, in later formulations, economic) production being eventually outstripped by growth in population. Theories of Malthusian catastrophe are very similar to the subsistence theory of wages. The main difference is that the Malthusian theories predict over several generations or centuries whereas the subsistence theory of wages predicts over years and decades.
A person acting upon their own best interests to the exlusion of others will attempt to accumulate capital resources of all kinds for his own requirements as completely as possible to the exlusion of all others.
Iraqis and American Soldiers could have spured the potential for invention; had they lived.
American young men and women sent to Iraq in the effort to exlude the Iraqis could also have spured the potential for inventions; had they lived.

They are dead. Knowing why they are dead could serve the interest of more people rather than less people, if, a person knowing these facts were less greedy and more generous.

Somewhere between greed and generosity is a concept known as equity.

The equitable exchange of available energy can help smooth out a future where an overdependence upon one source of energy is replaced by the development of another source of energy.

If the overdependence upon one source of finite energy continues, then, the change over and development of available energy sources will become increasingly more critical.

Leaders in the emerging energy markets have two possible future scenarios. Procrastinate and miss opportunity. Procrastinate long enough and the energy markets that remain could very well be the sharpening of sticks and the throwing of stones.

“Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius — and a lot of courage — to move in the opposite direction.”

“I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones.”

http://tinyurl.com/5kkgm

what’s the role of canada government to play in shielding canada from the deleterious effects of rising energy price.has canadian government done something?