OPEC member suggesting that oil might be a bit too high

[Martin Blank]

In a stunningly magnificent display of situational extrapolation surely worthy of a Nobel prize, Saudi Arabian Oil Minister Ali al-Naimi has suggested that current price levels might be "unjustified." This follows Congress, who has several members on both sides that have said that something needs to be done about it.

The question is what to do? Including both long- and short-term solutions, there are many options that can be tried:

• Boosting production of alternative fuels (not just ethanol -- there are other sources)
• Boosting efficiency of vehicles
• Encourage public transportation
• Pumping more oil
• Raising interest rates in the US to make the dollar more attractive to investors
• Altering the rules of oil trading in an attempt to curb speculation

These are the big ones, though there may be several others, and I'd like to hear about them.

The first three are all long-term issues. It takes more than a decade to cycle out the current fleet of vehicles in the US, so even if everyone started buying cars averaging 40mpg today, it would be 10 years before the entire fleet reached that minimum amount. Alternative fuels have had their own discussions and are worthy of still more. And encouraging public transportation is kind of iffy, though I was recently pointed to an article on Personal Rapid Transit, an idea that I find intriguing as it solves the issue of adaptability in public transportation and helps cover people who don't wish to ride with others.

The last three are short-term issues, and have some aspects worth watching, as they can change the market dynamics considerably.

Naimi has said that Arabia will be bringing a new oil field online soon, capable of (but not necessarily reaching) 500,000bpd. This is being done outside of OPEC, and may well break a deadlock in OPEC of nations that want to boost oil production and nations that are enjoying the current high prices and the concomitant income levels. (It's been suggested that Saudi Arabia may have another goal of reducing the income of Iran, weakening the government there somewhat.)

Raising interest rates in the US will bring back investors, strengthening the dollar and allowing the price of oil to come down as investors see it as less attractive than it currently is. However, raising interest rates too much can put a strain on the national economy, as it becomes more expensive to borrow. This may be required soon anyway, as inflation seems to be heating up a bit, and higher interest rates will cool that.

Altering the rules of oil trading is an interesting idea. There are two ideas put forward so far: an increase in the margin requirements for traders, and a limitation or ban on large investment entities being involved in trading at all.

In simple terms, margins in trading are the assets that must be put forward to engage in futures trading. For example, if a margin requirement is 10% and you want to buy $500,000 in contracts, then you must be able to provide $50,000 up-front. If the price goes up, then you sell it before the contract comes due, and you're able to pocket the profit while paying off the price from when you bought it. However, if it falls, you're still responsible for the price at which you bought the contract, and you must pay it no matter what. At the end of a specific term (the day, the week, the month, the quarter, depending on the trading rules), a margin call is made, and all accounts must be settled. If you bought $500,000 in contracts and the price went down by 20% by margin call, then you still must come up with the remaining $450,000, even though you hold contracts worth only $400,000. If you cannot come up with the extra money, then your assets may be seized and auctioned off to cover the difference.

The limit on large investment entities makes some sense, though I'm not sure if I'm comfortable with it in principle. As the price of oil went up, large investment brokerages started sending more money into the market. This happens all the time in stocks and commodities, and it's how the markets are supposed to work. But at a certain point, it can become unbalancing, and an artificial scarcity can erupt, where even the largest entities are grabbing what small numbers of contracts are coming available. These larger firms can afford to pay higher prices than the smaller firms, and so outbid them. This continues on even as prices rise, and the price rise can exacerbate it because it entices those holding contracts to continue to hold onto them, enforcing a supply limitation. It is not until the pace of buying slows that some of them begin to turn to profit-taking, selling off their contracts to get at the cash that they made in the price escalation. In simple terms, it's like a very rich company coming along and buying up all the land around you, making it impossible for your friends or family to be able to move close to you because they can't afford it.

I'm all for pumping more oil. It's going to happen anyway, especially with Brazil pioneering some very deep-water, deep-earth techniques that could find applicability in the Pacific. Interest rate changes are very sensitive, and I don't have the information at the moment to make a call on that. The margin requirement change may also be a very good idea. I'm still not sure about the changes to the entity sizes, but it could be worth discussing.

[adciv]

Alternative Fuels:
Probably not the best description, Alternative Sources would fit better. We can still use Gasoline and Diesel, so long as we get it from sources other than crude oil such as Coal (which I know you don't like MB, but that is for a different reason) and Algae. Just about everything I've read about is two years or more away from launch, the one exception being a cellulosic ethanol plant that came online in Georgia this past year. Drilling isn't much better time wise, but makes a decent intermediate solution. However, given the estimated 60 year supply we have that is completely untapped, we should have started decades ago.

We also need to chose the alternative carefully. Hydrogen has the distinct problem of "where do you get it from". Currently, it is produced from Natural Gas, which isn't much better than oil right now. Extraction from water would only become economical if we could get some nukes up and running (which I would support) but it still isn't as efficient as pure electric would be (which has it's own problems).

Energy Independence should be the primary goal of all this, I'd argue. So it shouldn't matter if the oil we drill only lasts another 30 years so long as it gives us a reprieve to build the longer term solution in the mean time. Related to this, I'm curious how much of a premium having a slightly more expensive fuel is worth, provided the money stays in the country (think the buy local argument). Would a 5% premium be worth it economically, so long as all the money stays in the country instead of contributing to the trade deficit? (5% is an arbitrary number used only for example)

On fuel from food (or related to it)
One thing that might be interesting is an export tax on food. (Not sure if this violates an treaties or not). It would have the effect of making it cheaper to keep it in the U.S. (and lower the price) while possibly somewhat increasing the price of food abroad (not our problem) and bringing some more money into the country.

Boosting Efficiency:
I'd say using less oil instead, for similar reasons to the above. If a car is less efficient, but uses a different source (say, electricity or hydrogen) we've still accomplished the goal.

Can't really say much about this, other than that there is a physical limit to how much you can do and still maintain safety standards and keep the cars affordable. (i.e. I could make a car that is just as safe and weighs half as much using carbon fibre, but would cost four times as much) One thing I've been told from several sources is that the EPA regs on NOx and similar generally cause a decrease in efficiency due to how the vehicles currently comply with them. But that gets into trade offs.

On a related possibility, here's a weird idea that might help decrease the time of transition to more efficient vehicles. The EPA has the fuel efficiency going back several decades. Have a tax credit for people getting rid of old cars that is proportional to the increase in mileage of the new car over the old car. This would make it more economical for people to upgrade to more efficient cars. Also, (not sure if this is already done or not, probably not) apply the CAFE standards penalty tax for vehicles that are not up to the cafe standards for used cars. This would further encourage more efficient car purchasing. I realize there are details that would need to be worked out to prevent abuse (such as a minimum mileage increase or ownership time) but It should help some.

Public Transportation:
Part of the problem is that it generally just does not pay for itself. Everyplace I've been, it is not economical to take public trans over driving unless it is heavily subsidized (this gets into the keeping local premium). However, I would like to see more of it in some places. High speed lines connecting major cities and airport hubs is one idea. (Interstate costs ~$1 million/mile, tracks are not much more, if not less) Basically, look at the main transportation corridors and run parallel tracks. Heck, if we could toss the cars on the train, that would also work. In addition, it would be useful to get the trucks onto train tracks, as is already somewhat happening, for long distance shipments. The railroads are having a boom with the high cost of fuel as they can ship tonnage cheaper than by truck (about 440 mile tons/gallon for a train compared to 110 mile tons/gallon for a truck).

Raising Interest Rates:
I very much disagree with doing this right now. The primary use of the interest rate is to manage the economy as a whole and to control rate of inflation. Raising the interest rate right now, while lowering the risk of inflation and maybe making oil cheaper, would also have the effect of slowing the economy even more when we are close to a recession. While a recession would probably lower the price of oil even more, it would have the counterproductive effect of killing the economy and making even fewer people capable of buying fuel and other things that they need to survive as they would probably have less money.

Altering the Rules of Oil Trading:
I'm not sure how much I like this in general. If the margins requirements are increased, why increase it only for Oil and not other things, such as Corn, Wheat and Orange Juice? Also, it would have the effect of pushing people to use means other than margins, say to outright purchases on the futures market. Elimination of large investment entities is just a plane bad idea period. It would squeeze out the entities that are made up of thousand of individuals investing (such as 401k entities). i.e. I, as an individual, may not be able to invest in oil. However, through my investment agency, along with thousands of other people, we can invest in a fund that invests into oil (among other things). Then there is the ethics (or something) of preventing one group from investing in something entirely.

rise, and the price rise can exacerbate it because it entices those holding contracts to continue to hold onto them, enforcing a supply limitation. It is not until the pace of buying slows that some of them begin to turn to profit-taking, selling off their contracts to get at the cash that they made in the price escalation.

Which could, in theory, cause rapid swings in the market until it decides to even out at some point, which is just plain bad.

The main problem here comes down to what to do in the short term (<5 years) and medium term (10 years) . There is enough out there that the long term (20+ years) will probably take care of itself right now.

I came across this earlier. It is somewhat related and definitely has some interesting comments in it.

[Martin Blank]

One small point:

Interest rate changes are probably a few months off and contingent on what happens in that time, but given that May's inflation rate was 0.6%, it may end up having to happen. The chances of it happening are already having some effect on the dollar, which gained nearly 3% against the euro this week. Oil was down a little over 3% for the week after an extremely volatile week.

[adciv]

Ouch. And looking over the summary transportation (aka gas) is the main cause of the jump. Although the transportation increase is less than it was in November. Interesting. By any chance do you know of a good resource for seeing charts of crude prices? The best I can find are current day prices or a rather primitive and short term graph from Nymex. I'm hoping for one more like what Google Finance has.

*edit* I found some information on proposed legislation. It's primary goal appears to be "position limits" to limit how much one group can own.

[collegestudent22]

I'm all for pumping more oil. It's going to happen anyway, especially with Brazil pioneering some very deep-water, deep-earth techniques that could find applicability in the Pacific. Interest rate changes are very sensitive, and I don't have the information at the moment to make a call on that. The margin requirement change may also be a very good idea. I'm still not sure about the changes to the entity sizes, but it could be worth discussing.

This needs to happen. There are plenty of places that oil can be recovered from here in the US, and if we allowed some compromise between environmental groups and those that want to drill the prices would be lowered significantly.

I'm also tired of people blaming the oil companies. According to HowStuffWorks.com, the breakdown of a dollar spent on gasoline:

Taxes: 11 cents
Distribution and Marketing: 6 cents
Refining: 10 cents
Crude oil: 73 cents

ANWR (I know this quote is from Wikipedia, but it is backed up by the most recent USGS survey of the area):

The U.S. consumes about 20 million barrels (3,200,000 m³) daily. If the Arctic National Wildlife Refuge oil reserves were used to supply 5% of the U.S. daily consumption the reserves, using the low figure of 4.3 billion barrels (680,000,000 m³), would last approximately 4300 days, or almost 12 years. In total, the oil deposits in ANWR contain as much oil to solely support U.S. consumption for 7 months (4.3B estimate) to 19 months (12B estimate). If used to completely replace oil imported from the Persian Gulf (775M barrels in 2007[12]), oil from ANWR would last from approximately 5.5 years (4.3B estimate) to 15 years (12B estimate)

And there is oil off the coasts of both California and Florida, as well as oil shale in the Rockies that can be reached with new methods that have very little impact on the environment. Now drilling is obviously not a long-term solution, but could it not solve the problem temporarily while we work towards limiting our consumption of oil using flex-fuel, alt. fuels, and more efficient vehicles...?

But Congress refuses to do anything that might have even a remote chance of damaging an environment, no matter how removed from civilization it is. Good to know. Now I shall stand back and watch while the country I love heads down into economic disaster and goes from the only remaining superpower to a third-world country that cannot transport food to its citizens, nor provide energy for homes, vehicles, nor protect itself. But, hey, at least the environment will be pristine.

[Martin Blank]

This needs to happen. There are plenty of places that oil can be recovered from here in the US, and if we allowed some compromise between environmental groups and those that want to drill the prices would be lowered significantly.

You quoted an entire summary paragraph that touched on five topics. Are you saying only that you agree with the additional drilling, or that you agree with the whole thing?

[collegestudent22]

This needs to happen. There are plenty of places that oil can be recovered from here in the US, and if we allowed some compromise between environmental groups and those that want to drill the prices would be lowered significantly.

You quoted an entire summary paragraph that touched on five topics. Are you saying only that you agree with the additional drilling, or that you agree with the whole thing?

As I stated later in my rant, I agree that additional drilling is only a short-term solution. I agree with almost everything you stated there, although I think that additional drilling outside of the methods you suggested is necessary during the changeover period. The problem is that the party in control of Congress is very reluctant to allow any of the short-term solutions you proposed, but instead wants a windfall tax on oil companies profits, which account for a very small amount of the gas price, apart from the fact that nothing would prevent them from tacking that tax onto the current price, which would only drive prices higher. (Unless of course it is a 100% tax, which would never get through, and even if it did, Socialism is not a system I want to live under.)

[adciv]

Saudi Arabia has stated it has increased production by 300,000 barrels the month and will increase it by another 200,000 barrels next month. Among other things noted in the article, the King of Saudi Arabia has appealed* to western Europe to cut fuel taxes.


*They use that word, I'm not quite sure why. If you can explain it to me, please do so.

[adciv]

Then it would cost about €87 right now instead of $135.

[ShahinVahdat]

Collegestudent, your breakdown of gasoline production to show that the oil companies aren't so bad would be helpful if oil companies didn't continue to make record net profits for the past few quarters for ANY company in ANY industry in U.S. history. If their costs went up as well with the price of oil their profits should stay the same, shouldn't they? So, for some reason, they make more and more money. I wonder why?

Secondly, even when you drill a little bit in a certain area, it ruins the ecosystem to put in an offshore drilling platform or an oil rig. So while we may not be tapping that much of the natural resources, we are probably causing bigger long term damage to the ecosystem and any life (plant or animal) that's living there.

Finally, to actually set those things up would take years, we wouldn't be able to tap the benefits of it for probably 5 years. With all the money we would invest to do offshore drilling and drill in ANWR, we could just continue to invest that money into alternative fuels so as to make the long term change much sooner.

We're about to see the first hydrogen cell fuel car hitting the streets in a test run in LA (although, you'd still get 0 mph because no cars actually move on the streets, they just sit in traffic), so the market is changing. If we kept investing in these technologies we could shed our oil dependency within the foreseeable future

[adciv]

if oil companies didn't continue to make record net profits for the past few quarters for ANY company in ANY industry in U.S. history. If their costs went up as well with the price of oil their profits should stay the same, shouldn't they? So, for some reason, they make more and more money. I wonder why?

How about because the oil industry is just so huge? The profit margin is only 10%. Many other companies make more money compared to how much they spend than the oil companies. Further, the Government has been making more than that every year for the past few decades in taxes alone.

Secondly, even when you drill a little bit in a certain area, it ruins the ecosystem to put in an offshore drilling platform or an oil rig. So while we may not be tapping that much of the natural resources, we are probably causing bigger long term damage to the ecosystem and any life (plant or animal) that's living there.

I call Bull Shit. Prove that it will produce some noticeable effect.

Finally, to actually set those things up would take years, we wouldn't be able to tap the benefits of it for probably 5 years. With all the money we would invest to do offshore drilling and drill in ANWR, we could just continue to invest that money into alternative fuels so as to make the long term change much sooner.

And people have been saying that for close to 30 years. Seems like any time it won't be an immediate return, you use it as an excuse to not do it. More drilling is an interim solution to alternative sources of fuel. Just because it would take a few years does not mean we should not do it. Otherwise, why should we even bother developing alternative fuels as that would take just as long, if not longer, to get up and running.

We're about to see the first hydrogen cell fuel car hitting the streets in a test run in LA

And pray tell me, oh enlightened one, where we are going to get the hydrogen from? Currently, most of it comes from natural gas.

[Mae Dean]

And pray tell me, oh enlightened one, where we are going to get the hydrogen from? Currently, most of it comes from natural gas.

Maybe from technology somewhat like this: http://gizmodo.com/5016343/genepax-unve ... er-and-air

And re: the whole record profits thing...

The reason for the boom is simple. Much of the investment in finding that oil -- and developing the wells and pipelines needed to produce it -- has already been made. So an oil field that was profitable with oil selling for $20 a barrel is much more profitable with oil trading around $60.

[adciv]

Greg. Please tell me you are being sarcastic there.

[ShahinVahdat]

Because the current drilling we do is completely harmless and there is absolutely no effect on our environment, right? If I sent a huge oil pipe through your house, don't you think your environment would be kind of messed up?

Secondly, while hydrogen is a natural gas source, we wouldn't have to solely rely on OPEC nations to get it. Also, it doesn't release deadly chemicals into the atmosphere.

Plus, saying the government is making more isn't a valid argument. If oil companies made more than the U.S. government, we would have a lot more problems today than we already do. If the oil industry is so huge (I'm assuming you mean that demand has just gone up, if you meant something else, please tell me) then their profits would still be tied to the fact that the cost of oil has gone up, meaning that their profits shouldn't be this big. Yes, they may make only 10 percent profits, but their profits as a percentage go up relative to the year prior.

[Arc Orion]

Yes, they may make only 10 percent profits, but their profits as a percentage go up relative to the year prior.

Damn these businesses, trying to increase their profits!