Why we all owe Shaul Mofaz a big ‘thank you!’

VS,

Rumors, speculation and headlines can move markets, but only short term. Speculators in the oil market can’t keep the price up if the demand is not there.

The fact that oil prices have been on a steady, frenzied, upwards march for well over a year now tells me that huge, real buying is taking place. I strongly suspect that all of this is directly caused by the US, as well as Europe, Japan, China, India, etc filling up their strategic oil reserves in anticipation of the attack on Iran.

Last I read is that the US strategic reserve is about 97% full; this is the public figure that we know. In addition, I am sure that the military has its own strategic reserves which we do not know. Remember that the US military is the largest single user of refined petroleum products.

Depending on what happens after the attack takes place, and the damage inflicted on oil installations, I would not be surprised to see the oil price actually FALL. I draw on the experience of Iraq’s invasion of Kuwait and the subsequent destruction of oil installations in Kuwait. The damage was repaired in about a year.

Recently, there has been a lot of media attention into who is the culprit regarding 4 dollar gas. The government is going through the motions to look into the commodity futures market to see if any villains are to be found, The other effort is based on raising margin’s to curb speculators. Yesterday, Bob Brinker, a finance media type who is on the radio in much of the nation, spent an hour explaining how the oil companies are not responsible (directly anyway). In the capitalist system, we have the concept of future contracts between the producers and the consumers. People buy commodity based index funds which anticipate the direction of the price of oil
in the near future, and contracts are let and bought at high prices by the international financial community. So Bob goes into defeating the leftist theory that the Big oil companies have convened in a back room, and with cackling glee, raised the prices of oil. The ownership of Big Oil is not the same as the management, ok he makes that point. On and on drones the show, belaboring the point that capitalist greed is not the cause of this spike. He is probably mostly right. Structural issues affecting the price of oil, like consumption patters from China, and Refinery capacity, and any peak oil concerns are drivers but they affect trend lines that appear over time scales of decades. This 6 month spike is NOT that. So he questions some oil commodity futures guys, and they bleat that the contracts are held by mostly institutional investors. In the mind of the listener, the price is being run up because of the contracts are being bought by your own 401K’s. and other such
broad investment community types. Then , by accident, the commodity trader let the truth slip out in 1 brief sentence, never to be visited again. The run up, he said,
is because of a fear of Israeli attack on Iran. Then, scoot by that point. Scoot by, never to discuss or mention it again, is the blank military checks we write to the Israeli hawks. We will cover their ass in case they do it;Osirak II, is ok with the Bush admin then (and because of the deafening silence, with the dems too, Obama included). The heart of the issue is off the table for even casual discussion. Somehow, the Media, Bob Brinker is an example, spend all of their time absolving the management of Big Oil, and the Commodity futures market. True, these oil contracts are a economically useful bird in the mine that reacts to anticipated shortages or demand imbalance before it is actually at the door. This is not bad. People who buy such contracts are not bad either. They are reacting as we would expect- that’s all. But the 900 pound elephant in the room is Israeli threats and militarism, and the US enablers. If the US posture in the middle east was even the same a pre 1991,
with no boots on the ground and no military involvement, Israel would need to be far more cautious. If the US, is Eisenhower did, told the Israelis to back off as in Suez, and said there will be NO Israeli military action against Iran, and If three is, Israel will be real sorry, the futures market for Oil would would see a price collapse to price level of years ago, removing the war risk premium.

So the real beef I have, is why we can’t discuss this in the price. When the gas pump is ding- ding-ing like crazy when you are filling up, If Israel was just another foreign country, causing this spike by their military posturing for regional hegemon in the Middle East, the gas pumper would know why is paying upwards of 4 bucks a gallon, because the media would discuss it. – and he might get pissed off enough to change some policy. If the media, press and electronic, is so cowed that the root cause cant be discussed, in what sense are we a free country. It is easy to conflate the long term trends, Competition of the developing world for oil, peak oil worries, etc with this current spike. -and we let the get away with it. Like the commodities trades on Bob Brinkers show, who rushed past the truth as fast as possible to continue a economics 101 discussion of what commodities contracts are and why there is no structural reason why international capitalism should be blamed-
we are off some reservation to discuss it, much less analyze it. Professional option traders know the truth. It’s their job. Just the shmo that reads the Chicago Tribune and listens to Bob Brinker on WLS for his news is clueless. Most people think it either the Saudi’s, Big Oil Greed, China now consuming, US not taping domestic reserves because of the Serra club and the tree hugging democrats. But why is all this relevant to a spike in the last year. Sure all may be legitimately discussed as components of a longer trend, but we can’t get off our knees long enough to consider the truth. WHY ARE THE WORLDS COMMODITY TRADERS so spooked in the last 6 months. What’s going on that was not going on a couple of years ago? Get out our knee pads because we have to kneel before our masters voice.

//news.yahoo.com/s/nm/20080609/ts_nm/g8_energy_dc

Here is what these big dodo’s have to say:

“Oil prices are surging not because of a supply shortage, but because of massive liquidity,” Ito said, referring to the influx of financial funds into markets, helped by low interest rates.

WHAT! So there is lots of cash around, and not knowing what else to buy, everybody blindly buys oil futures? Is that their answer? Like a giant tulip speculation deal? Is that all they can come
up with?

Bottom line.
1) Israel can and will do what it needs to do. I don’t want to tell them what to do BUT
2) If Israel wants us to hold their coat as they clobber Iran, I want the Press in the US to be free enough to discuss the reasons for this price spike,
and when the gas pump is ding ding-ing its head off, I want the driver in the US to know who to get pissed of at. If the US citizens want to continue to promote
Israeli regional hegemony at the cost of adding a risk premium to the cost of gas, driving it up to maybe 5 bucks a gallon, fine, after a sober national
discussion, I will have no complaint, given we are supposed to be living in a democarcy with a free press. ( I don’t like the scope of government but thats an separate issue)
3)If there is not allowed to be a discussion of this issue in the press, only obfuscation like “massive liquidity” in the commodities futures market, well
then I am annoyed at the gutless wonders that call themselves the press these days.

VS,

Actual total demand figures are hard to find. However, with most major economies slowing down and with the U.S. most likely in a recession, the demand has to be declining. On the other side of the equation production is not declining, but probably is increasing, albeit by a small amount. Even Iraq is producing more oil now than a year ago. The surplus above real demand has to be going into storage.

The U.S. strategic reserve has a declared capacity of about 700 million barrels. Private reserves are several times this amount. China had plans to double its reserves to about 100 million barrels, and so on.

When you add it all up, there is at least 2-3 billion barrels in reserves worldwide.

Iran exports about 2.5 million barrels per day, that is under a billion barrels for a full year.

Therefore, assuming no Iranian production and export for a full year, only about one third to one half of the global reserves would be used.

The key assumption here is that production in the rest of the gulf is not affected or, if interrupted, then for only a few weeks.

As the rest of the major economies sink in a major recession (as a result of the fears triggered by an attack on Iran and by the high prices), global oil demand would drop significantly, while the supply (thanks to the reserves) is hardly affected. Steady supply and lower demand means lower price.

By the way, how is Peter Saker related to you?

What always makes me laugh are the demands by the US – long-time proponent of survival of the fittest ‘free market capitalism’ where prices must be dictated by the ‘market’ – somehow drops all of this talk when it comes to oil. Suddenly, oil producing nations have a ‘duty’ to prop up the economies of wealthy rich nations and damage their own profits so that American housewives can go grocery shopping in their SUVs. And again, as a poster here has said, rather than examine all of the causes behind the recent price spike – ie Israel – it’s so much easier to indulge in some cheap grandstanding about ‘selfish’ ‘sheiks’. Even Michael Moore couldn’t resist…

Tony- not related to vin in any way.I asked him if it was ok to use this fearing confusion and he gratiously said ok.

AA, thanks- I tried this and I could not preview or publish the comment. (I substituted for ] in the actual example, and
removed the newline after yahoo.com and 609 in the following:
[a href=http://news.yahoo.com
/s/nm/20080609
/ts_nm/g8_energy_dc]link[a]

Tony. is is true then that the market is over-reacting to war fears by assuming too great an impact, and the commodity futures on oil are not realistic then? It’s possible certainly. They are not god and estimates of a future proposed calamity might be more emotion than science, but still, the driver seems to be fear, and if the fear is realistic or not, the price is going up because of this fear. What do you think? Apparently the people buying these contracts are bidding the price way up.

humbled a bit by my inability to get the posts correct, I think by knee jerk reaction to blame the neocons and Israel for everything needs to be tempered somewhat. Because oil futures contracts seem to be the driver in this run-up in prices, maybe the buyers on the open commodities market are not so much like Tony, with sharp pencils and maybe they don’t use realistic probabilities of the magnitude of a war disruption. Could be the hoards of investors (not really sophisticated in the oil production/consumption dynamics) in this future market are driven by a combination of
1) war fears
2) price is going up- so join the bubble and make some money short term.
3) lots of cash because the usual investment vehicles are not performing, and low interest rates make fixed income investments not so good.

Who knows how to weight the combination of such factors. My understanding of the futures market for commodities is very shallow. I think if it like farmers crop isurance, when they sell futures to the grain elevator for their crop, so really the don’t sell to the consumer, but to the middle man who speculates on demand. This mechanism has good and bad features. Sometimes bubbles develop and the herd mentality tries to ride a rising market independent of the real issues involved. The actual issues though, I think, are the war premium, not the usual longer term issues like rising China consumption and peak oil fears etc.

Peter Saker,

You are right about commodity traders and speculators. In the short term fear and greed dominate. My point is that if and when war takes place, the price may very well drop, for the reasons I gave. By then the risk premium has been removed and the actual supply (including from strategic reserves) and demand control the price.

@Tony: thanks a lot for making these very interesting points. Fascinating stuff about the reserves, I never looked into this – thanks for pointing it out to me!

I am still under the impression that whatever the reality of the supply/demand of petrochemicals may be, the world economy is at a breaking point with little or no capacity to absorb another crisis. The dollar, in particular, has been over-valued for decades and nowadays the greenback is even more of a baseless currency (considering the state of the US economy and the Fed printing money). Would a war with Iran not be enough to push the US (and other) economies openly into a recession regardless of what the strategic reserves are?

Also, can’t we expect the major oil companies to use a war with Iran to hike gas prices even further, thus compounding the crisis?

I would also note that should Iran take the decision to use the “oil weapon” it can definitely shut down the Iraqi oil production and most likely severely disrupt the Saudi one (Saudi oil facilities are all well within reach of Iranian missiles). Personally, I do not think that Iran would do that, but if the theoretical threat is real, as I believe it to be, would that not also put too much pressure on the price of crude?

History is full of real crises triggered by perceived shortages. From the February 1917 Revolution in Russia to the fuel shortages following the US hurricanes – a shortage just needs to be perceived to trigger a panic.

The Neocons have miscalculated pretty much everything they did. Could they not screw up again this time, built up their strategic reserves only to find out that this does not help?

Lastly, Peter Saker and I are only related in spirit, and not in any other way :-)