The Oil Drum: Canada

I have been gently chided on the internets for not doing any Countdown diaries since the oil prices have started going down. While the giddiness and glee demonstrated by many in the traditional media and elsewhere invites little but ridicule, as demonstrated by this graph below, prepared for the Oil Drum, some serious questions have been raised and deserve answers.

An installment of the Countdown to $200 oil series

Never mind that speculators have been caught shortselling oil (ie betting on a fall in prices) more than a few times in recent months. Never mind that spot oil prices, which require actual physical deliveries of oil at the end of each month, have behaved the same way as paper futures. Never mind that oil storage seems to not be increasing.

Nope, it is just too convenient, too irresistible and, let's say it, too comfortable an excuse that speculators are to blame. It's not our fault, we have our scapegoat. Our price increases are temporary, we'll soon be back to "normal" lower prices, as soon as (take your pick) speculators have been punished/oil companies are taxed for their profiteering/"fundamentals" are left to set prices.

This is just denial.

There are A LOT of good reasons why oil prices are going up. Let me show you just a few.

A Countdown to $200 oil diary

In an interview with the Financial Times, the Saudi oil minister, Ali Naimi, admits he is powerless in today's market:

We have nothing to do [with] where the price is today. (...) We work very hard and consciously to be sure that whatever actions we take that we are responsible do not dampen economic growth. (...) We are today not producing all our capacity because it is not needed. The demand is not there, the customers are not there.

This was initially posted as Opus 53 of my "Countdown to $100 oil" series on European Tribune.

1. oil companies are manipulating prices
2. speculators are driving prices up

"To increase by 500,000 or one million barrels, do you believe today it will bring back the price?" Attiyah asked. "I don't think so," he said, emphasizing his view that the price of oil had become almost wholly decoupled from supplies. Financial players "lost a lot of money on real estate, shares and bonds, and then they jumped to commodities," including oil, Attiyah said.
Herald Tribune  

The return of $30 oil?

Oil could fall to $40 (U.S.) a barrel or even as low as $30 as speculative investors sell their positions and spare production capacity increases, according to a research report published Monday by Sanford C. Bernstein & Co., an independent analysis firm.

The price of crude spiked higher in 2004 as demand from China surged at the same time the key cushion of spare capacity evaporated. As the commodity jumped, billions of dollars from speculative investors piled in, buying futures contracts on the New York Mercantile Exchange, helping push oil to almost $80 a barrel last year.

"We believe such speculative activity created perhaps the biggest artificial distortion of a market since the technology bubble of the late 1990s," analyst Ben Dell of New York-based Sanford said in a 67-page report entitled: "Energy investing: Beware the Ides of March."

"Timing when the good times will be over is difficult but we fear that the collapse could be dramatic."