But what do the speculators do with the oil? At the end of the day, they either have to take delivery of the oil and store it, or sell it.
Speculators could be really distorting the market if they were stockpiling oil, but they aren't. With oil selling for $120+ a barrel, consumption is roughly equal to production.
If prices were lower, consumption would be higher. Higher consumption isn't possible without higher production.
Perhaps the use of the term speculation is a bit of an issue, since much is not traditional speculation. There is a lot of institutional money moving into commodities, especially energy and oil that is banking on both short term and long term tightening of supplies. This level of investment has been unheard of in the industry. One would assume/hope they are not intentionally making risky bets (
).
Production is currently moving up notably (2 - 4 percent per quarter now) and demand similarly falling notably (or in some cases not increasing significantly). We currently have about doubled our daily surplus capacity to about 3 million bbl/day compared to 2006.
If it's not related to supply and demand, where is the oil going? If consumption = production at $120 a barrel, how could consumption = production at, say, $80 a barrel, unless production increased?
Perhaps that extra $40 is due to the belief in the futures market, right or wrong, that world events or peak oil or whatever will make $120 or $150 or $200 a natural future price for those contracts. Given the lag time for elasticity we have to eat $120 bbl for now to get on with daily life as we know it. However, if that throws us into a recession watch demand plummet and watch China and Indian growth collasp along with us. More on the rate of trading relative to actual product moving in the markets:
That brings us to speculation. Evans observes that since September 2003, the total number of open crude oil futures and options contracts rose by 364 percent. Meanwhile the global demand for petroleum rose by just 8.2 percent. "So the futures and options market has become more important than the physical supplies in driving the price," concludes Evans. "We are seeing investment flows into the oil market that don't have anything to do with the demand and supply of oil."
Investors are treating oil as a hedge against inflation and a falling dollar. Oil markets are part of a negative positive feedback loop in which higher oil prices contribute to higher inflation, which in turn lowers the value of the dollar, which boosts oil prices, and so forth. In other words, the oil market is coming to resemble the gold market (which has also been soaring). Evans notes that most gold traders don't even ask the question of how much gold was mined last year or how much spare gold mining capacity there is.
http://www.reason.com/news/show/125414.html
But, at some point they will have to: "take delivery of the oil and store it, or sell it."
Which gets to the point, are their price positions accurate?
But will the new sources even offset the decline in existing fields, let alone lead to increased supply? The North Sea is down 2 million barrels a day from peak, and likely to decline another 10% this year. Russian oil production actually declined in the first quarter of this year, rather than increased as forecast. Mexican production is falling fast. Venezuela, which had been forecast to increase production for years to come, is experiencing major declines.
Granted politics and mismanagement plays a part in the declines in some countries, rather than a lack of reserves, but that doesn't make the declines any less real.
The world has to add a lot of production each year just to make up for the declines in existing sources. In the last couple of years the US has added new production, but that's only halted the long term decline in the US, it hasn't actually increased total production from the 2006 figure.
I'm not convinced that we are quite there yet, and by yet this decade or so. But who really knows? There is a lack of transparency as to what is natural and what is artificial among producers, their capacity and reserves. And as noted politics and inefficiency come into play in Nigeria, Venezuela, Mexico and Russia (not to mention, Iraq). Easy oil is getting harder to extract, but to what extent are drops in US or North sea production simply an economic factor based upon lower cost alternatives in the Middle East? That is one of the criticisms of ANWR drilling, is that it would simply offset more slightly expensive fields that would be shut down.
Chinese and Indian demand are still somewhat artificial, propped up by the govt. subsidies and by our trade imbalance. Much of our demand is certainly artificial given the automotive trends of the 1990s onward. How long can that be sustained?
And, OPEC has kept unusually unified lately, largely by Venezuela not cheating as much, even with so much potential profit to be made. That has in the past and can again, likely, change dramatically.
I think that if peak oil were taken fully seriously, you would see a lot of investment start rolling into tar sands or shale or coal to liquid that you simply do not see today.
Charon
