G E B W E B

Tension between Israel & the US and Iran has been growing the past few months. The economic sanctions are really starting to hurt Iran, but they are also hurting the West with higher oil prices. Blocking Iran’s oil exports is a big sacrifice in today’s tight oil market.

Then, there is the arrival of the third US aircraft carrier in the Middle East in the next week. It’s highly unusual for there to be more than a single aircraft carrier in any location.

Obama has been busy the last few weeks making sure allies such as the UK and France are ready to release oil from their strategic petroleum reserves. This is supposedly because he wants to suppress high gas prices to help the economic recovery. But as I noted in my previous post, this is a spectacularly bad idea. Maybe he just wants them to be ready to pour out oil from the strategic reserves on short notice for a coming actual supply shortfall.

Today, the disturbing information that Israel’s army is cancelling leaves for Passover hit the newswires. The official explanation is problems with Gaza. However, cancelling leaves during the most important Jewish religious holiday sounds like overkill for a few under-equipped armed gangs in Gaza.

Edit: Another piece of information emerged today that Israel has gotten permission to use airfields in Azerbaijan for a strike against Iran. That helps Israel overcome the range problem and avoid having to perform in-air refuelling to reach Iran and fly back again. Also a great place to base search-and-rescue missions from.

Now, there are many reasons why a strike on Iran would be devastatingly dumb, and I think the odds are still against such a strike in the immediate future. But I have been surprised in the past…

The US and Great Britain are back at it, releasing their strategic oil reserves “in an effort to prevent high fuel prices derailing economic growth in an election year”. Last year, they did the same thing while Libya’s oil production was offline. The effect on oil prices lasted for  a whopping two weeks back then. This year’s action is, if possible, even more short-sighted.

Which part of the word strategic is it they don’t understand? Last year, there was at least a war and an actual disruption to oil production to go with the release. Now, unacceptably high prices are simply the new normal. I have seen no reports that the stockpiles were replenished after last year’s drawdown. The strategic oil reserves are sized to cover a complete breakdown of oil supply lines for one to two months. A limited drawdown of the size seen last year could go on for a little more than a year. If we need to use the strategic reserves just to maintain some resemblance of economic growth, you can expect another recession within that timeframe.

And what if there is an actual supply disruption in the future? A war with Iran? Unrest in Nigeria? The stockpiles will already be withered down, making the complete societal collapse that the strategic reserves are supposed to prevent that much closer. Extreme short-term thinking from the people in charge. Selling our future to make the party last a little longer… Their party… And you’re not invited…

It’s gearing up for the next round of financial crisis. While our so-called leaders have enjoyed their annual back-patting exercise at Davos, I have become exceedingly alarmed by what’s currently going on in the commodities markets. Food, energy and metals have all sky-rocketed during the last five or so months. While the financial markets have seen a 20% increase during that period, and this is touted as “the crisis is over”, the prices of raw materials have increased 50-100%. These are the real inputs that the economy and indeed our lives depend on.

Let’s look at some numbers:

And what has the S&P done?

This is looking to me like a very unhealthy market. It’s like the high commodities prices of the first half of 2008 all over again. Only this time, the economy is probably a lot less resilient towards high prices. If the economy tanks again, what instruments remain to bail it out? The “wealthy” nations of the world are already running close to 0% interest rates, and are up to their ears in debt. Printing money, as has already been done, is a surefire way to boost commodities even higher. Peak oil, the climate crisis (drought brought forth some of the high grain prices seen above) and general resource depletion are all converging to shake the foundations of our debt-based consumerist society.

The Davos growthsters have only one plan: Returning to the good old years of growth by “stimulating” the economy by ever more illusional money.

I have another idea: It’s time to question that old growth gospel and stop borrowing money and natural resources from our future.

I know it’s been a while, but the sequel to the broken Oil Price Widget is now here. The new widget not only shows the oil price, it shows a set of other futures, currencies and indices as well. I named it the Commodities Widget, even though some of the things it shows are not strictly commodities.

The new data source is INO.com. They are probably the web’s best free source for futures contracts. Clicking on any chart in the widget will bring you to the corresponding INO.com page with more details and longer-term charts.

Download: Commodities Widget.

Instructions: Mac OS X 10.4 Tiger or higher is required. If you’re using Safari, click the download link. When the widget download is complete, Show Dashboard, click the Plus sign to display the Widget Bar and click the widget’s icon in the Widget Bar to open it. If you’re using a browser other than Safari, click the download link. When the widget download is complete, unarchive it and place it in /Library/Widgets/ in your home folder. Show Dashboard, click the Plus sign to display the Widget Bar and click the widget’s icon in the Widget Bar to open it.

Maphacker (noun) – A player who uses a hack to see the entire gaming field, giving him an unfair advantage.

The word maphacker is so catchy, though, that I would like to apply it in a much broader sense. I will try to start a trend, and have maphacker become part of our common vocabulary. Also, I will list maphackers as I encounter them.

Now, for the first maphacker I nominated. The American Chronicle printed an article today, which I think deserves to be included into the maphacker category. The reason is simple, failure to look into basic facts that contradict their claims. The article is harmful, since it gives people a false sense of security by claiming there is no underlying problem with oil supply. And thus no reason to change lifestyle.

First, the article claims that oil is no longer traded in a free market that relies on supply and demand. Why? Where are the facts to support this claim? Look at the data from the International Energy Agency: world oil demand Q4 2007 was 88.4 million barrels per day. Supply was at 87.3 mbpd. A shortfall of 1.1 mbpd, which means that inventories are being drained somewhere.

I thought this quote was funny: “Firstly, the Iranian government is hell bent on constructing a nuclear reactor and repeatedly states it craves to destroy the state of Israel. This propaganda accounts for 50% of the price rise in oil and puts a floor under any falls. ” Where did you get your 50% number, Mr. Levy? By the way, I haven’t heard many of Ahmadinejad’s ramblings lately. They were much more frequent in 2006, with the whole Lebanon mess and in the following winter, when several western soldiers were captured by the Iranian coast guard. The oil price was around $60 at the time. You will need to present more hard evidence to make me believe the $65 per barrel increase since then is because of Iran.

“Secondly, expert opinion states China and India are booming and although there is no shortage at the moment, in five years time there will be. Even though most Indians and Chinaness ride bikes or walk.” Consider that 1 300 million Chinese used 7.5 mbpd of oil in 2007, while 300 million Americans burned 25.5 mbpd that same year. Assuming China’s cars have twice the fuel efficiency and that Chinese drive half as much Americans, that still means that most Chinese don’t drive. Imagine what a mess we would be in if they did!

He goes on: “What the so called oil experts do not take into account is economies do not boom forever and recession or inflation will come along and dampen the growth substantially.” Exactly,  recession and inflation will decrease demand. In order for demand to go down, the price must go up. Substantially. At $120 / barrel, we are hardly seeing demand destruction at all. We need to kill at least 1.1 mbpd of demand. However, demand in the oil exporting countries, such as Russia and Saudi-Arabia will probably go up rather than down, since they get wealthier because the price goes up! I agree that the so-called oil experts have a poor track record, though. They have consistently under-predicted the price of oil since 2004, when I started to pay attention to the price of oil.

“Also, many new discoveries of oil will emerge in the next five years that will add to the already enormous amounts of oil still in the ground.” I strongly disagree with this. Have a look at the following graph which shows global oil discovery by year.

This chart makes things look rosier than they are, because a big fraction (30-50%) is not recoverable, even with enhanced recovery methods and proper oil field management.

“What is the simple answer to end the craziness? The USA government should pass a law that declares every oil contact bought on the mercantile exchanges must be delivered to the buyer and held in storage no longer that 6 months.” In my honest opinion there is no simple answer to this craziness. If the proposed regulations were introduced, I think you would be disappointed with the result. As discussed in my previous post Who’s Driving the Price of Oil Up, the traders who can’t take physical delivery of oil have little influence over the price.

“The fear of enacting the law will be enough to drive the speculators away from the oil market in double quick time. As oil prices crash to around $40.00 a barrel, improving most corporations profits, the stock market prices will go through the roof, helping pension funds and public sentiments. Once again the open road will become the delight of the people that is an intrinsical part of the American way of life. The family can enjoy a car ride out in the countryside or beach without watching in dread as the fuel gauge drops.” Ah, $40 a barrel. I remember seeing that magical mark in the news in May 2004. That was what sparked my interest for this issue. My best guess as to the outcome of your new laws would be that oil would be traded in a different exchange, perhaps in London or Dubai, and perhaps even in a different currency. That could only hurt the US dollar more.