Maphacker!

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.