Thursday, February 18, 2016

Why is oil so volatile?

This interesting observation from Matt Ridley (author of "The Rational Optimist"):

Why is the price of oil so volatile? I thought I knew the answer — scarcity and Opec — till I read Aguilera and Radetzki. They make the case that depletion has never been much of a factor in driving oil prices, despite the obvious drying up of certain fields (such as the North Sea today). Nor did Opec’s interventions to fix prices make much difference over the long run. What caused the price of oil to rise much faster than other commodities, though erratically and with crashes, they argue, was the result of one factor in particular. 
There was a wave of nationalisation in the oil industry beginning in the 1960s. Today some 90 per cent of oil reserves are held by nationalised companies. ExxonMobil and BP are minnows compared with the whales owned by the governments of Saudi Arabia, Venezuela, Iran, Iraq, Kuwait, the United Arab Emirates, Nigeria and Russia. Post-colonial nationalisation affected many resource-based industries, but whereas many mineral and metal companies were privatised in the 1990s as their grotesque inefficiencies became visible, the same has not happened to state oil companies. 
The consequence is that most oil is produced by companies that are milked by politicians, and consequently starved of cash (or incentives) for innovation and productivity. Lamenting “politicians’ extraordinary ability to mess things up”, the two authors note “the severely destructive role that can be played by political fights over the oil rent and its use."

The good news: "If politicians don’t get in the way, and we have two decades of relatively cheap oil it will be bad news for petro-dictators, oil-igarchs, Isis thugs, and the promoters of wind power, solar power, nuclear energy and electric cars. But it is good news for everybody else, especially those on modest incomes."


Johnny Bee Dawg said...

I bet we have a whole lot longer than 2 decades of cheap oil if politicians stay out of the way. Each year new technology helps somebody finds a new cache of natural gas that's one of the world's largest. As more nat gas gets used, oil will last even longer, as long as markets and inventions are allowed to operate unfettered. And who says there won't be lots of new oil fields discovered, too? We could be looking at another few hundred years of plentiful fossil fuels. By then nuclear could be made incredibly safe, and we have thousands of years of that available right now.

Julian Simon is smiling. He was exactly right. Mankind IS the "ultimate resource", and if markets and people stay free we will never run out of anything...ever. We will always invent something else to replace the scarce thing as long as the guy or gal who invents it is allowed to get filthy rich, and everybody is allowed to buy it.

Grechster said...

Johnny: Amen, brother, amen. The caveat of "if politicians stay out of the way" is what scares me. The one, five, ten, fifty, and hundred year track records aren't inspiring.

William said...

WSJ: Developed-Country Economic Growth Slows Sharply, OECD Says

"Fourth-quarter slowdown was led by Japan and U.S.

"...The OECD said the combined gross domestic products of its 34 members—most of which are developed economies—grew by 0.2% in the final quarter of last year from the previous three-month period. That marked a sharp slowdown from the 0.5% rate of growth recorded in the three months to September, and was the weakest expansion since the end of 2012, when overall growth was dragged down by a contraction in the eurozone.

William said...

Conference Board Leading Economic Index for U.S. declined 0.2 percent in JAN 2016

following a 0.3 percent decrease in December and a 0.5 percent increase in November.

“The U.S. LEI fell slightly in January, driven primarily by large declines in stock prices and further weakness in initial claims for unemployment insurance,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “Despite back-to-back monthly declines, the index doesn’t signal a significant increase in the risk of recession, and its six-month growth rate remains consistent with a modest economic expansion through early 2016.”

ECRI U.S. Weekly Leading Index Plummets

"The U.S. Weekly Leading Index falls to 128.6 from 130.0. The growth rate decreases to -3.1% from -2.6%."

Benjamin Cole said...

Oil is controlled by monkey-thug states.

Saudi Arabia, Iran, Iraq, Nigeria, Venezuela, Libya, Mexico, Russia.

You know, it makes me feel better to look at that list of oil-nation. We have problems galorein the US...but compared to those nations...

William said...

This article goes a long way in explaining what ails the USA as well as Europe and Japan - and it's not just taxes and over-regulation.

Stephen S. Roach: Negative Interest Rate—-Catalyst For The Next Crisis

{Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm's Chief Economist}

"...This misses the essence of what is ailing a post-crisis world. As Nomura economist Richard Koo has argued about Japan, the focus should be on the demand side of crisis-battered economies, where growth is impaired by a debt-rejection syndrome that invariably takes hold in the aftermath of a “balance sheet recession.”

"Such impairment is global in scope. It’s not just Japan, where the purportedly powerful impetus of Abenomics has failed to dislodge a struggling economy from 24 years of 0.8% inflation-adjusted growth in gross domestic product. It’s also the U.S., where consumer demand — the epicenter of America’s Great Recession — remains stuck in an eight-year quagmire of just 1.5% average real growth. Even worse is the eurozone, where real GDP growth has averaged just 0.1% over the 2008-2015 period.

"All of this speaks to the impotence of central banks to jump-start aggregate demand in balance-sheet-constrained economies that have fallen into 1930s-style “liquidity traps.”

Full 2/18/2016 article here:

Unknown said...

Technological advancement will eventually disrupt everything, including authoritarians.

Lawyer in NJ said...

^Wrong log-in again. Sorry.

Frozen in the North said...

Sorry I don't get that.

I presume that the argument is that state owned oil companies are stifling innovation?

Private enterprise is not always that efficient or good (thinking of BP and the Gulf of Mexico). Don't know what regulation (I guess you are all talking of the US regulations), are an issue -- but again if it were true how is it that America has moved from buyer to supplier.

As for predicting that oil prices will stay low for the next decade(s). Good luck with that prediction -- afterall no one predicted that oil prices would go from $100 bbl to $31 today. I would suggest that the issue right now (on price vol) is driven by the scarcity of storage.

I've not seen a serious study done on any of this stuff (with empirical analysis)

Lawyer in NJ said...

The US has moved from buyer to supplier because of technological innovation.

Hans said...

I am very pleased that Mr Grannis has raised this most
salient point. Even a few years ago, I had no idea
that state control reached such proportions.

After western oil companies lost their concessions,
the dominance of state controlled oil reserves reverberated
throughout the third world.

OPEC and other cartel members further complicated the free
flow of goo with strict state practices of supplies, with
the emphasis of driving prices higher and higher.

Just examine the production from US Federal lands, with
very poor increases in overall oil production, is an example
of the outcomes from state control and production.

For the past four decades, the world's consumers have been
subject to restricted supplies and ever higher product costs.
If this would have been a bi-product of free enterprise, government's
units around the world would have launched investigations and
criminal charges.

Unfortunately, as long as the worldwide Socshevik movement remains
well and alive, state control and manipulation of natural resources
will continue into future generations.

Thanks to infinite ignorance, the argument of resource control by the
masses shall always carry the day since it culminates in understanding
one half of economic theory.

After all, any resource is only an asset if in fact it can generate a
gain - something beyond the (IIT) mental capacity of all too many people.
(Folks for you Barock-o-philes)

A very simple examination of Socshevik nations, especially with state
control of natural resources, is an indictment of their lack of understanding
fundamental economic values but a systematic failure of their general economy.

Resourcenza, would be the doctor's diagnose. Sad to say, it is indeed
contagious and deadly.

marcusbalbus said...

Hans said...
This comment has been removed by the author.
Hans said...

Marcus, we are all now Central "Crank" Bankers!

My dear Mrs I.Q. Query, could you direct "Dr" PP's loan
program to the US Government. He would have an unlimited
supply of demand.