Apr

1

Oil RigsIf the New York T!mes tripled its subscription price, how many would immediately call-up to cancel? Most would probably wait until their subscription ran out and not renew. And many would start looking around for alternate sources of business, political, and entertainment news. The NYT itself would probably publish stories claiming economists' price "theories" don't apply to "needs" like reading the NYT, so the price change should have no impact.

So it has been with oil and gas prices. Prices jumped dramatically, and NYT reporters repeatedly claim consumers are not driving less and not switching to sanctified high-mileage cars. Sitting in their NYC offices and traveling on expense accounts tends to shield reporters from much of everyday life. In the real world, large-scale shifts are taking place on both the demand side and supply side, just as they did when oil prices jumped in the 1970s. Rental car lots quickly filled up with unrented SUVs and mini-vans, and after some months, car dealers have large unsold inventories SUVs and mini-vans. Real-estate prices have crashed the hardest in communities with long commutes to jobs, for example. As usual, the NYT didn't retract, correct, revise, or even comment on their earlier "high prices aren't reducing demand" stories.

Market-failure stories in the New York T!mes come in various flavors. There are the "high prices don't change consumer behavior" stories run whenever politicians and environmentalists are pushing for new taxes and regulations to make people "do what's right." And then there are the equally popular markets "overreacting" stories about corporate lust for profits leading to "over-investment" chaos that somehow hurts "the little guy."

Reporters regularly blame markets for overreacting (though often the culprit is an earlier intervention or regulation). Still, much can be accomplished by overreacting in life. Men propose marriage (an obvious overreaction). Others, temporarily frustrated at work, quit their jobs and regret it at first, but are later thankful. Are oil companies overreacting to high prices, throwing money at a dizzying array of energy projects? Shell claims to have fifty new projects in the works. Gas exploration firms are investing large amounts in British Colombia (after Alberta arbitrarily raised energy taxes). Brazilians are investing in new deep-sea projects. Of the thousands of energy exploration projects that looked promising at $50 a barrel, each now looks like a slam-dunk, and tens of thousands of new energy projects look promising at $75 a barrel.

And on the alternative energy side, we see a similar story. As coal prices and political threats against coal burning have risen, solar, hydro, wind, geo-thermal and other alternative energy projects become more attractive. New millions (or billions?) are being invested in improving solar cell technology, and deploying current technologies. And when better car batteries enable new electric and hybrid cars to recharge at home from the grid, or to "fill-up" with pre-charged batteries at gas/battery stations, demand for expensive gasoline will begin the big slide.

So how far will oil prices fall as these demand-side and supply side investments come on-stream? A lot depends upon the Saudis, as usual. Those who remember the 1970s, remember the abuse heaped upon Milton Friedman and other free-market economists who claimed that cartels always fall apart. The OPEC cartel of major oil producers, let by America's "friend," the Shah of Iran, seemed to hold together, restricting oil sales and keeping prices high. (The joke was that Milton Friedman had proven OPEC wasn't a cartel… because it hadn't fallen apart.)

But before long OPEC did fall apart for just the reasons economists predicted: the urge to cheat and reap outsized rewards is just too strong. Saudi expenditures rose quickly to absorb oil income, as the Saudis wasted billions growing wheat and building new cities in the desert. OPEC would meet and members would promise to keep to their quotas in the interest of all cartel members. Then they would return home and push to secretly expand production and sales as much as possible. If everyone else held back, each member would reason, they could boost output and make a killing at the higher prices.

Oil profits were a magnet that drew vast capital into oil exploration, and new discoveries in North Sea and other non-OPEC developments soon pumped new oil supplies into the market. Higher prices allowed the Saudis to expand their exploration and upgrade their equipment. Before long new non-OPEC supplies, combined with widespread OPEC cheating, flooded world markets and drove oil prices way, way down.

As many analysts have emphasized, it was these years of low prices that are at the root of today's high prices. Conflicts in Iraq and Nigeria, along with government confiscations in the USSR and Venezuela, have played a role, but the low prices that essentially bankrupted the Saudis in the late 1990s also stopped development and even maintenance in Saudi Arabia and around the world. The majors laid off tens of thousands and most merged and downsized into the Chevron-Texaco, Exxon-Mobil, Conoco-Phillips two-name firms we know today.

So now the Saudis have all the billions to expand supply that they could ever wish for. And so does Shell, Exxon, Chevron, Total, Petrobras, along with hundreds of private-sector exploration and development firms large and small. It is true that more major oil reserves are owned and mismanaged by corrupt governments now than in the 1970s. But the earth is a big and mostly unexplored place. High oil prices paired with high-tech exploration and development innovations will bring new supplies to market, maybe just as alternative energy innovations take hold to lower energy use.

If so, the New York T!mes will have yet another opportunity to complain of markets "overreacting" to lower oil demand and boost oil supplies "too fast." Only government taxes and regulations, the NYT will argue (again), will be able to save billions of dollars invested in nifty green energy.


Comments

Name

Email

Website

Speak your mind

5 Comments so far

  1. Curmudgeon 3256 on April 2, 2008 12:50 am

    I have a vague impression that you do not like the New York Times.

  2. Anatoly Veltman on April 2, 2008 6:35 am

    Funny you should ask, Greg! My views of fundamentals are as bearish as yours. Alas, my technical outlook published toward the end of Q1: calls for $100->$115 rally in April, before any downside! I’m reprinting trading log from my website:

    Published on Mar 25, 2008
    10.45am(NY)- Crude’s been dropping in day session, attracting intra-day shorts on board. HO is down the most. Our contrarian intention to bid here just above $99 arises from the fact that EUR reversed to the up from precise 38.2% retracement 1.5342, pointed out yesterday. Currencies got further boost from 10am Consumer Confidence, lowest since 1973 oil embargo! So $ will not be boyant this week.
    Now, on 3/20: CL bounced quickly from 98.65 and then 98.85 - indication of near-term fundamental value down there. So bidding on first touch near there has good probability of profit: as day-trade shorts may be forced to run for cover; after they they bump into longer-term bids. Important: we’ll be monitoring T.Boone Pickens live on CNBC 11am.

    11.10am(NY)- Crude’s been dropping all day; then reversed on a dime in front of $99 and T.Boone Pickens live interview. BP Capital chief pled to been wrong in Feb (we remember it was 2/21 interview, and price was exactly today’s!) Says he’s bullish CL and NG now.
    Considering size of BP Capital speculation, we venture to assess that Crude’s run from $100 to $111.80 in-between the two interviews was to great extent on their short-covering…

    Published on Mar 27, 2008
    11.30pm(NY)- Crude has been rising rapidly from $99 area, bid by us just two days ago. Sentiment has ran wild since then, boosted by records in outgoing RBEJ and HOEJ contracts. This, in fact, creates perfect environment for typical Elliott Wave4 symmetrical triangle set-up. The move 111.80->98.65 on April contract would be marked leg A, run-up to 108.22 leg B.
    Now, the likely move would be down - still holding $99 area in the process. Up-trendline drawn from $86.24 Feb low thru $99.13 - to provide support on decline into waveC low. Buying waveC drop is very important, as waveD and waveE are often too close to triangle apex to be measured; they play out quickly right before wave5 thrust, projected to $114.5 objective!

    Published on Mar 31, 2008
    2.05pm(NY)- We covered short Crude. It traded into our area of interest between $100.00 and 100.50, where Daily up-trendline support was crossing today. So here we had to take a pre-planned Long, with the objective of wave5 up-leg to $114.50. The only problem that we see with this late Mon entry: there is possibility that currencies may attempt a bit of catch-up to Monday’s commodity flop, that developed in earnest well after Asia and Europe closed their currency books for the month/Q1 (and Japan’s fiscal year!)
    New Position: reversed to long CL 100.50; also long $ to hedge.
    Published on Apr 01, 2008
    10.10am(NY)- Our one-day long Dollar idea proved hugely profitable, with EUR correcting over 3 big figures in 24h! So now we are going back to the original idea of straight long in Crude, for wave5 rally of about $15. At this point, when $ is on a tear, Soybeans are below extended limit-down, Gold down over $30, Platinum down $150 - no one in their right mind would even think of Oil rally potential of $15! We do have logical stop below $99, as that would negate daily triangle pattern.

    12.30pm(NY)- It was actually surprising to see a few tiny up-ticks across commodity Open Interest figures as of final day of the month/quarter: Copper, NG, PA, Soybean complex. Of course, those were buried in the midst of breath-taking O.I. write-downs of 10 weeks: Gold neared 400k, down from 600k; Silver 146k from 190k; Platinum 12k from 20k! Today’s UBS 19b write-down envoked the term “kitchen sink”: never mind actual weak positions capitulation; they appeared to have recognized even relatively performing stuff as shaky. O.I. bottoming: “Kitchen sink” as never seen before!

    11.30pm(NY)- Tue $99.55 low, if holds, marked leg C of symmetrical A-B-C-D-E triangle of Elliott Wave4 on Daily Continuation. Wave3 was 86.24->111.80. Wave5 objective extends .618x(86.24->111.80) from 98.65: to 114.45! Note that $115 has historical significance in our book: we’ve noticed over the years that CL advanced its milestones by $15 at a time:
    $10: historic double-bottom of 1986 and 1998
    $25: 89′ Exxon Valdez spike, all 96′-97′ tops, all 00′-03′ bottoms
    $40: tops of both 90′ and 03′ Gulf Wars, also 04′ bottom
    $55: first “new oil era” ceiling of Q4 04′, turned support Q4 05′, Q4 06′
    $70: Katrina top of 05′, retested Jan’06
    $85: triple resistance before Q4 07′, turned triple support early ‘08
    $100: triple resistance late 07′, turned triple support Q1 ‘08
    $115: next resistance!

  3. Greg Rehmke on April 2, 2008 10:47 am

    I enjoy actually reading the NYT. It is our best smooth paved road to the world, but has some potholes along the way that are worth complaining about.

    Hundreds of reporters are out doing first-hand research, and the average week brings a diverse array fascinating stories, full of details. Some details turn out to be made-up or misleading, but most are real stories from reporters notebooks. I wrote earlier on a NYT story of manhole covers imported from India. The reporter may have wanted it to be a sad and terrible story, but it was an amazing and uplifting one when combined with other NYT India stories of new hope for progress slowly reaching the hearts and minds of hundreds of millions across India.

    The problem is more at the editor level. Whoever at the Times thinks Paul Krugman has insight on the world also influences which articles to put on the front page, and which anti-market themes to rehash over and over and over. Reporting on Latin America is particularly bad, I think because NYT reporters have contacts mostly with the elites they met at foreign aid conferences, or at university in Latin American studies departments (where they were all taught socialist ideas).

    Anyway, I like NYT stories on the rich tapestry of everyday life from around the world. A recent story on the amazing new road from China to Bangkok is an example. As Tom Wolfe calls it: “Stalking the Billion-Footed Beast.”

  4. reid wientge on April 2, 2008 3:06 pm

    Has the Bakken Field in North Dakota and environs been factored in the calculations? Low end estimates are for 100 Billion barrells with most estimates now in the 270 to 500 billion barrells of oil over its lifetime. The high end numbers increase known US reserves by 10 fold. And, yes, there is drilling in field. Apparently they shot all the caribou before they announced the find!

  5. Barry Gitarts on April 2, 2008 10:00 pm

    Whats interesting about the times is that some of these solar companies are turning a profit now. Looks like Kurzweil and the law of accelerating returns thrives (http://en.wikipedia.org/wiki/Accelerating_change#Kurzweil_and_The_Law_of_Accelerating_Returns).

    For $80k this may not be a bad deal.
    http://autoshow.autos.msn.com/autoshow/Detroit2008/Article.aspx?cp-documentid=5895877

Archives

Resources & Links

Search