Matthew Yglesias » Oil Price Madness

Jul 4th, 2009 at 3:58 pm

Oil Price Madness

I thought this chart from Calculated Risk looking at the past 25 years of oil prices was interesting:

At any rate, as you can see here it doesn’t just seem like the past few years worth of oil price activity has been crazy, it’s really been crazy. And note that we’re in the midst of a pretty remarkable increase in prices considering that there’s no economic growth.

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36

Filed under: Economy, Energy,

36 Responses to “Oil Price Madness”

KCinDC Says:
July 4th, 2009 at 4:03 pm
Yow, what did you do to that innocent graph? Your copy seems to have some sort of skin disease.
Walker Says:
July 4th, 2009 at 4:10 pm
Yeah, get a better copy of the graph. CR approves of people taking his graphs so long as you give him the proper link.
Nylund Says:
July 4th, 2009 at 4:14 pm
I was wondering if the oil prices didn’t have anything to do with Palin’s resignation. By all accounts, when oil was through the roof, Alaska was raking in the dough and spending like crazy. I think something like 90% of Alaska’s revenue is from royalties and taxes on oil. They were making billions upon billions during that huge spike. They probably still do ok, but no doubt the money isn’t pouring in like it was before. Maybe this’ll cause problems down the road if they didn’t properly account for the idea that maybe oil wouldn’t stay ridiculously expensive.
Mattyoung Says:
July 4th, 2009 at 4:21 pm
The dollar and oil efficiency in America are conjoined. Most of us pretend this is not so when it comes to our favorite government programs, but it is. One cannot fix Medicare without fixing oil efficiency, that is the meaning of conjoined. Doctors, hospitals, patients, insurance premiums all are highly correlated to oil in their operations, everything is.
David Tomlin Says:
July 4th, 2009 at 4:31 pm
The oil prices seem to be nominal. The graph combines information about real oil prices and inflation, so is not much use for analyzing either.
Alan Says:
July 4th, 2009 at 5:08 pm
You left off the demand curve and the note marking the beginning of energy futures trading.

When do oil prices divorce from their relationship with supply? Is it when the dollar is dropping in value?

Opaque energy futures market,s are a very profitable game for Goldman Sachs, JP Morgan and Morgan Stanley. They turn an energy product into a dollar hedge. While our politicians promote an elastic supply and demand curve for oil/gasoline, futures trading makes energy products inelastic, i.e. price has little relationship to demand.

The Obama administration won’t reign this in as it restarts greed with a tad less leverage. Naked credit default swaps are still OK. Securitization is up and running on the taxpayer’s dime. Banks can still use “hot deposits” to make risky loans.
James Gary Says:
July 4th, 2009 at 5:12 pm
The Obama administration won’t reign this in

Rein in, like a horse.
abb1 Says:
July 4th, 2009 at 5:29 pm
Well, you you care you can read Matt Taibbi’s explanation of (among other things) the recent oil bubble here. Two words: financial machinations.
Lupita Says:
July 4th, 2009 at 5:29 pm
And note that we’re in the midst of a pretty remarkable increase in prices considering that there’s no economic growth

No economic growth? Just because the US and its rich allies are contracting by -2% does not mean there is no growth elsewhere. China is projected to grow 7%, India 5%, and Brazil 2%. Outside the G7 empire, the rest of the world is expected to grow 6%; Africa, 5%. These are IMF projections.
Clem Guttata Says:
July 4th, 2009 at 5:33 pm
What’s going on here? Seven comments in to a thread on oil prices and no one has mentioned the relationship between peak oil and volatility in oil prices?

Unless you ignore the evidence that our current recession is largely a result of rapidly rising energy prices, it is difficult to believe that any attempts at recovery will not run into the exact same buzz saw.

Until the world’s economy either transitions away from fossil fuels or figures out how to get by on significantly less consumption, we are in for a long run of economic pain.
Charlie Murtaugh Says:
July 4th, 2009 at 5:52 pm
Unless you ignore the evidence that our current recession is largely a result of rapidly rising energy prices…

I know where Clem is coming from, but can’t the bursting of the housing-debt bubble suffice to explain the current recession? Perhaps the bubble burst sooner because of the spike in gas prices, but sooner or later people would realize that real estate values couldn’t outpace inflation indefinitely, and then poof. I’m happy to be corrected on this point, but I know that I was afraid of a housing bubble-driven crash well before I heard the phrase “peak oil.” (Let’s say 2003.)
TRIATHLON Says:
July 4th, 2009 at 6:00 pm
BLACK SEPTEMBER (1929) – (2009)?

Here is a (June 2009) version of the summary that calculates the Effective Unemployment Rate, which is now (18.70%), Eighteen-Point-Seven Percent, and the Effective Number of Unemployed, which is now (30.172M). Thirty-Point-One-Seven-Two-Million. There are currently (14.729M) Fourteen-Point-Seven-Two-Nine-Million), officially unemployed workers, as just announced. However, this figure does not include the combined (15.443M) Fifteen-Point-Four-Four-Three Million, workers either (1) One in the (LABOR FORCE RESERVES) because they have abandoned their job searches (i.e., 4.278M) Four-Point-Seven-Eight Million or (2) underemployed because they are (PART-TIME OF NECESSITY), (i.e., 8.989m) Eight-Point-Nine-Eight-Nine or OTHERWISE MARGINALLY ATACHED), (i.e., 2.176M) Two-Point-Seven-Six-Million.

The effective unemployment rate is therefore (18.70%), Eighteen-Point-Seven Percent instead of the official (9.51%) Nine-Point-Five-One-Percent .Since the start of the recession in (December 2007), the number of workers who are officially unemployed has increased by (7.188M) Seven-Point-One-Eight-Eight-Million while almost (2X) twice as many workers – (13.29M) Thirteen-Point-Two-Nine-Million, have become effectively unemployed. And all the while, we should have been creating around (2.25M) Two-Point-Two-Five-Million NEW JOBS or in (18) Eighteen months times (12.5M) Twelve-Point-Five Million jobs per month just to keep up with population growth. In June, the number of workers officially unemployed increased (218K) Two-Hundred-Eighteen-Thousand, while the number of workers effectively unemployed actually decreased (35K) Thirty-Five-Thousand .
(Source: (WWW.TheWashingtonNote.Com) InterMedia Partners Managing Partner and New America Foundation/Smart Globalization Initiative Chairman Leo Hindery.)

(The Zero Factor)

Now, a lot of numerical zeros were removed from the article above, there were a lot of zeros, and the most important zero not mentioned was the zero individual job, the zero prospects of finding a job, the zero bank account, zero chance of being able to make any payments on credit owed, and zero idea of what to do. So, what is really going on;

(Hidden War Tax/Military)

The Empire continues to print ($Dollars) based upon nothing, and with each percent of non-value currency printed, the ($Dollar) drops in value by a percent against that of other world currencies at present it has dropped (40%) Forty Percent against the (€ euro), So what, well it then comes out of your tax dollar as the cost of military installations and personnel to be stationed in Euro based economies goes up, pay the rent or its eviction time, which is cheaper sending food over to the bases for sale to off base dependents or give them enough money to feed themselves off the local economy which keeps increasing which means their employer the taxpayer must increase wages. Let’s not get into the increased cost of purchasing that French perfume, and wine, ouch.

(California)

California is Broke people it is Bankrupt, no doe-ray-me, the Worlds (7th) Seventh Largest Economy is belly up, many some of those Hampton, Wall St., Easy Living freaks should have purchased more California Wine, but its broke folks, and somehow it is not going to drag the Empires Economy down, this is going to have to be seen to be believed. No money Honey.

(Detroit/Michigan)

In the Real World their shutting Detroit Down, and so much for the Empire auto industry and all its support industries, the tax base of Detroit and the State of Michigan, the only thing that seems to have gone up in yet another STATE besides California is UNEMPLOYMENT, and the zero individual job, the zero prospects of finding a job, the zero bank account, zero chance of being able to make any payments on credit owed, and zero idea of what to do.

(Entertainment/ Hollywood/New York City)

The Entertainment Business, (75%) Seventy-Five percent of the shows on The Great White Way, Broadway have closed down, and that puts more actors on the streets looking for jobs a dog walkers, and dishwashers, and politicians there must be room for one more clown politician they have Franken and there is a joke. And, since the auto manufactures are gone so are revenues for television networks, no revenues coming in no expensive shows, and you wonder why shows are being cancelled or looking for another network to pick them up, MONEY HONEY. Even the SOAP stars had to take cuts in pay, with one going off after (75) Seventy-Five Years, you can’t pay good writers with Super-Star Actors. One of the big (3) Three Networks MAY have to close its business down, between (DVR’s) Digital Video Recorders and lack of revenues something is bound to give. A loss of a Hollywood Studio is not unlikely. The number of community movie theaters and other community group theaters are unknown, main Economic Effects, Hollywood California and New York City, New York.

(Aircraft/Airlines/California-Connecticut- Georgia-Washington State)

The Aircraft Industry, is going to see a lot of this Airlines and that falling from the sky, the cost of fuel, lack of passengers, no peanuts, or free drinks, free air marshal flights on each (100) one hundred flights, there is (1) One on each (100) One hundred flights. The Cancellation of aircraft orders or at best delay in the date of manufacture delivery, the (F-22) cancellation, and lets not even get into maintenance inspections, not being correctly done if at all, paperwork O.K.’s, main Economic Effects, California and Georgia Aircraft Manufacture/Airline Hub, Connecticut and Washington State Aircraft Manufacture.

(King Coal/ Colorado – West Virginia)
King Coal the Coal Industry, is sitting on the mother load of the Worlds Coal and they might as well be sitting on nothing as the Empire seeks to do away with the entire industry, Main Economic Effects, Colorado and West Virginia.

(Black September)

And the list goes on Naval Ship Yards being closed, Newspapers shutting down, on and on and on. The ($Dollar) is not going to hold, most Inter-Net speculation is that in September, Black September II, (1929-2009) will occur, all over again the bottom will fall out, and looking at the way things are going BLACK SEPTEMTER II is very possible.
ron Says:
July 4th, 2009 at 6:06 pm
Another Goldman-Sachs venture. They bought the London futures market, renamed it the Intercontinental Commodities Exchange, moved it to Atlanta, convinced the CFTC to not regulate it and then just went nuts.

They started selling commodities index funds to Harvard, CALPERS, etc.; increased the money in the market from ~ $13 billion to ~ $2,300 billion and the price flew up, in spite of supply keeping pace with demand and inventories staying steady.

When these manipilations happened in the past, regulators instituted position limits so the speculators had only a reasonable share of the market and couldn’t cause crazy swings. Bush’s CFTC refused to impose limits and now Obama’s CFTC hasn’t either. In fact, Obama recently appointed an ex Goldman guy to head the CFTC.

I guess everyone has to pay back those campaign contributions.
Mattyoung Says:
July 4th, 2009 at 6:28 pm
“..but can’t the bursting of the housing-debt bubble suffice to explain the current recession?”

It seems like a close call doesn’t it? The battle between housing bubbles and oil.

I think the answer is: If we continue to build houses in suburbia with automobile transportation then oil will be $150/barrel. So, one might take away one of two solutions:

1) We cram into urbanism, or 2) we use something other than the autmobile.

Suburbanites will win this battle, we will keep suburbia and scrap the automobile. Suburbanites expect they can always put street bots on suburban roads.
Charlie Murtaugh Says:
July 4th, 2009 at 6:34 pm
Suburbanites will win this battle, we will keep suburbia and scrap the automobile.

Seems right to me — the suburbs predate the automobile, and if anything survives the End of Oil, they will. The exurbs may be a different story.
Charlie Murtaugh Says:
July 4th, 2009 at 6:36 pm
@TRIATHLON:

The Cancellation of aircraft orders or at best delay in the date of manufacture delivery, the (F-22) cancellation

I’m not very good at reading numbers, which is why I appreciate the rest of your posting — but did you mean the EFF-twenty-two?
ron Says:
July 4th, 2009 at 6:37 pm
If oil data were added to that chart, it would show oil supply/demand tracking together, with inventories steady until a recent uptick.
And it would show the price tracking with the other data – until the Intercontinental Commodities Exchange opened for business.
robertdfeinman Says:
July 4th, 2009 at 6:51 pm
Not to take anything away from the main point (that the most recent bubble was a bubble), but it would be more meaningful if the graph was not in nominal dollars.

Not only does this miss the effects of inflation, but it distorts the changes in percent from earlier days. Going from $20 to $40 was a big deal at the time, but doesn’t seem so with the scale used here.

A semi-log graph would better reflect the impact on changes on the economy and people’s behavior.
Alan Says:
July 4th, 2009 at 7:11 pm
My apologies for the misuse of reign, instead of the proper rein.

ICE went to electronic energy futures trading in April 2005, the beginning of three year run up in prices.

ICE Futures Europe®, Europe’s leading regulated energy futures exchange. ICE Futures Europe’s markets today account for approximately 50% of the world’s crude oil and refined futures traded each day. In April 2005, ICE Futures Europe became the first fully electronic energy exchange.

https://www.theice.com/history.jhtml

Guess what’s up next for the big money boys? Carbon trading:

Today the ICE/ECX carbon futures contracts are the most widely relied upon carbon contracts globally.
Walker Says:
July 4th, 2009 at 7:17 pm
My apologies for the misuse of reign, instead of the proper rein.

Actually, that eggcorn is starting to become accepted usage.
DTM Says:
July 4th, 2009 at 8:36 pm
For real petroleum prices (plus projections, but feel free to ignore those), see here:

EIA Real Petroleum Prices

The downloadable spreadsheet is particularly useful. But the bottomline is that in real terms, we seem to be stabilizing in roughly the same range as circa 2006, and that was already high enough to cause a decrease in VMT, increase in transit use, increase in hybrid sales, and so on. Which makes sense, because that is way up in real terms from where we were in the late-1980s and 1990s, and that era appears to be decisively over.
Max424 Says:
July 4th, 2009 at 8:43 pm
The problem for short sellers is that when they make a quick killing crashing a business, like they did by destroying Bear Stearns in March of ‘08 and Lehman Brothers a few months later, they are also, unfortunately, killing the goose that is laying the golden eggs.

But oil speculation, on the other hand, is a magnificent game. It can be played forever -or at least until oil deposits finally run dry. Speculators (Goldman-Sachs) can simply trade the shit out of oil shares and make a fortune as an oil bubble inflates, and when the bubble inevitably bursts, they can short it on the back side and make a second fortune as the price collapses. Rinse and repeat.

It is fascinating how globalization has made the world almost exponentially more interconnected and complex than, say, even a decade ago, and yet it has become increasingly viable for a very small group of very greedy people to change the course of history in a heart beat.

Do you see what I see? I see a flock of black swans on the not too distant horizon. Where are they headed? Who can say.
JonF Says:
July 4th, 2009 at 9:04 pm
Re: 1) We cram into urbanism, or 2) we use something other than the autmobile.

Why is this an either/or choice?
Zach Says:
July 4th, 2009 at 11:14 pm
It’s very misleading to show this data on a non-logarithmic scale. On the appropriate scale you’ll see that the rapid increase, decrease, and recovery in price was unprecedented, but not all that different from the early 90s. The increase in price over the last decade is pretty steady. I don’t know anything about the oil market, but it seems like a paradoxical increase in price now could have to do with the incredible decline in price over year before — that production was taken offline as it became unprofitable and supply diminished. I don’t know that this is true, but it’d be interesting to see a plot of barrels of oil consumed per week on the same time scale.
Mattyoung Says:
July 4th, 2009 at 11:24 pm
Why is this an either or (cars or urbanism)?

Well, if we had cars that could carry groceries and get 100 MPG and cost $10,000 we could use cars. The problem arises once we get an oil shock and we try to save by taking fewer trips. When that happens the depreciation (or payment) cost of a car becomes about $60/trip, because during times of high gas prices we cut our shopping down to four times a month and ride public transit.

Until we can reliably count on cars costing $160/month in fees and payment we are stuck. When gas prices hit $4/gal last year, all the cars parked in the main residential neighborhoods, and strip malls suddenly looked at bankruptcy, as people walked to the local quick stop market, or they went on line.

We suffer the last mile personal freight problem. We suffered it in the Great Depression, we suffered it in the Long Depression. We suffer the last mile constraint whenever communication technology expands the horizon of available goods and put a strain on local transportation technology.
Max424 Says:
July 4th, 2009 at 11:34 pm
@24 JonF “Why is this an either/or choice?”

It’s not. But, for some unfortunate reason, no one who posts in this blog, including the blog’s commander-in-chief, or anyone in this country, for that matter, is able grasp the concept that the electric engine is 5 times more efficient than the combustion engine.

Instead, we are going to do what we do best -and putz around. We are going to look at oil graphs and remark on how spikey those pesky oil prices have been lately. We will hope those prices don’t go crazy on us because if they do we will be in a whole heap of trouble. But we will not be afraid, and we will mock the scaredy cats.

“Shouldn’t we take action, Psycho?”

“Fuck no. Let’s ride ‘er out and see what happens.”
bob in fla Says:
July 4th, 2009 at 11:59 pm
I really hate it when numbers & graphs are used incorrectly to to overstate a case. A 1986 dollar equals about $2.50 today. With the current price at ~$70/barrel, oil is actually cheaper now than it was in ‘86.

If we use the same chart & used constant dollars – taking inflation into account – we would see that it follows the supply/demand curves much more closely. It would also show declining prices into the mid to late 90s. And if we extended the chart to reflect the 20 years previous, I believe we would would see the recent $147/bbl. peak roughly equivalent to the one for 1973.

I would really like to see such a chart, as well as your conclusions, Matt.
omega centauri Says:
July 5th, 2009 at 12:02 am
I’m hearing too much of the “it’s the speculators duh”. The reality is most of the cheap oil has been pumped. There is still plenty of oil left, but almost all of it requires a quaranteed high price to attract investment in getting it out. So yeah, speculators have an ear to the ground for any coming supply shortage, and are able to drive the price up before the shortage actually shows up. But,they don’t cause the basic shortage, they can only exploit it when it shows up. The reality is that the oil price in the future is likely to be very volatile, but volatility imposed onto a strong upwards trend. We gotta get our heads around this. Else we will dawdle along and avoid making the changes we will need to to survive in the era of shrinking per capita oil supply that is upon us.
bob in fla Says:
July 5th, 2009 at 12:13 am
max 424: While it is true that an electric motor operates more efficiently than one run on refined fossil fuels, way too much of our electrical grid generation is powered by fossil fuels, which reverses much of the gain of switching to electric vehicles. One more reason to ramp up on green power. Also (God, I hate saying this) nuclear.
Mattyoung Says:
July 5th, 2009 at 1:00 am
The Internal combustion engine is about 20% efficient. The electrical motor is closer to 85%, and that takes us a long way. But inefficiency is heat loss and batteries are about 75% efficient. So the total electrical car efficiency is about 70% efficient. Transformers and electrical transmission have about 70%, and original steam generation from fossil fuel can approach 80%. But oil delivery is an efficiency loss also, and is greater for cars than power plants.

So, overall, the efficiency of an electrical car may be 35% (all things considered) and the auto about 10% (all things considered) I picked these number with quick web searches.

So, if these numbers hold up, then we get about a 3.5 times efficiency from using electrical cars. Not bad, enough?

We still have about ten years of electrical car manufacturing to get the economies of scale, add that in and you might have a problem. Remember there is a lot of back end energy loss in managing and building all those batteries. So you may get an equivalent of 120 MPG (variable costs) for an electrical car, but your capital costs will be very high for some time.

It is an efficiency race from the grocery store to the home, think of this recession in those terms. To maintain the same standard of living I would think we need triple that efficiency, or use 1/3 the amount of energy to get a bag of groceries. I think the Street Bots are going to win the race, even against electrical cars because street bots can deliver ten boxes of groceries in one trip without the cost of a driver. But they are both compatible on the street and work well together, so try them both.
bob h Says:
July 5th, 2009 at 7:52 am
A reinvigorated Goldman Sachs hard at work.
Wisconsin Reader Says:
July 5th, 2009 at 10:21 am
Matthew . . .
Recommended reading for you on this topic – Matthew Taibbi.
DTM Says:
July 5th, 2009 at 1:01 pm
I would really like to see such a chart, as well as your conclusions, Matt.

See the link in my 8:36pm post.
BruceMcF Says:
July 5th, 2009 at 1:41 pm
Charlie Murtaugh, July 4th, 2009 at 5:52 pm

I know where Clem is coming from, but can’t the bursting of the housing-debt bubble suffice to explain the current recession?

No. It suffices to explain a recession, but a recession built primarily on dropping consumption wealth effects as an asset bubble bursts explains a rather shallow but long lasting recession as in 2001 … which was, indeed, the kind of recession we were in for the first eight months of the recession.

The rapid free fall since Aug/Sep ‘08 with consecutive months losing more than 0.5m jobs per month is more from a financial panic or oil price shock recession, and not coincidentally we had not just one of those, but both of them.
Ginger Yellow Says:
July 6th, 2009 at 7:00 am
“China is projected to grow 7%, India 5%, and Brazil 2%. ”

Yes, but those are big reductions on previous forecasts, and China’s exports are down something like 30% year on year. Japan is something like 40% down. That results in a lot less demand for oil.
Mack Says:
July 6th, 2009 at 10:20 am
The oil spike happened because everyone saw what was happening in the financial and housing markets and switched to commodities speculation. At the same time, food prices were seeing similar spikes. This has everything to do with the housing bust, not oil supply or demand. The prices will stabilize at 60-80, which is the target for big oil companies and opec. That is the increase seen lately. To fund projects and make a refining profit, oil must be over 60/b (what used to be 20/b before inflation). Plus, this is likely close to a real and reasonable price anyway. Much more than 60 dollars of value is obtained from one barrel of oil.

Matt Yglesias

Oil Price Madness

36 Responses to “Oil Price Madness”

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