Sunday, July 27, 2008

CFTC: Oil Prices Rose Due to Supply and Demand

Charts above are from the July 2008 Interim Report on Crude Oil, from the Interagency Task Force on Commodity Markets. From the Executive Summary:

The Task Force’s preliminary assessment is that current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors. During this same period, activity on the crude oil futures market – as measured by the number of contracts outstanding, trading activity, and the number of traders – has increased significantly. While these increases broadly coincided with the run-up in crude oil prices, the Task Force’s preliminary analysis to date does not support the proposition that speculative activity has systematically driven changes in oil prices.

The world economy has expanded at its fastest pace in decades, and that strong growth has translated into substantial increases in the demand for oil, particularly from emerging market countries. On the supply side, the production of oil has responded sluggishly, compounded by production shortfalls associated with geopolitical unrest in countries with large oil reserves. As it is very difficult to rely on substitutes for oil in the short term, very large price increases have occurred as the market balances supply and demand (see top two charts above).

If a group of market participants has systematically driven prices, detailed daily position data should show that that group’s position changes preceded price changes. The Task Force’s preliminary analysis, based on the evidence available to date, suggests that changes in futures market participation by speculators have not systematically preceded price changes. On the contrary, most speculative traders typically alter their positions following price changes, suggesting that they are responding to new information – just as one would expect in an efficiently operating market.

From p. 14 of the report: The depreciation of the dollar since 2002 has contributed to the rise of the dollar price of oil, but can explain only a portion of the overall run-up. This point is also evident in the bottom chart above, which graphs the spot price of West Texas Intermediate crude oil in several currencies. Clearly, oil prices have risen sharply regardless of the currency of denomination. Moreover, from mid-March through June 2008, the dollar was stable, whereas oil prices increased appreciably.

MP: I think the top chart above says it all. Since 2002, world GDP increased by about 30% and world oil production increased by about 12%. Demand for oil increased significantly, oil supplies were tight, and oil prices rose significantly.



At 7/27/2008 10:46 AM, Blogger the buggy professor said...

Thank you for the valuable link and your charts.

A query here about the 4-quarter change chart. Maybe it's my stupidity, but it looks as though from the middle of 2004 until almost the end of 2007, that chart shows a decline in the growth of oil production even as oil-demand --- which temporarily grew more slowly, only to pick up again quickly --- continued generally to grow about the same rates as before.

What would explain that three year dip in the growth of oil production, compared to the soaring percentage growth from the end of 2001 until mid-2004, followed by a strong matching plunge (with some volatility briefly) in the growth of production until the end of 2007?


I followed the link to the Task Force's Interim Report, ran my eye over the entire thing, and looked in particular at the chart in question and the comments there. No illumination there, alas.

To repeat: why would oil production's growth have slowed down in that period even as oil demand continued to grow at roughly the same pace in that three year interval?

Was oil in the ground deliberately not produced by certain oil-producing countries (whether in OPEC or not)? Or was tapped but wrongly reported by certain governments (most likely, if this occurred, the Persian Gulf governments whose populations are tiny and whose oil resources are enormous)? Or can we even fully trust the reported production output from thoroughly corrupt, gangster-governed OPEC governments, especially those whose populations are small with no pressing need to buy off large and impoverished populations with oil-rich income?

Are, to continue along with this, ways for international oil companies that refine and sell the raw oil to monitor the reported production? And, if so, can their monitoring be relied on fully to be accurate or honest?


Just asking. I have no way of answering these questions.

Michael Gordon, AKA, the buggy professor:

At 7/27/2008 8:23 PM, Blogger OBloodyHell said...

Well, I have not investigated, but my speculations would include, from known facts, applicable to the US market and thus affecting the world market, given our place as the largest user:

1) We have been steadily reducing the overall capacity of our domestic oil refineries since the 1980s, thanks to ecotwits everywhere. I seem to recall (verify, by all means) that there were some plants due to go offline for a while for refurbishment ca. 2004. And since our refinery capacity is a fraction of what it should be, any downturn is significant.

2) The gulf region, esp. centered on Louisiana, is both a substantial refinery area as well as a transport hub/passthru for similar activities on either side, involving texas oil as well as offshore gulf oil. One word, "Katrina" should say enough.

Until someone takes the time to dig up some hard answers, that would be my bet.

At 7/28/2008 8:49 AM, Anonymous Anonymous said...


You're way off. First, refinery capacity will, generally, affect refined product prices and not that of crude oil itself (although, in theory, if there is far too little refinery capacity, then refineries would be taking in more crude than they can produce in refined products, which would lead to lower oil prices). Second, despite the popular perception, domestic refining capacity is increasing. One should not confuse the number of refineries with the capacity of refineries.

[As a note, the reason for the decline since about 1980 is that, in the late 70's government was subsidizing old and inefficient refineries. Without the government dole, they disappeared.]

Finally, domestic refining capacity is actually much less important than global refining capacity. Even if the US has a refining shortfall, that can easily be made up for by importing refined products instead of importing crude oil.

In short, refining isn't our current problem.

At 7/28/2008 9:38 PM, Blogger bobble said...

professor perry, as a global economist, what should we do? revoke all our trade agreements with china and india until they stop subsidising oil (and mineral) prices?

from experience, i know you won't answer me. why?

how can you approve of the global trade situation when it is so f***ed up?

if trade was really free, how different it might be. no currency manipulation, no subsidies. shoot, we might as well go for trade embargoes. what's the differance? i know, you won't answer.

At 7/29/2008 9:10 AM, Blogger OBloodyHell said...

> First, refinery capacity will, generally, affect refined product prices and not that of crude oil itself (although, in theory, if there is far too little refinery capacity, then refineries would be taking in more crude than they can produce in refined products, which would lead to lower oil prices).

1) This assumes that the companies in question do not adjust their output to match existing refinery capabilities. I see no basis for that claim. Why would they produce more than there is refinery capacity to process? That would be silly, as well as bad business.

2) Sorry, I don't consider increasing from ca. 15.5 mb/d to 17 mb/d to be an enormous increase in capacity, esp. when utilization of existing capacity is consistently in excess of 90%. I strongly suspect that if that went up, we'd find more oil to refine with it. Further, in that same time frame, how much as our usage gone up?

> In short, refining isn't our current problem.

What I said was, and I quote:
my speculations would include
That is, I consider it to be an obvious issue. You haven't convinced me of that not being the case, much less that I'm "way off".

Further, I'm discussing a narrow range of time, not the overall picture for the last 20 years.

Since you provide no stats to compare against, what is the US refinement capacity in comparison to the world's? We're looking at a cause for a downturn, which may or may not be something the world's refinement capacity can suddenly pick up the slack for, if our refinement goes down.

Also note that your US figures stop in 2004. Since that is before the downturn at question, you provide no data regarding it.

I also stand by my statement, which is that our capacity is lower than it was 20 years ago. Your own graph shows that. I'll grant you that JIT techniques allow tighter utilization, but once more -- what would happen if it went up notably? And centralizing on a few larger refineries is not good national policy, it means one accident or problem at one refinery takes down a hell of a lot of our indiginous manufacturing ability.

Unlike you, I don't assume that available capacity has no effect on production, just because (perhaps) more of the refinement can be done elsewhere. That may be the case, but it may not be, too.

Does it cost more or less to transport refined products long distances? Does it matter at all? Perhaps there is a reason why one transports crude by preference. One would think it's inefficient (refineries ought to be close to the wells?), but perhaps not. I dunno. Do you?

I don't believe you are even close enough to making your case. Some good points, yes, but "yeah, that sounds likely right" is not within your grasp. Likewise, "Way off" is not currently playing in your ballpark.



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