Friday, July 15, 2011

the beginning of the beginning of the end...,

Video - Someone at IEA leaked SPR release announcement

Utilipoint | I'm not one for conspiracy theories, but …

On June 23rd, 2011 the International Energy Agency (IEA) made a significant announcement. For just the third time in its history, it announced the release of oil from strategic reserves — some 60 million BBLs over the preceding month. The announcement pointed to the Libyan situation, where it estimated some 132 million BBLs of light, sweet crude oil had been removed from the market by the end of May, 2011 and noting that greater supply tightness (and the resulting run in up in prices) could threaten the fragile global recovery. The impact of this "shock" announcement was pretty immediate as crude prices fell with Brent Futures falling close to 7.5 percent in the immediate aftermath.

Reuters analyst, John Kemp1, immediately saw the move as targeted against speculators in the market. A view echoed by many U.S. newspapers which ran ugly headlines proclaiming the end of speculation in the market and a return to "fundamentals" and saner prices. If this unheralded and hugely coordinated and difficult decision by the IEA was targeted at speculators, it failed. The sudden unexpected downwards move did hit long biased hedge funds for sure—that can be seen in some rather disappointing returns for May from many managers, but was it even an effective "warning shot" as The Street2 put it? Was it a warning shot at all?

Strangely enough, oil prices were declining prior to the announcement and there was much speculation that the IEA move wasn't as much as a surprise as initially thought. According to one oil-trader, Mark Fisher, it wasn't and he made his accusation on CNBC."This information, in my opinion for what it's worth, was leaked. It was leaked," he rasped. "Somebody knew something." It wouldn't be too much of a surprise if the decision, which not only required agreement of IEA members but likely consultations with OPEC and others, was leaked as crude was down by four percent already.

What is clear is that the IEA's move was a direct market intervention, and yes, it was very much a speculative move by big governments to try to control what should be a free market. So who is crying foul now? After the announcement, the idea that another move by the IEA to keep down prices may be on the table was also mooted. But there is a problem with that strategy—the IEA simply doesn't have enough credible political capability to keep adding from the strategic reserve to the global oil supply. In a matter of months its reserves would be gone and the price of oil would still be close to record highs. As Fisher puts it—it's a risky gamble that the IEA can't win.

Central to this issue is this: the price is where it is at because of fundamentals, not speculators. I have argued this many times before. "To me, price volatility cannot be significantly dampened by reducing the ability of investors to "speculate" nor can it be addressed by greater market oversight and regulation (not that this may not be required for other reasons). It can only be addressed by recognizing and understanding the fact that for now, and the future, we are truly in a supply constrained world and that demands a higher level of thinking, a more strategic set of thinking and strategies at both the national and trans national levels,"4 I stated back in 2009. Even the IEA announcement points to fundamentals as its raison d'etre with its statement about Libyan oil. But hold on … 60 million BBLs to replace 132 million BBLs already lost from the market? Two million BBLs/day for 30 days to replace 1.5 million BBLs per day of lost Libyan oil? No wonder the speculators barely flinched.

The real reason for the release may be indeterminable. Some suggest President Obama has an eye on re-election and sees lower gas prices at the pump as a way to sweeten his chances. Others might suggest the move was really aimed at OPEC, the other speculators in the oil market, but the ones who really can impact prices. The fact is that it is irrelevant. What is relevant today, three years after my last article on this topic, is that nothing much worthwhile has been done to address the underlying issues of supply and demand. The United States still doesn't have an energy policy worth squat, and neither do many other Western economies. In fact, to me, it seems like only China has a practical energy/commodity policy these days—spend worthless T-bills on buying reserves in the ground anywhere you can—and fast.

But since 2009, the situation truly has gotten much worse. The population of this planet grew in those three years to 6.7 billion (by more than three times the population of Germany) and is set to rise to around 10 billion by 2050. Those extra people and their demands for food, energy and raw materials of every kind is the problem. In fact, policy decisions across the board have been counterproductive and counterintuitive. For example, The World Trade Organization changed its rules on subsidies, meaning that rather than buy and stockpile produce from farmers building reserves, governments pay subsidies without buying any of the produce. The impact of that move? No reserves to protect against volatility when some crisis arises. Another example is the move to biofuels again driven by government subsidies&3151that means farmers are turning arable farmland into corn or other ethanol making materials rather than grow food people can actually eat.

Through all of 2011, the cost of food has sat at record levels as measured by FAO price index5. I don't see any inkling of a sign that that situation will improve in the medium to longer-term., which brings me back to the title of this article, "The Beginning of the Beginning of the End." To me, the move by the IEA signals the beginning of the beginning of the end of the life we know. Something has to change and fast, but no one seems willing to tackle the issue. Boris Johnson, Lord Mayor of London, said it better than I back in 2007, "How the hell can we witter on about tackling global warming, and reducing consumption, when we are continuing to add so relentlessly to the number of consumers? The answer is politics, and political cowardice."6 "The debate is surely now unavoidable. Look at food prices, driven ever higher by population growth in India and China. Look at the insatiable Chinese desire for meat, which has pushed the cost of feed so high that Vladimir Putin has been obliged to institute price controls in the doomed fashion of Diocletian or Edward Heath," he states further in his article. Before concluding, he writes, "It is time we had a grown-up discussion about the optimum quantity of human beings in this country and on this planet.” Amen to that.