Posts Tagged ‘Oil prices’

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The WSJ’s confused story on gasoline prices and crude oil prices

October 4, 2011

Michael Giberson

Caption: Change in retail gasoline prices vs. prices of two benchmark crude

WSJ Image: Change in retail gasoline prices vs. prices of two benchmark crude

The story in yesterday’s Wall Street Journal on the link between gasoline prices and crude oil prices was a bit frustrating. The article does a reasonable job explaining key pieces of the puzzle, but then fails to assemble the puzzle into something resembling reality.

The story is headlined, “Gas Stays High as Oil Drops: Prices at the Pump Have Yet to Reflect the Substantial Decline in Crude Futures,” and the first sentence repeats the theme: “U.S. crude-oil prices have hit the skids, but drivers aren’t feeling the impact.” The next couple of sentence fill in some details. In brief, the story says, the benchmark crude oil price is down nearly one-third since April, but U.S. gasoline prices are only down about 13 percent.

The mystery of the just-down-13-percent gasoline prices is almost entirely created by trying to treat the NYMEX price as the relevant benchmark, but it isn’t. (As noted here in February.) Currently the Brent price is a better indicator of the world oil market price for crude oil. Our story here, then, is that world oil prices have dropped 18 percent since April while average gasoline prices dropped 13 percent. Hardly a different warranting a headline.

The reporter fully recognizes this point, as he explains, “gasoline prices on the East Coast and even in the Gulf Coast track the price of Brent crude, which analysts view as a better indicator of global prices than Nymex. While Nymex futures are down 30% since April 29, Brent is down 18%.” And the story is accompanied by a graphic, above, which graphically illustrates the point that Brent seems to be the relevant reference point.

So why the struggle to cast this story about gasoline prices that are not falling fast enough?

Posted in Energy markets | Tagged , | Comments Off

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Oil speculator witch hunt, 2011 edition

April 22, 2011

Lynne Kiesling

Following up on Mike’s post yesterday about pandering politicians and their 2011 edition of the recurring petroleum price witch hunt … Others have weighed in on the idiocy of this “Oil and Gas Price Fraud Working Group”. Let’s start with KP’s go-to energy finance economist, Craig Pirrong:

… it’s an opportunistic effort to scapegoat others on the basis of zero evidence in order to distract attention from the real issues–but that’s cool!

Here’s a non-enabling professor’s take:

“Craig Pirrong, a finance professor at the University of Houston who specializes in commodity prices, says the task force is hardly needed, since the agencies already have the tools to monitor for fraud and take action. [Yeah.  It's like their day job.]

“This is a transparently political fishing expedition that insinuates that fraud or manipulation is distorting oil prices without providing even the flimsiest factual basis for such a suspicion,” Pirrong said. “This is part of a broad effort by the administration to deflect criticism with regard to gasoline prices.””

Actually, the “fishing expedition” characterization is probably optimistic.  Especially given Obama’s assertion of ownership of the issue, and his personal identification with the claim that speculators are distorting prices, there is a high likelihood that fishing expedition will give way to witch hunt.  Remember when Obama told bankers “[m]y administration is the only thing standing between you and the pitchforks”?   It is becoming increasingly clear that Obama won’t be standing between oil “speculators” and the pitchforks this time.  Indeed, he’s taking leadership of the mob.

And this from KP’s go-to journalist (and, I’m convinced, sometimes more-eloquent inhabitor of my brain), Reason’s Matt Welch:

Here’s your federal energy policy: Do nothing significant to increase domestic supply, create mandates to have XX% of future supply come from magical green leprechauns, then when prices (surprise!) go up, you know what to do: Blame the “speculators”.

Finally, Cato’s Jerry Taylor and Peter VanDoren in Forbes give a thorough, straightforward lesson on how futures market works to indicate how ludicrous the “speculators are raising petroleum prices” argument truly is:

If this is going on we would expect to see some sort of inventory buildup. While crude inventories in the U.S. are increasing, they always increase at this time of year, and this year’s increase is well within the normal range. More important, gasoline inventories are decreasing and decreasing much more rapidly than normal. Hence, there’s no evidence that speculators are reducing the supply of crude or gasoline through increased storage.

Producers, however, could react in the same way to higher futures prices by decreasing current production to allow more future production at higher prices. Alas, we see no evidence of suspicious reductions in producer output that might give this story credence.

They then go on to give a good, concise summary of recent research showing that both prices and quantities in petroleum futures markets are reacting to global factors, such as political unrest in Libya (shifting the oil supply curve to the left) and increases in economic activity (shifting oil and gasoline demand curves to the right). Even a basic understanding of introductory economics would enable the interested observer to conclude that, while the ultimate quantity of oil and gasoline transacted is ambiguous, the combination of a decreased supply and an increased demand will unambiguously increase prices.

Perhaps someone should inform the DOJ and the Obama Administration, assuming that they actually care about the underlying economic fundamentals …

Posted in Economics, Energy markets, Politics, Regulation | Tagged , , | 3 Comments »

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Crude oil prices in 2008: Was the spike a bubble?

March 31, 2010

Michael Giberson

In the physical world, spikes and bubbles are quite different things that don’t generally get mistaken for one another.  Curiously, in economic metaphor, the same phenomena can be called a spike and a bubble.  Argument among economists continues on the issue of whether the oil price spike in 2008 was or wasn’t a bubble.

A few weeks ago Paul Krugman dismissed the idea that the 2008 run up in oil prices was a bubble, and suggested that high oil prices “are largely caused by fundamentals.” In a May 2008 op-ed Krugman also argued against the bubble claim, claiming that if speculators were to  blame there would be tell-tale signs like the accumulation of excess inventories.

Amy Myers Jaffe responded at the Baker Energy Institute Forum blog:

The problem with Krugman’s logic is that he was in factual error. Oil inventories were indeed increasing as prices were going up, and by a large amount, especially if you add in what we in the industry call “oil at sea” which refers to a build up of the number of large tankers of oil floating offshore or slow steaming to markets that lack sufficient demand for that supply.

Right around the time that Krugman declared that there was no oil bubble, Energy Intelligence Group was reporting that oil inventories in the industrialized countries had risen by 1.2 million barrels per day in April 2008, which put them well above the five-year average. In a telling sign of how limited on-land oil-storage space was at the time, Iran had to commission ten very large crude oil carriers (VLCCs) to hold its unsold oil afloat off its coast, a practice not seen since 1989, when oil prices were collapsing.

The problem with Jaffe’s response is that it ignores long established oil industry patterns. High prices or low prices, the industry tends to build inventory in the first four months of the year and draw down those inventories during the next five or six months. (For example: U.S. Energy Information Administration on oil stocks: “World oil stocks follow a seasonal pattern in which they are typically drawn down rapidly in the middle of the winter and re-built rapidly in the spring…”)

Jaffe needs inventories to accumulate in excess of normal industry practices to sustain her argument.  Her claim that inventories in April 2008 were “well above the five-year average” is ambiguous; was April 2008 inventory above the five-year average for that time of year or just above the average level for every month of the previous five years?  It makes a difference because it is ordinary for April to have higher inventories than any other month, and only relevant to the case if April 2008 was extraordinarily high.

I don’t have the Energy Intelligence Group data at hand, and I don’t find other world inventory data readily available.  U.S. inventory data from the EIA shows the typical pattern of inventory accumulation in the spring and draw down over the summer.  Early 2008 does show slightly higher inventories (less than 2% higher) relative to the average inventory for the same week of the year over the prior five years.  On the other hand, early 2008 also showed slightly lower inventories (less than 2% lower) relative to the average inventory for the same week of the year over the prior 20 years.  The inventory build up in early 2008 doesn’t seem so far off typical industry practices to justify bubble claims.

Admittedly, crude oil inventory is the U.S. is only a part of a bigger picture. If you have better data to share, I’d be interested.

The Iran anecdote that Jaffe tossed into here story seems to be the result of temporary and idiosyncratic conditions, so probably not revealing on the larger issue.  On May 2, 2008, Bloomberg reported:

Iran, OPEC’s second-largest oil producer, more than doubled the amount stored in tankers idling in the Persian Gulf, sending ship prices higher as demand for some of its crude fell, people familiar with the situation said….

While oil rose to a record $119.93 a barrel on April 28, Iran has a glut of its sulfur-rich crude as refineries that can process the fuel shut down for maintenance. The discount on Iranian Heavy crude compared with Oman and Dubai petroleum has more than doubled since the start of the year, according to data compiled by Bloomberg.

“There’s not much demand for heavier crudes such as those from Iran,” said Anthony Nunan, assistant general manager for risk management at Mitsubishi Corp. in Tokyo. “It’s the peak of the refinery maintenance season in Asia, and Iran also sells oil to Europe and the Mediterranean, where some refineries are having turnarounds,” or seasonal shutdowns for repairs, he said.

I’m not claiming Krugman is right; I generally don’t read Krugman and particularly don’t rely on his opinions on energy market issues. I’m also not claiming that Jaffe is wrong.  What I am claiming is that Jaffe simply doesn’t offer sufficient backing for her argument.

Posted in Economics, Energy markets | Tagged , , , | 4 Comments »

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Price signals and free markets lead to oil exploration: who’d a thunk it?

September 24, 2009

Lynne Kiesling

From a good article in today’s New York Times: 2009 is turning out to be a bumper year for new oil discoveries; new oil discoveries always occur, but this year has been unusually fruitful. This quote from the article illustrates the important dynamic intertemporal incentives that price signals provide:

These discoveries, spanning five continents, are the result of hefty investments that began earlier in the decade when oil prices rose, and of new technologies that allow explorers to drill at greater depths and break tougher rocks.

“That’s the wonderful thing about price signals in a free market — it puts people in a better position to take more exploration risk,” said James T. Hackett, chairman and chief executive of Anadarko Petroleum.

More than 200 discoveries have been reported so far this year in dozens of countries, including northern Iraq’s Kurdish region, Australia, Israel, Iran, Brazil, Norway, Ghana and Russia. They have been made by international giants, like Exxon Mobil, but also by industry minnows, like Tullow Oil.

Note here the hetergeneity of both the location of the discoveries and the types of firms that are exploring and discovering.

See also the comments and the tie to peak oil from Tim Haab at Environmental Economics.

There’s also an interesting similarity, and contrast, with how high natural gas prices have induced further exploration and discovery in the U.S. in the form of shale gas. Extracting shale gas is more costly because it’s embedded in shale rock, but the high natural gas prices since 2003 have induced innovation and exploration. That, combined with other discoveries, has led to historically high natural gas inventories (shifting out the supply curve); this year’s recession has reduced the demand for natural gas (shifting in the demand curve). Not surprisingly, therefore, the price of natural gas is about one-fourth of what is was back in, say, 2005. This week NPR has been running a series on natural gas innovation and exploration; the first in the series is here, and there are more resources associated with the series on their web site as well.

Posted in Economics, Energy markets | Tagged , | 2 Comments »

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Crude oil price volatility

July 6, 2009

Michael Giberson

The New York Times observes that crude oil price volatility has been exceptionally high for the last eighteen months.

Daily changes in the spot price of crude oil, 1983-2009

New York Times graphic: Daily changes in the spot price of crude oil, 1983-2009

(Hmmm. Eighteen months ago … January 2008 … the Iowa caucuses … the U.S. presidential primary season gets underway in earnest … nahhh, couldn’t be all due to presidential politics.)  Actually, eyeballing the chart that accompanies the article, it looks like volatility didn’t really take off until the macroeconomic slide later in 2008. From the story:

“To call this extreme volatility might be an understatement,” said Laura Wright, the chief financial officer at Southwest Airlines, a company that has sought to insure itself against volatile prices by buying long-term oil contracts. “Over the past 15 to 18 months, this has been unprecedented. I don’t think it can be easily rationalized.”

Volatility in the oil markets in the last year has reached levels not recorded since the energy shocks of the late 1970s and early 1980s, according to Costanza Jacazio, an energy analyst at Barclays Capital in New York.

Energy price volatility may have implications for various energy policy proposals seeking to dramatically reshape the industry.  Research published in the Energy Journal (“Does oil price uncertainty affect energy use?” Gerard Kuper and Daan van Soest, 2006. Link to abstract.) reported that oil price volatility discourages investment in new energy-using technology:

Volatility clustering implies that high levels of volatility today give rise to the expectation that volatility will remain high in the foreseeable future, and hence the probability of price change reversals is expected to remain high as well. Volatility itself induces firms to respond sluggishly to energy price changes, and this effect is exacerbated if volatility is clustered over time as higher volatility today implies that tomorrow volatility is likely to be high too….

Our results thus give support to the theoretical prediction that energy price volatility renders energy-saving technologies less attractive. The policy implications are that in uncertain times, energy taxes are not expected to be very effective in reducing energy use, and that reducing and managing uncertainty should be high up on the policy agenda.

AN ASIDE: Between when I first read the NYT story yesterday and posting about it this morning, the title of the article morphed from “Volatile swings in price of oil stir fears on recovery” to “Swings in price of oil hobble forecasting.” I wonder if that change is a editorial judgment to minimize negative tone toward the economy, or just an effort to make headlines into statements of the obvious?

ANOTHER COMMENT: The Energy Journal doesn’t make it easy for web-based researchers to locate and link to articles in the journal (as compared to, say, the Electricity Journal or Energy Policy). As research has become increasingly web-based, that is probably not the best long-term approach.

Posted in Economics, Energy markets, Politics | Tagged , | 6 Comments »

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Fuel hedging: sometimes you get the bear, sometimes the bear gets you

January 22, 2009

Lynne Kiesling

One of my father’s default tag lines was “sometimes you get the bear, sometimes the bear gets you.” I use this phrase frequently when discussing hedging future price changes — if prices move in the direction you anticipated, you earn a profit, if they move in the opposite direction, you earn a loss.

Last quarter the bear got Southwest Airlines (hey, that’s a good pun too). Southwest reported a net loss last quarter, due in large part to their fuel price hedging position:

The loss included net charges of $117 million related to the falling value of its fuel-hedging positions. Without the charges, Southwest would have earned $61 million, or 8 cents per share, which beat expectations of analysts surveyed by Thomson Reuters, who forecast a gain of 5 cents per share excluding special items.

Recently, Southwest has cut back sharply on fuel hedging. It also said Thursday that it plans to reduce capacity this year by 4 percent and will rein in fleet-expansion plans.

In periods of uncertainty, you manage this risk by hedging your hedge, buy buying an instrument that in essence allows you to get out of buying the fuel at the price you contracted. I’m thinking of instruments like put options. Of course, you are unlikely to recoup all of your money by doing this, but you can mitigate your losses.

But, being the “glass is half full” person that I am, I focus on the fact that their net income before special items was higher than analyst expectations. I doubt that’s the case for other airlines in this market.

Posted in Economics, Energy markets | Tagged , , | 1 Comment »

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My benchmark oil price is better than yours

January 9, 2009

Michael Giberson

The WSJ’s Environmental Capital blog notes that the price for “WTI”, which is to say the price for West Texas Intermediate grade of crude oil, a commonly used benchmark for quoting crude oil prices, has been drifting out of the usual relationships with other commonly used benchmarks, like Brent crude. (Here is Wikipedia on WTI and Brent.)

The post cites opposing views from FT’s Alphaville blog and Platt’s The Barrel. At Alphaville, the changes indicate that WTI is losing touch with reality:

Essentially that means once Cushing storage nears capacity WTI will become increasingly depressed versus other crude grades and therefore disconnected from real oil supply/demand fundamentals. As a result it will no longer be a good indicator of US crude prices.

While at The Barrel, the WTI price movements are reflecting reality:

So it’s WTI that’s reflecting what is going on in the world: the collapse in demand, oversupply and a resulting enormous contango that is encouraging storage. On this one, WTI is ahead of the curve, not behind.

Why the difference?

Maybe where you sit affects what you see.  Should I say more clearly that the U.K.-based Alphaville blog favors the local Brent benchmark, while the U.S.-based The Barrel thinks that WTI is all right.

My view, from here in Lubbock: West Texas Intermediate is A-OK.

Posted in Energy markets | Tagged , , | 1 Comment »

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