Are “Speculators” Causing the Oil Price Rise?

by BWK ~ July 8, 2008

“How much of the oil price rise is due to speculation?”

Blaming “speculators” for rising oil prices is nothing but cheap demagogy.

Speculators are speculating because there is something about which to speculate. (Let me thank my sixth-grade English instructor for teaching me how to compose that sentence.)

Remember when oil ran up back in 1979 and 1980, when the entire Iranian oil industry collapsed in the wake of Ayatollah Khomeini’s Islamic Revolution? About 5 million barrels of oil per day simply left the world marketplace. It was gone — poof! Not there. No tankers.

Even though 5 million barrels went away, people could still look to places like the North Sea, Alaska, Angola and elsewhere. And they could feel certain that sooner or later, there would be future oil supplies flowing down the pipelines.

But that’s not the case today. When people look ahead now, they don’t see from where the oil of the future will come. Most of the world’s current large oil fields are in decline.

I discussed the calamitous decline rates of Mexico’s Cantarell field in a recent OI issue. In that same issue, I talked about McDermott Intl. (MDR: NYSE). McDermott is well positioned to profit from helping out with Mexico’s ailing oil industry.

As for the so-called oil speculators, they are just defending the value of their money. They are looking forward a few years. What do they see? All of the current energy development projects will just barely replace the oil that will NOT be coming from declining oil fields. So peering ahead, there’s no net increase in future oil output. We’re looking at a plateau in output, if not the backside of the Peak Oil curve.

But we are looking at growing energy demand, as well as demand for other resources. So investors have placed hundreds of billions of dollars into energy and other commodity funds during the past two years. They are both hedging against dollar inflation and anticipating future supply shortfalls.

Long term, this is great news for the likes of Suncor (SU: NYSE), the Canadian tar sands company. Suncor is facing higher capital costs, as well as higher costs for inputs like natural gas. And Suncor suffers from a raw political bias (suicidal, in my view) against synthetic crude oil because of the carbon dioxide emissions.

Along those lines, some politicians in the U.S. want to renegotiate the North American Free Trade Agreement (NAFTA) that includes Canada. Word to the wise: Don’t go there!

Really, if the U.S. renegotiates NAFTA with the Canadians, our friends to the north will have some surprises in store. The U.S. will rue the day that it tore up NAFTA with the Canadians, because that will just plain shut off many of the valves on a lot of pipelines.

Seriously, the Canadians have eager buyers for their energy resources, and they don’t need us Yankees. Just keep in mind that downstream, people will demand oil, and Suncor will have it. So Suncor will make money.

Getting back to Brian’s question, those “speculators” are not the problem. Speculators are sending a message that policymakers had better heed. American politicians better get serious about finding pathways through the “energy issue.” And on that note, let’s hit the last question.

Until next time,

Byron King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Additional Resources:
Warning from My Energy Insider…
Oil Defies a Correction…
The Oil “Melt-Up” and Why the U.S. Economy Won’t Run On Windmills Alone…
The 2nd Fed… Carbon Permits
Russia… Energy Priority #1
Talking Oil with the Vice Chairman of Chevron
Congress Beats Up On Oil Execs…
Silent Spring For Aviation
The U.S. Oil Supply — A Look At Our Future Oil Needs
U.S. Energy Policy — And Getting It Right