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Perhaps 60% of today’s oil price is pure speculation
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| otec |
| quote: | ‘Perhaps 60% of today’s oil price is pure speculation’
by F. William Engdahl
The price of crude oil today is not made according to any traditional relation of supply to demand. It’s controlled by an elaborate financial market system as well as by the four major Anglo-American oil companies. As much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds. It has nothing to do with the convenient myths of Peak Oil. It has to do with control of oil and its price. How?
First, the crucial role of the international oil exchanges in London and New York is crucial to the game. Nymex in New York and the ICE Futures in London today control global benchmark oil prices which in turn set most of the freely traded oil cargo. They do so via oil futures contracts on two grades of crude oil—West Texas Intermediate and North Sea Brent.
A third rather new oil exchange, the Dubai Mercantile Exchange (DME), trading Dubai crude, is more or less a daughter of Nymex, with Nymex President, James Newsome, sitting on the board of DME and most key personnel British or American citizens.
Brent is used in spot and long-term contracts to value as much of crude oil produced in global oil markets each day. The Brent price is published by a private oil industry publication, Platt’s. Major oil producers including Russia and Nigeria use Brent as a benchmark for pricing the crude they produce. Brent is a key crude blend for the European market and, to some extent, for Asia.
WTI has historically been more of a US crude oil basket. Not only is it used as the basis for US-traded oil futures, but it's also a key benchmark for US production.
‘The tail that wags the dog’
All this is well and official. But how today’s oil prices are really determined is done by a process so opaque only a handful of major oil trading banks such as Goldman Sachs or Morgan Stanley have any idea who is buying and who selling oil futures or derivative contracts that set physical oil prices in this strange new world of “paper oil.”
With the development of unregulated international derivatives trading in oil futures over the past decade or more, the way has opened for the present speculative bubble in oil prices.
Since the advent of oil futures trading and the two major London and New York oil futures contracts, control of oil prices has left OPEC and gone to Wall Street. It is a classic case of the “tail that wags the dog.”
A June 2006 US Senate Permanent Subcommittee on Investigations report on “The Role of Market Speculation in rising oil and gas prices,” noted, “…there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices.”
What the Senate committee staff documented in the report was a gaping loophole in US Government regulation of oil derivatives trading so huge a herd of elephants could walk through it. That seems precisely what they have been doing in ramping oil prices through the roof in recent months.
The Senate report was ignored in the media and in the Congress.
The report pointed out that the Commodity Futures Trading Trading Commission, a financial futures regulator, had been mandated by Congress to ensure that prices on the futures market reflect the laws of supply and demand rather than manipulative practices or excessive speculation. The US Commodity Exchange Act (CEA) states, “Excessive speculation in any commodity under contracts of sale of such commodity for future delivery . . . causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and unnecessary burden on interstate commerce in such commodity.”
Further, the CEA directs the CFTC to establish such trading limits “as the Commission finds are necessary to diminish, eliminate, or prevent such burden.” Where is the CFTC now that we need such limits?
They seem to have deliberately walked away from their mandated oversight responsibilities in the world’s most important traded commodity, oil.
Enron has the last laugh…
As that US Senate report noted:
“Until recently, US energy futures were traded exclusively on regulated exchanges within the United States, like the NYMEX, which are subject to extensive oversight by the CFTC, including ongoing monitoring to detect and prevent price manipulation or fraud. In recent years, however, there has been a tremendous growth in the trading of contracts that look and are structured just like futures contracts, but which are traded on unregulated OTC electronic markets. Because of their similarity to futures contracts they are often called “futures look-alikes.”
The only practical difference between futures look-alike contracts and futures contracts is that the look-alikes are traded in unregulated markets whereas futures are traded on regulated exchanges. The trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron and other large energy traders into the Commodity Futures Modernization Act of 2000 in the waning hours of the 106th Congress.
The impact on market oversight has been substantial. NYMEX traders, for example, are required to keep records of all trades and report large trades to the CFTC. These Large Trader Reports, together with daily trading data providing price and volume information, are the CFTC’s primary tools to gauge the extent of speculation in the markets and to detect, prevent, and prosecute price manipulation. CFTC Chairman Reuben Jeffrey recently stated: “The Commission’s Large Trader information system is one of the cornerstones of our surveillance program and enables detection of concentrated and coordinated positions that might be used by one or more traders to attempt manipulation.”
In contrast to trades conducted on the NYMEX, traders on unregulated OTC electronic exchanges are not required to keep records or file Large Trader Reports with the CFTC, and these trades are exempt from routine CFTC oversight. In contrast to trades conducted on regulated futures exchanges, there is no limit on the number of contracts a speculator may hold on an unregulated OTC electronic exchange, no monitoring of trading by the exchange itself, and no reporting of the amount of outstanding contracts (“open interest”) at the end of each day.” 1
Then, apparently to make sure the way was opened really wide to potential market oil price manipulation, in January 2006, the Bush Administration’s CFTC permitted the Intercontinental Exchange (ICE), the leading operator of electronic energy exchanges, to use its trading terminals in the United States for the trading of US crude oil futures on the ICE futures exchange in London – called “ICE Futures.”
Previously, the ICE Futures exchange in London had traded only in European energy commodities – Brent crude oil and United Kingdom natural gas. As a United Kingdom futures market, the ICE Futures exchange is regulated solely by the UK Financial Services Authority. In 1999, the London exchange obtained the CFTC’s permission to install computer terminals in the United States to permit traders in New York and other US cities to trade European energy commodities through the ICE exchange.
The CFTC opens the door
Then, in January 2006, ICE Futures in London began trading a futures contract for
West Texas Intermediate (WTI) crude oil, a type of crude oil that is produced and delivered in
the United States. ICE Futures also notified the CFTC that it would be permitting traders in the United States to use ICE terminals in the United States to trade its new WTI contract on the ICE Futures London exchange. ICE Futures as well allowed traders in the United States to trade US gasoline and heating oil futures on the ICE Futures exchange in London.
Despite the use by US traders of trading terminals within the United States to trade US oil, gasoline, and heating oil futures contracts, the CFTC has until today refused to assert any jurisdiction over the trading of these contracts.
Persons within the United States seeking to trade key US energy commodities – US crude oil, gasoline, and heating oil futures – are able to avoid all US market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York.
Is that not elegant? The US Government energy futures regulator, CFTC opened the way to the present unregulated and highly opaque oil futures speculation. It may just be coincidence that the present CEO of NYMEX, James Newsome, who also sits on the Dubai Exchange, is a former chairman of the US CFTC. In Washington doors revolve quite smoothly between private and public posts.
A glance at the price for Brent and WTI futures prices since January 2006 indicates the remarkable correlation between skyrocketing oil prices and the unregulated trade in ICE oil futures in US markets. Keep in mind that ICE Futures in London is owned and controlled by a USA company based in Atlanta Georgia.
In January 2006 when the CFTC allowed the ICE Futures the gaping exception, oil prices were trading in the range of $59-60 a barrel. Today some two years later we see prices tapping $120 and trend upwards. This is not an OPEC problem, it is a US Government regulatory problem of malign neglect.
By not requiring the ICE to file daily reports of large trades of energy commodities, it is not able to detect and deter price manipulation. As the Senate report noted, “The CFTC's ability to detect and deter energy price manipulation is suffering from critical information gaps, because traders on OTC electronic exchanges and the London ICE Futures are currently exempt from CFTC reporting requirements. Large trader reporting is also essential to analyze the effect of speculation on energy prices.”
The report added, “ICE's filings with the Securities and Exchange Commission and other evidence indicate that its over-the-counter electronic exchange performs a price discovery function -- and thereby affects US energy prices -- in the cash market for the energy commodities traded on that exchange.”
Hedge Funds and Banks driving oil prices
In the most recent sustained run-up in energy prices, large financial institutions, hedge funds, pension funds, and other investors have been pouring billions of dollars into the energy commodities markets to try to take advantage of price changes or hedge against them. Most of this additional investment has not come from producers or consumers of these commodities, but from speculators seeking to take advantage of these price changes. The CFTC defines a speculator as a person who “does not produce or use the commodity, but risks his or her own capital trading futures in that commodity in hopes of making a profit on price changes.”
The large purchases of crude oil futures contracts by speculators have, in effect, created an
additional demand for oil, driving up the price of oil for future delivery in the same manner that additional demand for contracts for the delivery of a physical barrel today drives up the price for oil on the spot market. As far as the market is concerned, the demand for a barrel of oil that results from the purchase of a futures contract by a speculator is just as real as the demand for a barrel that results from the purchase of a futures contract by a refiner or other user of petroleum.
Perhaps 60% of oil prices today pure speculation
Goldman Sachs and Morgan Stanley today are the two leading energy trading firms in the United States. Citigroup and JP Morgan Chase are major players and fund numerous hedge funds as well who speculate.
In June 2006, oil traded in futures markets at some $60 a barrel and the Senate investigation estimated that some $25 of that was due to pure financial speculation. One analyst estimated in August 2005 that US oil inventory levels suggested WTI crude prices should be around $25 a barrel, and not $60.
That would mean today that at least $50 to $60 or more of today’s $115 a barrel price is due to pure hedge fund and financial institution speculation. However, given the unchanged equilibrium in global oil supply and demand over recent months amid the explosive rise in oil futures prices traded on Nymex and ICE exchanges in New York and London it is more likely that as much as 60% of the today oil price is pure speculation. No one knows officially except the tiny handful of energy trading banks in New York and London and they certainly aren’t talking.
By purchasing large numbers of futures contracts, and thereby pushing up futures
prices to even higher levels than current prices, speculators have provided a financial incentive for oil companies to buy even more oil and place it in storage. A refiner will purchase extra oil today, even if it costs $115 per barrel, if the futures price is even higher.
As a result, over the past two years crude oil inventories have been steadily growing, resulting in US crude oil inventories that are now higher than at any time in the previous eight years. The large influx of speculative investment into oil futures has led to a situation where we have both high supplies of crude oil and high crude oil prices.
Compelling evidence also suggests that the oft-cited geopolitical, economic, and natural factors do not explain the recent rise in energy prices can be seen in the actual data on crude oil supply and demand. Although demand has significantly increased over the past few years, so have supplies.
Over the past couple of years global crude oil production has increased along with the increases in demand; in fact, during this period global supplies have exceeded demand, according to the US Department of Energy. The US Department of Energy’s Energy Information Administration (EIA) recently forecast that in the next few years global surplus production capacity will continue to grow to between 3 and 5 million barrels per day by 2010, thereby “substantially thickening the surplus capacity cushion.”
Dollar and oil link
A common speculation strategy amid a declining USA economy and a falling US dollar is for speculators and ordinary investment funds desperate for more profitable investments amid the US securitization disaster, to take futures positions selling the dollar “short” and oil “long.”
For huge US or EU pension funds or banks desperate to get profits following the collapse in earnings since August 2007 and the US real estate crisis, oil is one of the best ways to get huge speculative gains. The backdrop that supports the current oil price bubble is continued unrest in the Middle East, in Sudan, in Venezuela and Pakistan and firm oil demand in China and most of the world outside the US. Speculators trade on rumor, not fact.
In turn, once major oil companies and refiners in North America and EU countries begin to hoard oil, supplies appear even tighter lending background support to present prices.
Because the over-the-counter (OTC) and London ICE Futures energy markets are unregulated, there are no precise or reliable figures as to the total dollar value of recent spending on investments in energy commodities, but the estimates are consistently in the range of tens of billions of dollars.
The increased speculative interest in commodities is also seen in the increasing popularity of commodity index funds, which are funds whose price is tied to the price of a basket of various commodity futures. Goldman Sachs estimates that pension funds and mutual funds have invested a total of approximately $85 billion in commodity index funds, and that investments in its own index, the Goldman Sachs Commodity Index (GSCI), has tripled over the past few years. Notable is the fact that the US Treasury Secretary, Henry Paulson, is former Chairman of Goldman Sachs.
F. William Engdahl is an Associate of the Centre for Research on Globalization (CRG) and author of A Century of War: Anglo-American Oil Politics and the New World Order. He may be contacted at [email protected]
1 United States Senate Premanent Subcommittee on Investigations, 109th Congress 2nd Session, The Role of Market speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back on the Beat; Staff Report, prepared by the Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs, United States Senate, Washington D.C., June 27, 2006. p. 3. |
http://globalresearch.ca/index.php?context=va&aid=8878
This was published on globalresearch.ca. Just wondering do they have any credibility or it's just another conspiracy-type sites on the Net? |
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| occrider |
"Theoretical" is probably the more appropriate categorization. And even with that label I'm being overly generous because the article seems to make numerous egregious missteps to equate correlation with causation. I've been noticing a continuing trend of scapegoating derivatives markets and "speculation" as a whole, much of which, is without merit. It seems like a big part of the issues is derviced from the complex relationship between the type of oil, the refinieries, and the oil supplier. However, once again I think others have stated the full complexity of issues at play much better than myself so I will defer to them.
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Double, double, oil and trouble
May 29th 2008
AFTER oil hit its recent record of $135 a barrel, consumers and politicians started to lash out in every direction. Fishermen in France have been blockading ports and pouring oil on the roads in protest. British lorry drivers have paraded coffins through London as a token of the imminent demise of the haulage industry. In response, Gordon Brown, Britain's prime minister, is badgering oil bosses to increase production from the North Sea, while Nicolas Sarkozy, the president of France, wants the European Union to suspend taxes on fuel.
In America, too, politicians are haranguing oil bosses and calling for tax cuts. Congress has approved a bill to prevent the government from adding to America's strategic stocks of oil, and is contemplating another to enable American prosecutors to sue the governments of the Organisation of the Petroleum Exporting Countries (OPEC) for market manipulation.
But the most popular scapegoats are “speculators” of the more traditional sort. OPEC itself routinely blames them for high prices. The government of India is so sure that speculation makes commodities dearer that it has banned the trading of futures contracts for some of them (although not oil). Germany's Social Democratic Party proposes an international ban on borrowing to buy oil futures, on the same grounds. Joe Lieberman, chairman of the Senate's Homeland Security Committee, is also mulling regulation of some sort, having concluded that “speculators are responsible for a big part of the commodity price increases”. The assumption underlying such ideas is that a bubble is forming, and that if it were popped, the price of oil would be much lower.
Others assume the reverse: that the price is bound to keep rising indefinitely, since supplies of oil are running short. The majority of the world's crude, according to believers in “peak oil”, has been discovered and is already being exploited. At any rate, the size of new fields is diminishing. So production will soon reach a pinnacle, if it has not done so already, and then quickly decline, no matter what governments do.
As different as these theories are, they share a conviction that something has gone badly wrong with the market for oil. High prices are seen as proof of some sort of breakdown. Yet the evidence suggests that, to the contrary, the rising price is beginning to curb demand and increase supply, just as the textbooks say it should.
Those who see speculators as the culprits point to the emergence of oil and other commodities as a popular asset class, alongside stocks, bonds and property. Ever more investors are piling into the oil markets, the argument runs, pushing up the price as they do so. The number of transactions involving oil futures on the New York Mercantile Exchange (NYMEX), the biggest market for oil, has almost tripled since 2004. That neatly mirrors a tripling of the price of oil over the same period.
But Jeffrey Harris, the chief economist of the Commodity Futures Trading Commission (CFTC), which regulates NYMEX and other American commodities exchanges, does not see any evidence that the growth of speculation in oil has caused the price to rise. Rising prices, after all, might have been stimulating the growing investment, rather than the other way around. There is no clear correlation between increased speculation and higher prices in commodities markets in general. Despite a continuing flow of investment in nickel, for example, its price has fallen by half over the past year.
By the same token, the prices of several commodities that are not traded on any exchange, and are therefore much harder for speculators to invest in, have risen even faster than that of oil. Deutsche Bank calculates that cadmium, a rare metal, has appreciated twice as much as oil since 2001, for example, and the price of rice has risen fractionally more.
Investment can flood into the oil market without driving up prices because speculators are not buying any actual crude. Instead, they buy contracts for future delivery. When those contracts mature, they either settle them with a cash payment or sell them on to genuine consumers. Either way, no oil is hoarded or somehow kept off the market. The contracts are really a bet about which way the price will go and the number of bets does not affect the amount of oil available. As Mr Harris puts it, there is no limit to the number of “paper barrels” that can be bought and sold.
That makes it harder for a bubble to develop in oil than in the shares of internet firms, say, or in housing, where the supply of the asset is finite. Ultimately, says David Kirsch of PFC Energy, a consultancy, there is only one type of customer for crude: refineries. If speculators on the futures markets get carried away, pushing prices so high that refineries run at a loss, they will simply shut down, causing the price to fall again. Moreover, speculators do not always assume that prices will rise. As recently as last year, the speculative bears on NYMEX outweighed the bulls.
There is, admittedly, a growing category of inherently bullish investment funds that seek to track commodity-price indices, in which oil is usually the biggest component. Politicians have begun to denounce these “index funds”, since they make money for their investors only if prices rise. According to Mr Lieberman, they have grown in value from $13 billion to $260 billion over the past five years. This surge of investors betting on rising prices, many observers contend, has become a self-fulfilling prophecy, helping to push prices ever higher and thus attract yet more investment.
But Bob Greer, of PIMCO, an asset-management firm, argues that even index funds make unlikely suspects. For one thing, they too invest in futures, rather than in physical supplies of oil. So every month, they must trade contracts that are about to fall due for ones that will not mature for several months. That makes them big sellers of oil for prompt delivery.
What is more, their growth is not as impressive as it first appears. Paul Horsnell of Barclays Capital, an investment bank, puts the total value of index funds and other similar investments at $225 billion. That is less than half the market capitalisation of Exxon Mobil, he points out, and a tiny fraction of the $50 trillion-odd of transactions in the oil markets each year. Although index funds have grown quickly, that growth stems in large part from the rise in value of the futures they hold, rather than from fresh investment flows. He estimates that index funds swelled by $13 billion in the first quarter of this year, for example, of which all but $2 billion derives from the rise in commodity prices.
Back to basics
Mr Harris of the CFTC, for one, believes that the oil price is still a function of supply and demand. For the past few years, the world's production capacity has grown only sluggishly. Meanwhile, demand, especially from the developing world, has been growing faster. So there is hardly any slack in the system. Only Saudi Arabia and the United Arab Emirates are thought to be able to increase their output from today's levels, and even then, there are doubts, since Saudi Arabia, in particular, is secretive about the state of its oil industry.
That leaves the oil market at the mercy of even small disruptions to supply. Prices tend to jump each time militants sabotage an oil pipeline in Nigeria, bad weather threatens production in the Gulf of Mexico, or political clouds gather over the Persian Gulf.
The problem is exacerbated by a growing mismatch between the type of oil being produced and the refineries that must process it. The most common benchmark prices, including the one used in this article, refer to “light” crude, the least viscous sort, which produces the most petrol and diesel when refined. “Heavy” oil, by contrast, yields more fuel oil, which is used mainly for heating.
At the moment, diesel is in short supply and there is a glut of fuel oil. That makes processing heavy oil unprofitable for some refineries, since the gains from diesel are outweighed by losses on fuel oil. As refineries turn instead to lighter grades, it pushes their prices yet higher. The discount on heavier crudes has risen to record levels. But even then, points out Ed Morse, of Lehman Brothers, another investment bank, Iran is having trouble selling the stuff. It is storing huge quantities of unsold oil on tankers moored off its coast.
Presumably, Iran and other heavy-oil producers will eventually be obliged to drop prices far enough to make processing the stuff worth refiners' while. In the longer run, more refineries will invest in the equipment needed to crack more diesel out of heavy oil. Both steps will, in effect, increase the world's oil supply, and so help to ease prices.
But improving an existing refinery or building a new one is a slow and capital-intensive business. Firms tend to be very conservative in their investments, since refineries have decades-long life-spans, during which prices and profits can fluctuate wildly. It can also be difficult to find a site and obtain the right permits—one of the reasons why no new refineries have been built in America for over 30 years. Worse, new kit is becoming ever more expensive. Cambridge Energy Research Associates (CERA), a consultancy, calculates that capital costs for refineries and petrochemical plants have risen by 76% since 2000.
Much the same applies to the development of new oilfields. CERA reckons that the cost of developing them has risen even faster—by 110%. At the same time, oilmen remain scarred by the rapid expansion of output in the late 1970s, in response to previous spikes in prices, that led to a glut and so to a prolonged slump. Exxon Mobil claims that it still assesses the profitability of potential investments using the same assumptions about the long-term oil price as it did at the beginning of the decade, for fear that prices might tumble again. Environmental concerns are also an obstacle: America, for one, has banned oil production off most of its coastline.
Increasing nationalism on the part of oil-rich countries is adding to the difficulties. Geologists are convinced that there is still a lot of oil to be discovered in the Middle East and the former Soviet Union, but governments in both regions are reluctant to give outsiders access. Elsewhere, the most promising areas for exploration are also the most technically challenging: in deep water, or in the Arctic, or both. Although there have been big recent discoveries in such places, they will take longer to develop, and costs will be higher. The most expensive projects of all involve the extraction of oil from bitumen, shale and even coal, through elaborate processing. The potential for these is more or less unlimited, although analysts put the costs as high as $70 a barrel—more than the oil price this time last year.
Nonetheless, PFC Energy has examined projects that are already under way, and concluded that global oil production will grow by over 3m barrels a day (b/d) over the course of this year and next. In particular, it expects production outside OPEC to grow by about 500,000 b/d both years—a marked increase from the near stagnation of recent years.
Meanwhile, the high price is clearly beginning to crimp demand. The growth in global consumption last year was barely a quarter what it was in 2004 (see chart); this year, it is likely be even lower. In rich countries (or at least among the members of the Organisation for Economic Co-operation and Development (OECD), a rough proxy), the effect is even more pronounced. Consumption has been falling for the past two and a half years.
Poorer countries' demand for oil is still rising, albeit at a slowing pace. That is partly because their economies are growing faster, and partly because their consumers are shielded from the rising price through subsidies. But the increasing expense of such measures is forcing governments to water them down or scrap them altogether (see article). That, in turn, should further sap consumption.
Oil pique
China's growing thirst for oil is often put forward as one of the main factors behind today's higher oil prices. Demand for diesel there, for example, rose by over 9% in the year to April. But Mr Morse argues that such growth might not last. The government has ordered oil firms to increase their stocks of fuel by 50% to be sure there are no embarrassing shortages during the Olympics. It is also planning to run some power plants near Beijing on diesel rather than coal, in an attempt to reduce pollution during the games. These measures are helping to boost China's demand for diesel, but the effect will be transitory.
In the short run, neither demand for nor supply of oil is very elastic. It takes time for people to replace their old guzzlers with more fuel-efficient cars, or to switch to jobs with shorter commutes, or to move closer to public transport. By the same token, it can take ten years or more to develop an oilfield after its discovery—and that does not include the time firms need to bolster their exploration units.
Gary Becker, an economist at the University of Chicago, has calculated that in the past, over periods of less than five years, oil consumption in the OECD dropped by only 2-9% when the price doubled. Likewise, oil production in countries outside OPEC grew by only 4% every time the price doubled. But over longer periods, consumption dropped by 60% and supply rose by 35%. The precise numbers may be slightly different this time round, but the pattern will be the same.
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| Kinezi |
I have ssaid it in details before.. that this whole oil price today is just bull.. there is no shortage, no demand, no 'inadequate' supply.. just some sad ass harvard graduate anakyst sitting in lehman, merryl or goldman says so and whole FIIs, speculators, Lehmans, merrils, goldmans start buying oil future commodities paper...
http://www.tranceaddict.com/forums/...5&forumid=66&s=
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http://www.tranceaddict.com/forums/...6&forumid=66&s=
The price discovery mechanism of oil is completly screwed up..
To make this world a better place there are four things world leaders need to do... and developed countries like USA, UK, France, Germany should LEAD!! we need leadership from G8, developed nations, France, Germany.. which is lacking at present.. they are all just keeping shut up and let all this happen.. who the gave them 'Veto' power in UN... strip them of this Veto power and .. they have done a terrible thing by just sitting duck and let and see all this happen.
1. Take Global Warming and Climate change issue seriously.. like when CFC carbon and ozone depletion measures were taken.
2. Stop this bull war on terrorism.. let afghgans, iraqies fight among themselves.. let there be civil war in this countries and let themselves solve their own prob.. even if it takes 10 years.. get the out of these two nations.. dont give a about them either. But yes.. make US pay them for the buildings, bridges nd infrastructure they destryed there.
3. Cease trading of oil in exchanges.. and setup auction houses.
4. Restore power to UN, remove this ban ki moon, he is ing nobody, kofi anna was a disastor too.. put someone from EU on UN head position.. Tony Blair..? Al Gore?
But I am not pessimistic.. everything will fall in place once bush is out.. i hope he goes straight to prison from white house.. when Obama comes in power he should encourage citizens of every US soilder killed in Iraq to file personal lawsuits against Bush, Donald, Collin Powwel.. |
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| otec |
Personally I dont have give a damn about Global Warming. It's just another hype marketed by the West.
Tony Blair? WTF!? He has started the war on terror together with Bush and Co.
Why do you want to put a corrupt politic in the UN again? |
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| Shakka |
Here's a long, albeit interesting copy of a speech given by T. Boone Pickens recently. If you're not familiar with him, you should be. He is quite an expert on the oil patch.
http://en.wikipedia.org/wiki/T_boone_pickens
| quote: | Testimony of Mr. T. Boone Pickens before the Senate Energy and Natural Resources Committee
Hearing to examine the challenges and regional solutions to developing transmission for renewable electricity resources.
Tuesday, June 17, 2008
10:00 AM
366 Senate Dirksen Building
Chairman Bingaman, Senator Domenici, and members of the Committee, thank you for holding this hearing today. Our country is in a crisis caused by imported oil, and any serious solution to help us escape from this trap will require action by the Congress to promote private investment in our electric transmission system.
We must develop and promote every available domestic energy resource to solve this crisis, and the lynchpin to addressing our escalating dependence on foreign oil is a willingness and determination to invest in and streamline our electric transmission system. Private enterprise will invest money, and will build new transmission infrastructure cheaply and efficiently, if Congress adopts clear, predictable policies.
And Senators, ladies and gentlemen, simply stated, our main energy problem begins and ends with imported oil. Seventy percent of the oil we use is imported. With current oil prices, we are getting close to exporting $700 billion a year overseas because of our addiction to imported oil. That’s nearly four times the cost of the Iraqi war. We purchase it from a few friends and a lot of enemies. We are paying for the war against ourselves and we have got to stop it, some way, somehow.
And the price of oil will go up further. Over the next 10 years, you’re looking at exporting $10 trillion out of this country. It will be the greatest transfer of wealth from one country to other parts of the world in the history of mankind. It is a clear and growing threat to our national security, and our national economy. It has to be stopped. We are on the verge of losing our Super Power status. It’s time to quit the blame game, and look for solutions and leadership to solve the problem.
For decades, every presidential candidate has talked about making us energy independent. That hasn’t happened, of course, and the hole we’ve dug for ourselves just keeps getting deeper. In 1945 we were exporting oil to our allies. In the 1960s we were importing about 10 percent of our oil. By the 1980s it was 40 percent. In 1991 during the Gulf War, it was 54 percent. Now it’s about 70 percent.
The world produces 85 million barrels of oil a day, or more than 30 billion barrels of oil a year. We haven’t replaced that amount of consumption on an annualized basis since 1985. World oil production, I believe, has peaked, and the world’s current oil fields are declining at the rate of 8 percent a year. The simple truth is we’re never going above 85 million barrels of oil production.
The U.S. consumes 25 percent of the world’s oil, with only 5 percent of the world’s population. And what’s going to happen when you’re dealing with a supply capped at 85 million barrels and increasing demand as the Chinese, Indians, and rest of the underdeveloped countries around the world continue to use more and more oil?
I have a plan to fix this problem. I’ve stress tested it with government and business leaders across the U.S. in recent months. No one has found any major flaws in it. That said, if there’s a better plan out there, it’s time to hear it. The time for action is now.
Worldwide 70 percent of the 85 million barrels a day is used for transportation. To replace foreign oil, we need a major energy source that works for transportation. The domestic energy resources we have are oil, coal, natural gas, wind, solar, bio-fuels, hydroelectric and nuclear.
Natural gas and bio-fuels are the only fuels on the list that work to replace foreign oil for transportation. It’s my belief that bio-fuels, while helpful, will not be the total solution.
So we have domestic natural gas as the replacement for foreign oil. Natural gas is clean, abundant, affordable and, again, domestic.
Natural gas is the second largest energy resource in the country. When you look at the piechart of power generation in the United States, you have 50 percent coal, 22 percent natural gas, 20 percent nuclear and 8 percent hydro and renewables.
If we take the natural gas we’re using for electrical generation and move it to transportation, we can replace 38 percent of our foreign oil imports. And that, sports fans, is a real number.
Using natural gas for transportation is not a new idea. While there are only 150,000 vehicles running on natural gas in the U.S., there are nearly 8 million automobiles worldwide and that number is growing rapidly. We’re getting beat by the French in nuclear power, and by the world in natural gas vehicles. We should be leaders, not laggards.
I know that we can do this because we’ve done it before. President Eisenhower led us to build an extraordinary interstate highway system. President Kennedy took us to the moon. And President Reagan led us to win the cold war.
If you could lower your foreign oil imports by 38 percent, you are reducing the amount of money you’re exporting by 38 percent. Reduce $700 billion in foreign oil purchases by 38 percent and you’ll see an annual savings of nearly $300 billion every year. $300 billion more would be staying inside our country instead of going to other countries overseas.
Nothing can reduce your imports better than this and you work with energy supplies right here.
But if we use all of that natural gas for transportation, how do we displace it from the nation’s electrical grid?
The Sweetwater, Texas, wind complex is the model. If you take the total Sweetwater complex it will soon be producing 2,000 megawatts. The Shell Oil Company and TXU are getting ready to do another project just north of Sweetwater, and that’s 3,000 megawatts. My company, Mesa Power, just put under contract with GE the largest single turbine order that has ever been given. The first phase of the Mesa Pampa Wind Project will be capable of generating 1,000 megawatts of electricity, enough for 300,000 average U.S. homes. When we complete the entire project, it will have the capacity to generate some 4000 megawatts and will have cost close to $10 billion.
We have the best wind in the world. It’s time we got serious about using it.
The US wind corridor runs from Sweetwater to Pampa and Goodland, to Kansas, and Hastings, Nebraska and right up the line to Canada. The Department of Energy in April of this year showed that we could develop 20 percent of our electricity generation from wind using wind resources in the heartland of the United States.
Now, if you take wind power and use it to replace natural gas for electricity generation, you can release the natural gas to transportation. One million cubic feet (MCF) of natural gas equals 8 gallons of gasoline. At $4 dollars a gallon for gasoline, that means an MCF of natural gas is worth $32 dollars. And natural gas is selling today around $10 dollars an MCF.
We don’t buy all of our oil from our enemies. We do have some friends – Canada and a few others. But most of the money that the world pays for oil goes into the hands of countries that are not our reliable allies. And some of that money is used right back against us in the war on terror. And so, we are funding the people who are trying to wreak havoc on this country.
The good news is we can use alternatives to address this problem. I am 100 percent for all alternatives. It is clear that renewable energy sources are an essential national security strategy. But in order for renewables to replace a meaningful amount of our imported oil, we need a national electricity transmission system to carry this electricity, be it wind, solar, biomass or other alternatives.
I have always believed that an idea has to be simple to be worth investing in. That is why I am building the world’s largest wind farm. There is good wind in the area where I live in Roberts County in the Texas Panhandle, and I have the ability to transmit the electricity to markets in Texas that will pay for it. Good wind and transmission are the keys to my project.
I think that most of the witnesses here today have said that those two elements are key to every wind project. That is because, as can be seen from the Department of Energy wind resource map above, the large, flat, open areas with adequate wind are usually located a long way from where electricity is needed. Since we can’t do much about where nature has put the wind, we have to do something about transmission to move the electricity to market.
Unfortunately, the large, flat, open areas with adequate wind do not already have transmission service because there has been no reason to provide transmission service to those areas, so we are looking at a need for green field transmission projects. The Department of Energy map below has identified the scale of transmission projects that will be required to move electricity generated from our wind resource heartland to the load centers that need it.
Greenfield transmission projects all face the same obstacles--siting, use of federal lands, permitting, equitable allocation and recovery of costs, equitable allocation of capacity, and availability of financing. Senator Reid’s bill, S. 2076, which would provide for the identification of National Renewable Energy Zones, will definitely help move the process forward, but I would like to explain to this Committee what I see as the issues through the eyes of a wind project developer who has had to deal with each of these issues.
There is a sequencing problem that is circular—transmission won’t be built unless there is generation capacity to be carried, and generation won’t be built unless there is transmission. Furthermore, long distance transmission is only economic if it is built to high capacity, which means that there must be a large amount of generation capacity in one place.
I happened to be lucky with my project, because I was already planning a water project that required a pipeline running in the same direction that I needed transmission for my wind project. The water project pipeline right of way eliminated the siting and permitting issues, but I still have to face the financing, and cost recovery issues.
As you may know, Texas has taken a leadership role in encouraging the development of wind generation. The Texas Legislature has adopted a renewable portfolio standard, which has encouraged development of wind projects in Texas, and has directed the Texas Public Utility Commission to identify competitive renewable energy zones (CREZ)—areas that are well suited to development of renewable energy production, and to adopt policies that will make transmission available to those zones.
However, the Texas CREZ process began in 2005, and is expected to be completed in 2013. I am eighty years old, and I don’t have time to wait for the process to be completed, and neither does this country. I am building my own transmission line, which will ultimately travel 250 miles in Texas from the top of the Panhandle to near the Dallas/Fort Worth area, and I will have to pay for this transmission line myself. Not very many wind developers are in a position to do this.
I expect to sell my power in the Texas ERCOT market where prices are set by competition among power generators. As a result, I will not be able to simply increase the price of my power to cover transmission; instead, my profits will be reduced by my transmission line costs. This is a penalty that I am willing to pay in order to get my electricity to market first, but it is not a burden that most developers can bear. It requires scale and financial capacity. That is how I came to build the world’s largest wind farm. It is the only way to pay for the transmission capacity as a private line, and it is only feasible within Texas. If you want to do it on a national scale, where the transmission line distances will be much longer, and utility regulations are different, Congress must act.
As I said earlier, I believe that the United States has the opportunity to build renewable electricity capacity to serve a substantial part of our needs for energy. By doing so, we will increase our energy security, improve our environment, revitalize the heartland of the United States, reduce the demand for natural gas to be used as fuel for generation, reduce the production of greenhouse gases, and reduce the demand for water to be used in thermal generation.
In order to secure these benefits, the issues that I identified above must be addressed. Let me take a moment to explain each of them.
Siting Authority. As a land owner myself, I understand concerns that landowners have about having their property taken for public use. Quite properly, our Constitution provides protection for landowners from arbitrary takings. However, for more than 150 years, we have recognized that private companies transporting the common necessities of life, food, water, fuel and electricity, to cities and towns are serving the public interest because life in the cities would not be possible without those necessities. As a result, private companies, such as Mesa Power, have been permitted to use the power of eminent domain, subject to oversight by public authorities and the courts, to obtain rights of way for transportation corridors.
This system worked well for many years, but the large distances between the best sites for renewable power and the places where that power is needed have presented new challenges. The state public authorities that oversee the use of eminent domain by private companies are required to consider the benefits of the project to the citizens of their states. They often have indicated that they do not have the authority to consider the benefits to citizens of the United States who are not residents of their states in deciding whether a particular transmission line should be permitted to be located through the power of eminent domain.
No project sponsor likes to use eminent domain powers. It is slow, cumbersome, expensive and unpredictable. Negotiated easements that result in a landowner willingly permitting the use of the land are very desirable. However, a transmission line with a gap in it, no matter how small, is useless. Any single landowner along a transmission route can prevent the entire project from being constructed, no matter how important the transmission project, unless the transmission provider has the power of eminent domain.
Where state utility commissions are limited by state law to considering benefits to citizens of their state, eminent domain power may not be available to transmission developers wishing to cross the state without providing transmission service to local generators or local electricity users. This problem was recognized in the Energy Policy Act of 2005 (EPAct 2005), but the provisions of that act, which added Section 216 of the Federal Power Act, need to be extended. Section 216 currently requires that the Secretary of the Department of Energy conduct a study and issue a report designating corridors as a National Interest Electric Transmission Corridors every three years. After the designation, a transmission service provider can seek siting approval from a state commission, and if the approval is not received within one year, the provider can then seek siting approval from the Federal Energy Regulatory Commission (FERC). This introduces a potential delay of over four years before the FERC transmission approval process can even begin. In addition, there is not agreement that the language of Section 216 authorizes a finding by the Secretary of Energy that transmission is “constrained” if there is a proposed project, but no available transmission at all. Congress needs to address these issues by amending Section 216 to direct the Secretary to make designations of National Interest Electric Transmission Corridors, outside the three year cycle provided by Section 216, upon request from a transmission service provider who can show that a renewable project developer has requested service and a load serving entity is willing to contract to purchase power from the renewable project developer. Congress also needs to provide the FERC exclusive jurisdiction to site new transmission for a renewable energy project in the specific case where a developer has contracted to build, and a load has contracted to buy the energy from, a new renewable energy resource.
Federal Lands. Most long transmission lines in the west will cross federal lands. Again, while EPAct 2005 recognized the issue, and provided a process to address the issue, the process for approval should be streamlined. Either designation of a national interest electric transmission corridor by the Secretary of Energy or specific siting approval by the FERC should be sufficient to grant approval by the United States for use of any federal lands crossed by the proposed transmission line. (EPAct 2005 excluded lands included within the National Park System, the National Wildlife Refuge System, the National Wild and Scenic Rivers System, the National Trails System, the National Wilderness Preservation System, or a National Monument from its scope, and that exclusion should be continued.). Any affected federal agency could appear in the FERC proceeding to present any concerns regarding the use of federal lands included in the proposed route for the transmission line.
Federal Permitting. Every transmission line involves multiple approvals from the United States and its agencies and departments. While it is possible with enough time and patience to gather the necessary permits, it introduces unnecessary delays into the process. Again, EPAct 2005 addressed the issue, but the process can be further streamlined. While EPAct 2005 did authorize the DOE to take the lead in coordinating federal permitting, and required other agencies and departments to enter into a memorandum of understanding with DOE regarding permitting projects, I believe that DOE should be authorized to issue the required permits directly after the transmission service provider meets the requirements for those permits in the judgment of DOE.
Equitable Cost Allocation and Recovery. As I said earlier, a transmission line with a gap in it is worthless. Put another way, there is no useful way to build a transmission line in phases. It either is or it isn’t. As a result, the costs are all incurred at once before it is available for use. Generation, on the other hand, can be built over time, and may have to be built as wind turbines become available. That means that the first wind turbines on a transmission line may not be able to bear the entire cost of the transmission line until more of the transmission line capacity is in use.
In Texas, we have concluded that transmission service to renewable energy production areas is socially desirable, and our legislature has directed our public utility commission to develop a plan, the CREZ plan that I mentioned earlier, to pay for extending transmission lines to serve areas where renewable resources are available to generate electricity. The cost of those lines will be paid by the ratepayers throughout ERCOT, because all of them benefit. In Texas, we have a very large market for electricity, the ERCOT market, so that several billion dollars of costs can be spread across the entire market without creating a problem for electric rates. In much of the rest of the country that is not true. It is a particular problem where many interconnected systems would benefit from new long distance transmission to serve renewable generation projects, but one utility or group of rate payers is expected to bear the entire cost.
Once again, Congress addressed the issue in EPAct 2005, but the FERC needs to be directed to spread the costs more widely, across multiple states if necessary, to reflect the benefits that are gained from the transmission project in terms of congestion relief, and other benefits. I propose that the FERC should be directed to allocate the costs of a new transmission line constructed under a special renewable resource NIETC designation that the FERC has sited to all load that benefits from the access to the energy transmitted over the line.
Equitable Allocation of Capacity. If I put several billion dollars at risk, which I expect to do with my project, it does not strike me as fair that someone else can show up after everything is built, and all of the risks have been taken, and ask for and receive the right to use the transmission line that I paid for and force me to curtail transmission of my own electricity to permit them to use the transmission line. If you are going to encourage people to take entrepreneurial risk, you cannot expect them to do so if they can receive the same benefits by sitting back and waiting for someone else to take all the risk. Open access is fine for transmission lines that have already been in service for many years and their costs recovered, but there must be a process that encourages renewable generation developers to put up risk capital in return for preferred access rights to transmission capacity.
Financial Incentives. I think that I may be unique both in being willing to take the risks that I am taking in developing my wind project, and in having the capital to do so. Most of the other wind developers, even the other developers who are willing to develop on utility scale, are not willing to take the sorts of risks that I am facing. I would not be willing to do it if I was not a believer that Congress will do the right thing in the end. Wind and other renewable energy projects need production tax credits. For projects like the one that I am building, we need predictable policies regarding the credits for the long period that it takes to get everything put together. My project, even with the favorable regulatory climate for wind in Texas, will take seven or eight years to complete. If we decide to build more generation capacity to supply other parts of the country, it may even take longer from start to finish. We need to know, when we start, what economic incentives will be in place when we get to the finish line. Otherwise, developers have to use very conservative assumptions about project economics, and many projects just won’t get built. We also need targeted incentives for transmission lines, such as the loan guarantee program for rural renewable transmission lines that was proposed by the Senate in its version of the Farm Bill. Long distance transmission projects for renewable energy should qualify for an investment tax credit as well. When climate change legislation is considered again, if a cap and trade program is the mechanism, renewable energy projects should receive an allocation of credits based upon production. Those credits can be sold to help underwrite the cost of transmission lines to serve remote projects.
If we do these things, our country will benefit. We will see reduced demand for imported oil, cleaner air, a reduction in the price of natural gas, savings in demand for water to cool thermal generation, revitalization of the rural heartland in the central United States, and natural gas used for higher, better purposes than electricity generation.
We can fix these problems over time if we move a meaningful amount of our power needs to alternatives. There are no enemies, no competitors, nothing in domestic alternatives.
I have a mission ladies and gentlemen. That mission is to try to explain what I’ve just explained here. And no matter how many times I explain it nobody argues with me about it. Which is interesting because I wish somebody would jump up and say you’re wrong and let me show you where you’re wrong. And nobody does that. Everybody says, well, that sounds like a good idea.
So, I don’t know whether it’s a good idea or whether they don’t understand.
Again, thank you Mr. Chairman for holding this hearing today. If we don’t solve the energy problems we are facing, the hole we are in will continue to grow and swallow more and more of our scarce resources and will overwhelm us as a nation.
I am happy to answer any questions you may have.
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| pkcRAISTLIN |
| nice to have you back occrider, thanks for the post i learned a lot :) |
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| occrider |
| quote: | Originally posted by pkcRAISTLIN
nice to have you back occrider, thanks for the post i learned a lot :) |
Thnx. I still drop by to lurk every couple of moons :). |
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| Kinezi |
| quote: | Originally posted by pkcRAISTLIN
nice to have you back occrider, thanks for the post i learned a lot :) |
He just wrote two lines.. what you learned from it?
| quote: | | If you're not familiar with him, you should be. He is quite an expert on the oil patch. |
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| pkcRAISTLIN |
| quote: | Originally posted by Kinezi
He just wrote two lines.. what you learned from it?
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yeah, and funnily enough it was more illuminating than the combined total of your contribution to the PDD. |
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| Kinezi |
| quote: | Originally posted by pkcRAISTLIN
yeah, and funnily enough it was more illuminating than the combined total of your contribution to the PDD. |
I think you are just kissing his ass.. but anyways you need to learn a lot more.:) |
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| pkcRAISTLIN |
| quote: | Originally posted by Kinezi
I think you are just kissing his ass.. |
there's nothing wrong with showing a bit of appreciation for those here that broaden my horizons. if you'd been around more than 5 seconds you'd appreciate that occ's posts are worth paying attention to, especially if we're talking about economics.
| quote: | Originally posted by Kinezi
but anyways you need to learn a lot more.:) |
who doesn't? |
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