Energy thread

[southsider2k5]

Here is a very good article with some interesting facts

 

http://money.cnn.com/2008/07/24/news/econo...sion=2008072418

 

The oil speculator sideshow

As the CFTC trumpets its charges against a Dutch hedge fund, the fundamental supply-and-demand factors that govern the price of oil haven't changed.

By Brian O'Keefe, senior editor

Last Updated: July 25, 2008: 10:40 AM EDT

 

okeefe_OIL_CFTC_graphic.jpg

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NEW YORK (Fortune) -- Watch out, speculators: The Commodity Futures Trading Commission is getting tough on crime. But since, as the CFTC has said, speculation hasn't pushed up prices, the crackdown will benefit its image more than the economy.

 

Under increasing pressure from Congress in recent months to crack down on speculative activity in the oil futures markets, today the CFTC filed civil charges against Optiver, a Dutch hedge fund, plus two subsidiaries and three employees, alleging manipulation of crude oil, heating oil and gasoline futures prices on the NYMEX. According to the charges, the defendants attempted to manipulate short-term prices on 19 different occasions in March 2007, were successful at least five times, and netted an illicit profit of $1 million.

 

"Today's action lets the marketplace know that the division of enforcement has a zero-tolerance policy for illegal gamesmanship when it comes to our nation's vital futures markets," said Stephen Jay Obie, the CFTC's acting head of enforcement, at the press conference.

 

Asked if he was willing to say that the charges are not politically timed, Obie heartily obliged. "I categorically deny it," he responded.

 

Optiver issued a statement Thursday that said, "we believe that we have run our business by doing not only what is best for the bottom line, but what is right," but said it would not comment further until it had an opportunity to review the complaint.

 

But given the fact that the Senate is currently considering a bill that would compel the CFTC to limit the amount of trades by certain market players - namely the shady speculators who, lawmakers believe, must be to blame for the skyrocketing price of oil - it's hard not to see today's charges as a response to Congressional pressure.

 

Unfortunately, what will almost certainly continue to get lost in the coverage of the Optiver case - and, of course, in the ongoing bickering between Democrats and Republican about the provisions to attach to the speculation bill - is that Congress still has its facts wrong. That was reinforced by the CFTC's other big move this week: the release of a refreshingly reasonable and insightful report on the causes of the increase in the price of oil.

 

This meaty 40-page document has gotten short shrift this week. But it ought to be required reading for majority leader Harry Reid and his fellow senators before they press ahead with legislation that might do more harm than good.

 

The big conclusion of the Interim Report on Crude Oil, the product of an interagency task force led by the CFTC, 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."

 

And it makes a really strong case. Global GDP has grown at close to 5% annually since 2004, the report points out, driving rising consumption of oil. And production has not been able to keep pace. In June, world surplus production capacity, the task force says, was a mere 1.35 million barrels per day, or about a third of what it average from 1996 to 2003. The market is getting tighter and tighter.

 

Just as compelling are the report's conclusions about what's not happening: Analysis of the futures markets showed no evidence of speculators driving up prices.

 

Plenty of smart observers (including my colleague Jon Birger here and here) have done a good job explaining why blaming speculators for $130/barrel oil just doesn't make sense. In their rush to embrace a quick-fix solution to the problem and to appease constituents outraged about $4 per gallon gas, however, lawmakers have seized on testimony from witnesses like hedge fund manager Michael Masters. Masters made a big splash by blaming a flood of money from institutional investors, who he termed "index speculators," for driving up prices.

 

That doesn't appear to be the case. When the task force examined non-public trading data for the so-called swap dealers (traders such as investment banks) who handle transactions for those institutional investors as well as other market participants, they found no evidence that their activity was providing upward pressure on prices. On the contrary, the analysis showed that the dealers "have held roughly balanced long and short positions in the crude oil markets over the last year and actually held a net short position over the first five months of 2008."

 

In other words, from the beginning of the year through the end of May, during which time the price West Texas Intermediate crude rose from $96 to $127, the positions of swap dealers would have benefited more from prices falling than rising. So much for blaming "index speculators" for the price rising.

 

What about regular "speculators" like hedge fund managers? Despite isolated examples such as the alleged behavior by Optiver, the CFTC's statistical analysis again found no evidence that speculative traders had significantly affected prices one way or another. In fact, their trading activity appears to have helped. "[T]he positions of hedge funds appear to have moved inversely with the preceding price changes," the report concludes, "suggesting instead that their positions might have provided a buffer against volatility-inducing shocks."

 

That's right, in general hedge funds have probably made things better, not worse. Driving out speculators and hedgers is not the way to solve the oil problem. And limiting their activity will only make the market less efficient.

 

One hedge fund that may have broken the rules over a year ago doesn't change that.

[lostfan]

Why is it discussed as a fundamental fact by the talking heads on TV, and almost never disputed? I mean, honestly, I didn't know it was all bulls*** until SS2K5 explained it to me in dummy terms.

[NorthSideSox72]

Why is it discussed as a fundamental fact by the talking heads on TV, and almost never disputed? I mean, honestly, I didn't know it was all bulls*** until SS2K5 explained it to me in dummy terms.

The real story was out there, you just can't listen to the talking heads. If more people turned away from the boob tube for their news, and went to websites and papers and periodicals that actually provide NEWS (as opposed to just flashy commentary), then we as consumers could change the type of news we get.

 

[lostfan]

The real story was out there, you just can't listen to the talking heads. If more people turned away from the boob tube for their news, and went to websites and papers and periodicals that actually provide NEWS (as opposed to just flashy commentary), then we as consumers could change the type of news we get.

I mean, when talking heads and "experts" talk, it's rare that they are unanimously wrong about something.

 

Well not counting the time when the ESPN panel unanimously picked the clearly inferior Saints over the Bears in the NFC Championship for some reason only to watch the Saints get their asses kicked.

[NorthSideSox72]

I mean, when talking heads and "experts" talk, it's rare that they are unanimously wrong about something.

 

Well not counting the time when the ESPN panel unanimously picked the clearly inferior Saints over the Bears in the NFC Championship for some reason only to watch the Saints get their asses kicked.

The experts were even saying this on CNN and other outlets too, though. I even linked to the article about the Speculators BAD Act, from CNN, which had one expert quoted - and he made it clear, exactly what SS and I have been saying. It was only a graf or two though, buried in the article.

 

Most people don't bother to read into it. They just take the headline and teaser lines, and infer their own truths from it.

 

[lostfan]

The experts were even saying this on CNN and other outlets too, though. I even linked to the article about the Speculators BAD Act, from CNN, which had one expert quoted - and he made it clear, exactly what SS and I have been saying. It was only a graf or two though, buried in the article.

 

Most people don't bother to read into it. They just take the headline and teaser lines, and infer their own truths from it.

It's difficult to want to read into it when you read the same thing 50 times and then watch a 10 minute discussion on it every night. Only recently can I recall people saying that speculators aren't having a significant impact on prices (it should be assumed unanimously that there is increased demand from Asia, amusingly enough when you read their media they hate that we point this out, as if we were trying to stop it or something).

[NorthSideSox72]

It's difficult to want to read into it when you read the same thing 50 times and then watch a 10 minute discussion on it every night. Only recently can I recall people saying that speculators aren't having a significant impact on prices (it should be assumed unanimously that there is increased demand from Asia, amusingly enough when you read their media they hate that we point this out, as if we were trying to stop it or something).

People were saying it all along - just not the majority of newscasters et al. Panic and mayhem sell, and so does an apparently easy solution. TRADERS BAD is an easy solution - someone to blame other than themselves. So, the mainline news folks fed people what they crave - simple, easy, loud, and shallow.

 

[lostfan]

People were saying it all along - just not the majority of newscasters et al. Panic and mayhem sell, and so does an apparently easy solution. TRADERS BAD is an easy solution - someone to blame other than themselves. So, the mainline news folks fed people what they crave - simple, easy, loud, and shallow.

I could easily make an argument that this is why we ended up going to Iraq.

[Balta1701]

Have we been sticking the speculation bill stuff here?

The Senate failed to advance legislation targeting oil speculators after Republicans and Democrats remained at an impasse on adding an expansion of offshore drilling to the bill.

 

The chamber voted 50-43 — well short of the 60 votes needed to limit debate on the measure that would have addressed manipulation in the oil futures markets, primarily by adding more regulators at the Commodity Futures Trading Commission. Democrats had said the bill was the logical first step towards solving high gas prices since speculation was a large part of the problem.

 

GOP senators wanted to add language that would expand offshore drilling and pledged to block floor action unless they received a chance to amend the Democratic bill. Democratic leaders said they wanted to limit amendments for practical reasons — the chamber expects to adjourn in August — and because Republicans’ real goal was to protect oil companies.

 

...Durbin said there remains only faint hope for a breakthrough deal in the Senate’s last week before lawmakers adjourn for August.

 

“There’s always a chance, but it hasn’t been very encouraging,” Durbin said. “We couldn’t even get a deal on votes this weekend.”

 

GOP leaders have pledged to block movement onto any other issues besides energy.

[HuskyCaucasian]

Have we been sticking the speculation bill stuff here?

are you freaking kiddin me? We'll help you drive down the prices as long as you promise to scratch the backs of our buddies over hear. Please.

[Balta1701]

are you freaking kiddin me? We'll help you drive down the prices as long as you promise to scratch the backs of our buddies over hear. Please.

The speculation bill will not help drive down prices.

[HuskyCaucasian]

The speculation bill will not help drive down prices.

oh i think it will. It'll help more than offshore drilling in the short term.

[StrangeSox]

oh i think it will. It'll help more than offshore drilling in the short term.

 

How will it drive down prices?

 

Also, I hate Dick Durbin.

[southsider2k5]

The speculation bill will not help drive down prices.

 

If anyone thinks price maniputlation happens now, wait until the price control falls to an interested party. Its called a monopoly.

[NorthSideSox72]

The speculation bill will not help drive down prices.

Thank you.

 

[Balta1701]

France, which gets a large majority of its electricity from nuclear power, has suffered a rash of nuclear related accidents in recent weeks.

Too many French nuclear workers are being contaminated with low doses of radiation, an independent research group on atomic safety said on Thursday, a day after the latest incident in southern France.

 

The Independent Commission on Research and Information on Radiocactivity (CRIIRAD) also said a growing number of French nuclear workers were complaining about worsening working conditions and their likely impact on safety.

 

"In less than 15 days, the CRIIRAD has been informed of four malfunctions in four nuclear plants, leading to the accidental contamination of 126 workers," CRIIRAD head Corinne Castanier told Reuters in an interview.

 

"This is the first time I have seen so many people being contaminated in such a short period of time."

 

On Wednesday alone, some 100 staff at the nuclear power plant of Tricastin in southeastern France were contaminated with low doses of radiation.

[Balta1701]

One more energy piece. If you're interested in energy issues at all I think this is an excellent piece, must-read level. You want to cut this country's carbon emissions drastically, or cut its energy use drastically, or hell, meet Al Gore's goal with room to spare? Here's the outline, and it's really not that hard, as this state has proven. I'll excerpt about 1/2, covering the argument for why it would be so amazingly easy for this country to use less electricity than it currently does and how much money it would save. The policy prescriptions are in the article.

America is the Saudi Arabia of energy waste. A 2007 report from the international consulting firm McKinsey and Co. found that improving energy efficiency in buildings, appliances and factories could offset almost all of the projected demand for electricity in 2030 and largely negate the need for new coal-fired power plants. McKinsey estimates that one-third of the U.S. greenhouse gas reductions by 2030 could come from electricity efficiency and be achieved at negative marginal costs. In short, the cost of the efficient equipment would quickly pay for itself in energy savings.

While a few states have energy-efficiency strategies, none matches what California has done. In the past three decades, electricity consumption per capita grew 60 percent in the rest of the nation, while it stayed flat in high-tech, fast-growing California. If all Americans had the same per capita electricity demand as Californians currently do, we would cut electricity consumption 40 percent. If the entire nation had California's much cleaner electric grid, we would cut total U.S. global-warming pollution by more than a quarter without raising American electric bills. And if all of America adopted the same energy-efficiency policies that California is now putting in place, the country would never have to build another polluting power plant.

 

How did California do it? In part, a smart California Energy Commission has promoted strong building standards and the aggressive deployment of energy-efficient technologies and strategies -- and has done so with support of both Democratic and Republican leadership over three decades.

 

Many of the strategies are obvious: better insulation, energy-efficient lighting, heating and cooling. But some of the strategies were unexpected. The state found that the average residential air duct leaked 20 to 30 percent of the heated and cooled air it carried. It then required leakage rates below 6 percent, and every seventh new house is inspected. The state found that in outdoor lighting for parking lots and streets, about 15 percent of the light was directed up, illuminating nothing but the sky. The state required new outdoor lighting to cut that to below 6 percent. Flat roofs on commercial buildings must be white, which reflects the sunlight and keeps the buildings cooler, reducing air-conditioning energy demands. The state subsidized high-efficiency LED traffic lights for cities that lacked the money, ultimately converting the entire state.

 

Significantly, California adopted regulations so that utility company profits are not tied to how much electricity they sell. This is called "decoupling." It also allowed utilities to take a share of any energy savings they help consumers and businesses achieve. The bottom line is that California utilities can make money when their customers save money. That puts energy-efficiency investments on the same competitive playing field as generation from new power plants.

 

The cost of efficiency programs has averaged 2 to 3 cents per avoided kilowatt hour, which is about one-fifth the cost of electricity generated from new nuclear, coal and natural gas-fired plants. And, of course, energy efficiency does not require new power lines and does not generate greenhouse-gas emissions or long-lived radioactive waste. While California is far more efficient than the rest of the country, the state still thinks that with an even more aggressive effort, it can achieve as much additional electricity savings by 2020 as it has in the past three decades.

 

Serious energy efficiency is not a one-shot resource, where you pick the low-hanging fruit and you're done. In fact, the fruit grows back. The efficiency resource never gets exhausted because technology keeps improving and knowledge spreads to more people.

 

The best corporate example is Dow Chemical's Louisiana division, consisting of more than 20 plants. In 1982, the division's energy manager, Ken Nelson, began a yearly contest to identify and fund energy-saving projects. Some of the projects were simple, like more efficient compressors and motors, or better insulation for steam lines. Some involved more sophisticated thermodynamic "pinch" analysis, which allows engineers to figure out where to place heat exchangers to capture heat emitted in one part of a chemical process and transfer it to a different part of the process where heat is needed. His success was nothing short of astonishing.

 

The first year of the contest had 27 winners requiring a total capital investment of $1.7 million with an average annual return on investment of 173 percent. Many at Dow felt that there couldn't be others with such high returns. The skeptics were wrong. The 1983 contest had 32 winners requiring a total capital investment of $2.2 million and a 340 percent return -- a savings of $7.5 million in the first year and every year after that. Even as fuel prices declined in the mid-1980s, the savings kept growing. The average return to the 1989 contest was the highest ever, an astounding 470 percent in 1989 -- a payback of 11 weeks that saved the company $37 million a year.

 

You might think that after 10 years, and nearly 700 projects, the 2,000 Dow employees would be tapped out of ideas. Yet the contest in 1991, 1992 and 1993 each had in excess of 120 winners with an average return on investment of 300 percent. Total savings to Dow from just those projects exceeded $75 million a year.

 

When I worked at the Department of Energy in the mid-1990s, we hired Nelson, who had recently retired from Dow, to run a "return on investment" contest to reduce DOE's pollution. As they were at Dow, many DOE employees were skeptical such opportunities existed. Yet the first two contest rounds identified and funded 18 projects that cost $4.6 million and provided the department $10 million in savings every year, while avoiding more than 100 tons of low-level radioactive pollution and other kinds of waste. The DOE's regional operating officers ended up funding 260 projects costing $20 million that have been estimated to achieve annual savings of $90 million a year.

 

[EvilMonkey]

It's amazing what positive reenforcement (awards)can accomplish, instead of negative punishment (taxes).

[Balta1701]

It's amazing what positive reenforcement (awards)can accomplish, instead of negative punishment (taxes).

I think passing laws mandating things like you can't waste light from lampposts or you face fines appears to have been effective negative punishment as well.

 

But here's the kicker...if positive reinforcement were all it took, then why haven't businesses interested in cutting their own energy demands made some of the obvious changes years ago? Things like factories installing heat recovery systems which are all over the place in Europe but hardly exist here in the U.S., or improving the efficiency of their own appliances, etc.? The reward should be saving money on energy costs.

[EvilMonkey]

I think passing laws mandating things like you can't waste light from lampposts or you face fines appears to have been effective negative punishment as well.

 

But here's the kicker...if positive reinforcement were all it took, then why haven't businesses interested in cutting their own energy demands made some of the obvious changes years ago? Things like factories installing heat recovery systems which are all over the place in Europe but hardly exist here in the U.S., or improving the efficiency of their own appliances, etc.? The reward should be saving money on energy costs.

Because now the 'punishment' part of that is coming in from market factors (high costs). Saving money IS the reward, but like someoil exploration, it just wasn't worth it, for a while. now it is worth it, and a few, like what you posted, are showing the way.

[Balta1701]

Because now the 'punishment' part of that is coming in from market factors (high costs). Saving money IS the reward, but like someoil exploration, it just wasn't worth it, for a while. now it is worth it, and a few, like what you posted, are showing the way.

So, if I then point out that in Europe, one of the reasons these sorts of things were done years ago in Europe is that energy was vastly more expensive there due to the fact that higher taxes were placed on energy, and those things haven't been done here because energy was much less expensive...does that not suggest that using the government as an instrument to force people to conserve or to develop alternate energy technology through taxed-based disincentives works quite well?

[EvilMonkey]

So, if I then point out that in Europe, one of the reasons these sorts of things were done years ago in Europe is that energy was vastly more expensive there due to the fact that higher taxes were placed on energy, and those things haven't been done here because energy was much less expensive...does that not suggest that using the government as an instrument to force people to conserve or to develop alternate energy technology through taxed-based disincentives works quite well?

You just said it, ENERGy was more expensive. They were not suddenly charged x-millions of dollars because they didn't use 10% renewable energy or something like that. And the energy was higher for everyone. Go ahead, raises taxes here. See how fast it takes for businesses to pick up and go somewhere else. And regardless of of differing views on that, it is still a good thing that you posted. More people should be doing that.

[Balta1701]

You just said it, ENERGy was more expensive. They were not suddenly charged x-millions of dollars because they didn't use 10% renewable energy or something like that. And the energy was higher for everyone. Go ahead, raises taxes here. See how fast it takes for businesses to pick up and go somewhere else. And regardless of of differing views on that, it is still a good thing that you posted. More people should be doing that.

Yup, they could just move overseas, because shipping costs are...right.....that whole oil thing....

[kapkomet]

Yup, they could just move overseas, because shipping costs are...right.....that whole oil thing....

Either you're missing te point on purpose or you just don't understand. I'm not sure which.

[Balta1701]

Either you're missing te point on purpose or you just don't understand. I'm not sure which.

I'm afraid I don't see what I'm missing. The point I'm trying to make is that appropriate regulation combined with appropriate taxation, as we've seen in the cases of both California and Europe, can easily make dents on the order of 25-50% in electricity demand and beyond that are a key step towards pushing towards a carbon-free economy. None of the reduced consumption in California happens if the state government doesn't step in and mandate various switches, nor does it happen if the state government doesn't totally rework the way energy producers are paid (where they don't make more money by selling more electricity as they do everywhere else).

 

His response to that was that if you raise taxes, and thus raise energy prices by raising the tax on those items...businesses will go elsewhere. I responded yeah...that would make sense, except now that shipping costs are suddenly going through the roof because oil prices are rising, that's no longer as great of a decision. And having higher oil prices for decades due to taxation has clearly not stunted European growth...the area with the vastly more expensive energy has simply adapted, while this country's businesses planned on cheap oil up to infinity and now it's largest industries are taking $15 billion a quarter hits because of it.