[GoIllini]

The big companies formed an oligopoly to the independent gasoline companies that they used to compete to sell excess refining capacity to, using their power to demand higher prices and to restrict their operations.

Notable US oil mergers of the last ten years

* 1997 Ashland Oil combines most assets with Marathon Oil
* 1998 British Petroleum (BP) acquires Amoco
* 1998 Pennzoil merges with Quaker State Oil
* 1999 Exxon and Mobil join to form ExxonMobil
* 2000 British Petroleum (BP) acquires ARCO (Atlantic Richfield)
* 2001 Chevron acquires Texaco to form ChevronTexaco
* 2002 Conoco merges with Phillips
* 2002 Royal Dutch Shell acquires Pennzoil-Quaker State

Note the history of these companies. After the 1911 breakup, Standard Oil of New Jersey was Esso, later Exxon. Standard Oil of New York is the basis for Mobil. Atlantic Oil was part of the breakup (basis of ARCO), Amoco used to be Standard Oil of Indiana. Chevron is the old Socal, Standard Oil of California. And Sohio, Standard Oil of Ohio, became part of BP in 1987,

http://www.oligopolywatch.com/2004/06/12.html

Fossil guy--Being a geologist doesn't give you any advantage in terms of understanding collusion, how it works, or how to spot it. It would be difficult for forensic accountants to determine exactly how prices are being rigged, as the implementation plans are all off the record. For someone living in an engineering or scientific realm where transparency and accuracy of information are vital, it would be difficult to imagine that other aspects of the oil industry are basically, gangsters. Perhaps the company or companies you have worked for are clean, but I wouldn't extrapolate from there that oil is a clean industry, environmentally, or otherwise.

Well, it honestly doesn't take lots and lots of connections to buy stock in oil companies and avoid getting screwed. I own a few dozen shares of Chevron, and have more money in an energy mutual fund.

40 shares of BP translates into a gallon a day of gasoline production- and it costs around $2800, last I checked. I mean, if you can't beat 'em, you might as well join 'em.

[AlCzervik]

Not surprisingly, Mike Ruppert says the fix is in.

[What baffled many of us was how the markets could have signaled a rally this morning when the damage from Rita had not been fully assessed yet, let alone that from Katrina. Oil industry figures show 97% of all Gulf of Mexico oil production is now shut in. What I suspect is that both hurricanes have thrown the timetable of the powers that be off. I suspect they had serious short positions (put options or short sales) that would have needed covering and that would have been a disaster for them if prices had risen too quickly. Cornered and/or caged beasts are both more dangerous and more likely to make mistakes. So it’s quite likely that the Plunge Protection Team and other market manipulators had to make oil and gas prices drop a bit today so that the real money could back out before allowing oil and natural gas prices to hit the markets. Thus we have seen stories in one 24-hour period saying that oil might drop to $25 next year in the morning and stories saying that futures were swinging markedly upward by the closing bell.

None of that had anything to do with damage assessments from two major hurricanes which haven’t really even begun yet. As one astute observer noted, “A couple of months ago if there was one small refinery fire, crude oil futures went up $2 a barrel. We have two major hurricanes taking all refineries offline and oil prices fall. What’s up with that?”

Market manipulation is up. That’s what’s up. And I suspect the move is now on around the world to suck as much last minute “sucker” cash into play as possible before pulling the plug this winter. My guess is that we will not have a clear picture of actual damage to oil and gas infrastructure for at least ten days to two weeks. And even then what we get might not be honestly reported. Rita was either a Cat 4 or a Cat 5 when it went through the offshore facilities in the gulf. We’re all still waiting to hear what happened there. Are the platforms there? Are they damaged? Are the pipelines damaged? The list of questions that need answering is a long one.

Make no mistake, the long term issue is about supply. There are many reasons for this but the main one is that, even assuming all the infrastructure gets repaired and once all the undamaged refineries get started up again – a process which may take as long as two weeks for each refinery – every drop of production that has been lost so far is going to have to be made up. With Bush opening the Strategic Petroleum Reserve conveniently for a second time today, all that oil is going to have to be replaced on top of normal (growing) demand.

All the while, now-documented decline is taking about a million barrels per day out of the global pipeline. So where is all the “make-up” oil going to come from? -- MCR]

http://www.fromthewilderness.com/free/w ... ries.shtml

[Graeme]

Steven Levitt thinks so:

The cover story of the New York Times Sunday Magazine written by Peter Maass is about "Peak Oil." The idea behind "peak oil" is that the world has been on a path of increasing oil production for many years, and now we are about to peak and go into a situation where there are dwindling reserves, leading to triple-digit prices for a barrel of oil, an unparalleled worldwide depression, and as one web page puts it, "Civilization as we know it is coming to an end soon."

What most of these doomsday scenarios have gotten wrong is the fundamental idea of economics: people respond to incentives. If the price of a good goes up, people demand less of it, the companies that make it figure out how to make more of it, and everyone tries to figure out how to produce substitutes for it. Add to that the march of technological innovation (like the green revolution, birth control, etc.). The end result: markets figure out how to deal with problems of supply and demand.

Freakonomics

There is also considerable discussion and posts from readers after this short article.

[PenultimateManStanding]

"
What most of these doomsday scenarios have gotten wrong is the fundamental idea of economics: people respond to incentives. If the price of a good goes up, people demand less of it, the companies that make it figure out how to make more of it, and everyone tries to figure out how to produce substitutes for it.

What these polyanna cornucopian economists have gotten wrong is that there is no substitute for oil and natural gas, no innovation that can grow and process all those grains without plenty of hydrocarbons, no way to feed 6 billion people if those substances start to run out. We know that and one of these days they will know it too, to their horror and astonishment.

[peaker_2005]

"
What most of these doomsday scenarios have gotten wrong is the fundamental idea of economics: people respond to incentives. If the price of a good goes up, people demand less of it, the companies that make it figure out how to make more of it, and everyone tries to figure out how to produce substitutes for it.

What these polyanna cornucopian economists have gotten wrong is that there is no substitute for oil and natural gas, no innovation that can grow and process all those grains without plenty of hydrocarbons, no way to feed 6 billion people if those substances start to run out. We know that and one of these days they will know it too, to their horror and astonishment.

Though I agree with you. The market will NOT provide. It'll provide some solutions, sure, but not on a large enough scale.

I would, though, hope that they start rebuilding the railroads. And not just because I'm a budding gunzel, either...

[killJOY]

What most of these doomsday scenarios have gotten wrong is the fundamental idea of economics: people respond to incentives. If the price of a good goes up, people demand less of it, the companies that make it figure out how to make more of it, and everyone tries to figure out how to produce substitutes for it.

With abstract language, Anything Is Possible.

[perplexd]

The market forces assumption is not problematic in itself. It is when it is used to prop up the absurd idea that infinite growth is either possible or inevitable that these folks get into trouble.

Unfortunately, they are all too happy to talk about market forces all day. Ask them about the infinite growth assumption and see how quickly they change the subject back to "market forces". The lapsed time is a fantastically accurate denial gauge.

[PenultimateManStanding]

The market forces assumption is not problematic in itself. It is when it is used to prop up the absurd idea that infinite growth is either possible or inevitable that these folks get into trouble.

Unfortunately, they are all too happy to talk about market forces all day. Ask them about the infinite growth assumption and see how quickly they change the subject back to "market forces". The lapsed time is a fantastically accurate denial gauge.

Lapsed time and denial gauges - an interesting concept. It conveys alot. It's also rather disturbing in what it says about people. Tom Cruise, 'The Truth! I want the Truth!' Jack Nicholson, 'The Truth? You can't handle the Truth!'.

[perplexd]

I guess there is another problem that I glossed over in the market forces crowd. They think that demand creates supply.

[Paul64]

Though I agree with you. The market will NOT provide. It'll provide some solutions, sure, but not on a large enough scale.

The scale factor of the energy economy is often overlooked. Even supposing there was some new energy substitute that could be scaled up starting tomorrow (and there isn't), given the massiveness of the undertaking, even with a loss of base fossil energy of only a few percentage points a year, there wouldn't be enough time to transition to the new thing before we are basically out of the energy needed to run the current system.

I do like markets and believe in them for many things, and they can provide for the benefit of many...but only on a small, local, human scale; the bigger they get the less faith I have that they will provide in the best interest of all. But even some small markets may need regulation when Tragedy of the Commons is a risk:
http://en.wikipedia.org/wiki/Tragedy_of_the_commons

[bobcousins]

Market forces are the abstract counterpart to intensive farming. They are both methods to turn energy into people. Their effect is to accelerate our population growth towards the maximum carrying capacity. Over time as stored energy depletes and we are forced to use renewables, technology will tend to keep population near to carrying capacity, but at a lower level.

So in the sense that market forces optimise our population, they work. The economists unfortunately miss a step in their logic. It is true that market forces provide a solution. However, the solution may be very limited supply and incredibly high prices. This is a valid solution derived from the theory of supply and demand. As everyone here realises, once its gone, its gone.

Market forces are the most effective method of optimising growth, and for that reason are likely to stay in place. Economists are living in a time when market forces provide a positive feedback to population growth, which if you make a linear extrapolation leads to infinite growth - clearly impossible. But inherent in the theory of market forces is that it will also provide a negative feedback, which is what the economists fail to realise.

[jaws]

Market actors providing substitutes doesn't necessarily mean that a new form of energy will replace oil, but it does mean that new forms of goods will emerge that adapt themselves to higher energy scarcity.

[UIUCstudent01]

Market actors providing substitutes doesn't necessarily mean that a new form of energy will replace oil, but it does mean that new forms of goods will emerge that adapt themselves to higher energy scarcity.

For example, new urbanism as a way to live.

I think... maybe...

[0mar]

Market actors providing substitutes doesn't necessarily mean that a new form of energy will replace oil, but it does mean that new forms of goods will emerge that adapt themselves to higher energy scarcity.

War, Famine, Pestilance, Death repackaged.

[rogerhb]

It is said that "The Market will provide", this cannot be true since the market cannot provide what cannot exist.

It is said that "The Market Optimises", not even this can be true, consider the Mobile Network in NZ. We have two companies duplicating the same network. Sure the most optimised solution would be to have one network. But if we did we would have a monopoly with free reign to raise prices to whatever level it deemed appropriate (eg preferred number of customers). So you either you get a monopoly or duplication of effort. Neither is optimal.

[Corpsicle]

Does anyone know of analysis done showing for how long the price of oil futures have exceeded the present price, over time?

[MrBill]

No, I do not know of any studies, but you can easily create one if you have access to historical data, bloomberg for example. Download CO1 or CL1 into an Excel spreadsheet in one column and CO2/3 or CL2/3 into a another column and then run a chart. You will quickly see how often the near future month is below the next future's month. However, I am not sure of what value it would be as current supply & demand effect backwardation or contango now but past events do not effect supply & demand going forward (unless you count taking decisions to build or not to build refineries, but that is academic). Therefore, for predictive value it is of very little value. Good luck.

[Corpsicle]

I don't know much about economics, but I was thinking about trying to build an expectation of the progress of the average future price, by separating futures from actual seen price.

Say for example the price-derivative X months ahead can be predicted by looking at the difference between the derivative of the average seen price and the derivative average future price.

[MrBill]

I don't know much about economics, but I was thinking about trying to build an expectation of the progress of the average future price, by separating futures from actual seen price.

Say for example the price-derivative X months ahead can be predicted by looking at the difference between the derivative of the average seen price and the derivative average future price.

you can use historical data to calculate exactly what the historical spread has been on average, but it is of little use for predicting what the spread will be in the future, just as last winter's weather gives me an idea of the range of temperatures I might expect, but has little to do with this year's winter weather.

the cash market is a better predictor of where futures are going in the short term, but even then this year's contango markets do not necessarily predict contango for the future, just that there has been more than adequate physical stocks to meet demand, limited storage, but futures were high on supply disruption worries which did not materialize or were not as bad as feared (i.e. Katerina/Rita + a mild winter).

[MrBill]

You may want to read this paper by the Federal Reserve Bank of San Francisco appropriated titled Do Oil Futures Prices Help Predict Future Oil Prices?

Conclusion
Oil futures prices contain important information about future oil price movements, especially for the near term. In particular, taking into account the relationship between current spot and futures prices instead of considering only the raw futures price can significantly improve forecasting accuracy. Prediction errors, however, are still substantial, and accurately predicting the future price of oil seems as elusive as ever.

My thanks to Policy Pete who spotted this article and posted it to his page Policy Pete which is another excellent source of information on energy markets in general.

Good luck and have a nice weekend. Cheers.