An Open thread from the snow-covered North-East
Posted by Heading Out on December 28, 2005 - 12:22am
As you may have noticed most of the TOD editors are off around the country this week, but that doesn't mean we don't continue to read the threads. And so, from beneath a clear star canopy, as requested, here is the Open Thread, please enjoy.
“Government is too big and too important to be left to the politicians.”
—Claire Huchet Bishop
Contact
- Content: editors at theoildrum dot com
- Tech support: support at theoildrum dot com
License
This work is licensed under a Creative Commons Attribution-Share Alike 3.0 United States License.
(And I really have no stats to back this up)
I'd say demand has been lower ever though it's colder. The media and Wall Street have made such a big deal out of this, that people are adjusting thermostats all around the country. Just think if everyone turned their temp down 2 degrees, (and they might of) NG use would plunge.
Since Demand is much higher than Supply in North America the NG market is becoming caotic. He found a connection of this market behaviour with the queue theory. Once the dispatching system is unable the answer all the queue elements, caos sets in.
That's what happen in gas queues when people have to wait hours to fill the tank.
What a good thread on the natural gas issue! Everyone seems to be thinking through the issue like a chess game, which is what it is fast becoming!
Some thoughts on what has and has not been said so far
-first, the prediction of warm weather has been correct in much of the country for this week, and for the next week at least. That is about as far forward as we can even half accurately predict, and it's easier to take profit than to take risk, you can always buy back in.
-Speaking of profit, we are getting near the end of the year which creates financial oddities. If you were a fund or a trader who has already enjoyed a run up beyond what anyone predicted, why goes for the last nibble and take the chance of getting smacked...take the big money off the table...you have made plenty (enough to look like a genuis to the boss...
-Demand switching. Why do people assume the public will not do it? And they can. I have personal friends who have bought electric space heaters (I live in coal country, Kentucky, and electricity is still almost giveaway priced), turned down the thermostat, and let the cheap electric cover you for a bit. I myself have found a few nices dishes that require baking for at least an hour or two, since I have an electric oven and range!
-Industrial demand destruction. Does anyone have any statistics on how many natural gas intensive business's have slowed production, or even took the opportunity to give their employees a bit of a "holiday" off, in an effort to outwait the natural gas price? Nationwide, it could be making a difference.
-Production increases. There can be no doubt that drillers want to be selling gas NOW. In the above mentioned coal country, KY, there is new fascination with even small gas fields and "stranded gas" in the mountains. Now, whether this burst of productive activity can make enough of a difference in the longer view is the great question. The bet by folks like Boone Pickens, Matt Simmons, Deffeyes and others is no. But it can hold the price down while folks wait and wonder.
-Lastly, I think some folks overreacted and misread the hurricane issue FOR NOW. The natural gas injection period was already well up into it's season when the hurricanes hit. Thus, on this winter, we went in with a decent supply in storage.
THE BIG QUESTION-Can the natural gas industry deliver the injection season in the spring. If they are fully recovered, probably, but by a hair. If they are not fully recovered, or we have a hot summer (especially if it starts early) this coming injection season could tell us much abot exactly where we stand.
Either way, what we have is (a) a price that even though off it's peak is still staggeringly high, and off the charts high compared to what was predicted by the experts only a couple of years ago, and (b) an industry that has to do everythng right, and is reliant on luck with the weather to avoid a major, possibly even catastrophic failure. Recall, we still have Jan. and Feb. to go (and it's still chilly in the north in March!).
The gas industry, and by extension, the nation, are on the razors edge. The brief price breather while welcomed, cannot comfort us much.
Part of the runup in price is caused by a fear that a cold winter could cause us to run low by spring. The warm weather and usage reports are probably leading people to believe that this won't be a problem in the U.S. this winter.
Haven't heard about the U.K. though - how is the winter over there, and what has happened to natural gas prices?
There are constraints (both legislative and competitive) on how fast wholesale prices can be passed on to consumers, most have had recent price increases of about 10% and will likely have another 10% slapped on them before too long.
Heard some mutterings today that the UK electricity grid was getting close to limits, could be high price of gas is having an effect there, gas fired power stations being the fastest to switch on / off.
downs and extrapolating NG storage with increasingly pessimistic scenarios.
I grabbed eleven yeares of draw down data from EIA monthly reports (assumption: believe EIA).
Note that a negative draw down (like for Septembers) is an increase in storage.
The data is for months around and including the winter season.
For the first scenario, the average draw down for each month is calculated. Then each month's
average is subtracted from the NG storage number at the end of the previous month. I plugged in
the EIA weekly report number of 3,225 BCF for the end of November 2005 and went from there.
For the second scenario, the maximum historical draw down for each month is used instead of the average
to calculate the change in storage.
The third scenario takes the storage from the second scenario and withdraws an additional 60 BCF each month.
This represents an estimated average of 2 BCF per day of NG production shut in for the GOM.
Here is the chart:
Here is the data for the chart:
Excel file for draw downs
The first scenario is mild, just getting under 1,400 BCF of NG in storage at the
end of March 2006. The trouble is, we all know this has not been an average
year. Depletion rates for NG are higher than ever, the drilling rigs are going
flat out, resources are being diverted to repair hurricane damage, electrical
demand backed by NG is up, and alot of the industrial demand that used to drop
out with tight supplies has already dropped out permanently. Let all of these
be the justification for the second scenario, which gets just under 700 BCF of
storage at the end of March, uncomfortably but not dangerously low. The third
scenario adds in the direct effect of the NG shut in for the GOM. We are abit
above 2 BCF/day right now, and the shut in curve is flattening out, so I think 2
BCF/day (60 BCF/month) is justified. This scenario gets us down below 500 BCF of
storage sometime in March, and it stays low through April.
I think that the second scenario has the biggest uncertainties. We probably do
need to see a worse than average winter for this scenario to apply. Also, there
may be some additional demand destruction out there somewhere. Maybe the
Canucks will be incredibly generous with their NG exports to us?
Anyway, I don't think we will be dipping down into the base gas this wnter.
Maybe the recent decrease in the price of NG indicates that the traders have come to a similar conclusion.
It will be interesting to see if we can build up storage much next summer,
especially if it is hot and all of those new NG-powered electrical plants go
online to run our air conditioners. My guess is that next winter (2006-2007)
will be very interesting for natural gas.
Discontinuance of M3
An explanation of M3 and a very good comment on this at the Daily Kos.
Oil price predictions for 2006 might get all wrong because of this. Please comment.
However, we have been through this cycle several times. An assertion is made that the Iranian Oil Bourse will destroy the US economy and is a cause for war, but little effort is made to prove the case. When questioned, the poster usually just replies with a whole bunch of links to other people saying the same thing.
It is impossible to disprove a rumor, so I won't continue to do it unless you try a bit harder to show there is more there.
There are only two markets where you can buy oil, Nymex and IPE, both trading in dollars. So if you want oil, you need dollars to buy it. Over the years central banks outside the US have been accumulating petrodollars to a point where it now accounts for 70% of all monetary reserves around the world.
Next year IOR will give you the chance of buying (and sell) oil in euros. That's particularly good for countries (like Iran) than don't trade directly with the US. There's no need now to buy dollars in order buy oil, or to trade dollars for euros if you're selling it. All of this is quite simple.
Now let's see what happens when a country stops buying dollars to later buy oil. The demand for dollars shortens a bit. That of course will lower the value of dollar against other currencies. The more the devaluation, the more people will want to sell dollars.
What's the consequence of this? Well, purchasing power of people that have dollars will fall against people earning in other currencies. The imports will become increasingly expensive for the US and inflation sets in.
These consequences can be offset by the Central Bank (in this case the Fed) by increasing tax rates, and by that making the dollar more attractive to investors. That can only be done to a certain extent, because rate hikes will put people in debt on the red line, not being able to pay their rents. That relates to the House Bubble Burst many people talk about.
Your turn Jack, how can the dollar keep its value with less people buying it?
And above all, why in your view is the Fed making such a strange move?
I'm with you for the first three paragraphs (through... "All of this is quite simple"). However I disagree with "what happens when a country stops buying dollars to later buy oil.". You claim that this will "of course will lower the value of dollar against other currencies". I disagree that pricing of anything, including oil, is a major determinate in the denomination of assets oil producing countries hold. And that it is the long-term holding of assets, rather than the day or two transaction period that is important.
If a large portion of oil were to be priced in Euros and the transactions made without passing through dollars it would probably be a net detriment to the US, but not a very significant one. The important issue is what currency assets are held in, not was they are priced in. Petrodollars usually refers to dollars held as assets by petroleum exporting companies. As you note, Oil exporters hold massive quantities of dollar-based assets. This is not because they got dollars and are too lazy or stupid to convert them into another currency. It is because they want to hold US assets.
Every country has an explicit strategy for what foreign currencies they hold. If for example Saudi Arabia wanted to hold 70% dollars and 30% Euros, when they receive 100% dollars as payment, they convert 30% to Euros, then hold those assets for a long period of time. Currency transaction costs are low. If they were to receive 50% of their payment in Euros, they would than convert Euros to dollars to match their strategy.
So turning to "how can the dollar keep its value with less people buying it? And above all, why in your view is the Fed making such a strange move?"
The dollar will keep its value because countries will buy and hold US dollar assets according to a strategy based on risk, return, exchange rate, trade and payments. Changing the currency of a portion of the oil price is a small part of this. I don't know why the Fed is eliminating the M3 tracking. I am not an economist and would have to refer you to one. I believe Econbrowser posted on this topic. I have noticed that the origin of most commentary on the change in M3 freporting is from entities long on gold.
So, I have agreed that a shift in currency would be a net negative, I just think it is a small one. Can you provide some perspective to show why the oil price is more important that the determination of what currency assets are held in? Do you believe that this is a cause for the war in Iraq and strife with Iran? Is there any factual basis for this assertion or is it surmise?
Thanks for your good reply.
Petrodollar Warfare: Dollars, Euros and the Upcoming Iranian Oil Bourse
I guess you have a point in saying that as long as central banks buy US assets it's ok. But there's something you have to consider, it's not only the exporting countries that own massive sums of dollars, the importers have it too (in this case the Eurodollar), in order to buy oil.
Putting it simple, if you can buy oil in a more convenient currency, you won't trade it for dollars.
I do not know the extent of the effects the bourse will have. "Meltdown" and "War" might really be exaggeration. But I believe there's a serious danger of a weakening of the dollar, and subsequently of the US life quality.
There's also another thing we should consider, the snow ball psychological effect. Imagine that the dollar keeps relatively strong, but if a central banker believes it will plunge, he'll sell it now that it's still high. That will make the dollar fall, making other people sell, pushing the dollar price even lower, and so on.
Please scroll down and read the following posts, they have more interesting debate.
I do think that the U.S. benefits a great amount from the role of the dollar as a global currency and that there are events that could threaten the status quo. I agree that the US could be expected to react to this threat. We seem to agree that a change in the willingness of other countries (primarily oil exporters and countries in Asia) to hold dollar assets is primary, or at least crucial.
I hold that there are two reasons that these countries are willing to hold dollar assets.
- Expectation of better return than assets in other currencies.
- Managing exchange rates
When these two factors change, the role of the dollar will be threatened. Dollar pricing of oil may play a role, but I think it is secondary. The first reason, expectation of better returns, is by far the greater threat to the appeal of holding dollar assets. If Asian countries and oil exporters fear that the dollar will fall greatly, or that the U.S. will default (or inflate out of debt), they could pull back. This would doom the dollar, but would also choke trade with the U.S.. It would hurt the others as much as the U.S. - so I think it would have to be caused by panic rather than calculation.IRAQ WAR AND IRAN'S NUCLEAR WEAPONS
These two side issues deserve some treatment. Did the US go to war because of oil? The question is meaningless. Of course oil played a role and the reason for the attention to the Middle East instead of, say, Africa, relates to energy security. But you could say with as much accuracy that France and Russia opposed the war because of oil. Remember Dick Cheney, as head of Haliburton, advocated for eliminating US barriers to trade and investment in Iran. Like it or not the current US Iran policy owes more to ideology than the interests of US oil companies.
Is Iran developing an offense nuclear capability? To me the answer is yes. I don't really think there is much debate over this. Is it justified and/or legal. I don't know. That is a tougher question and beyond my expertise. But fear over Iran's intentions to develop nuclear weapons is not a fraud or a cover story.
IRANIAN OIL BOURSE
So will Iran develop a Euro-based bourse and will it impact the dollar? I tend to doubt it. I would expect that part of the reason why there are only two exchanges in London and NY has something to do with the fact that these are global financial centers. I would guess that a massive exchange in Iran would add enough credit risk to be prohibitive for any oil other than Iranian. Would Saudis trade there? No. Maybe all transactions would be done through a primary (ie. existing) exchange first.
IRAN'S OIL WEAPON
Actually, I think this is the greatest threat to the US. If Iran announced a one week export halt, oil prices would soar and the global economy would crash. I have heard that Iranian FX reserves are fairly strong and Iran could wait out an export stoppage better than the world could. I think an export moratorium is a far, far greater threat than the bourse. The problem is that it is a blunt weapon. It would hit all countries and the US has the biggest oil reserves and, hence the best insurance policy.
I guess at the end of the day, I think the currency issue is a complex two-way street and the balance much more complex than it seems. I don't deny that Iran (and others - Russia) holds a lot of cards. But I think the actual oil, rather than the currency it is priced in, is where the power lies. The global reliance on oil is more precarious than the use of the dollar as a global currency. In either case, it is hard for me to see that the U.S. has an Achilles heal and that the country can be undone in a way that doesn't take the whole world down with it.
My prediction: Simply put, 80% everything will be fine, 20% it will go up in smoke. I don't like the odds, but I can't change them. It's midnight where I am so I am going to bed. It's been good discussing this and I hope to pick it up in the morning.
I think we've both made the point. I share your view that an eventual dollar plunge woulnd't benefit anyone (not even Iran).
Let's just wait and see.
- Oil is traded and priced in dollars.
- This creates a worldwide demand for dollars.
- Which enables the U.S. to export its inflation to other central bank vaults.
- Petro-Dollars get recycled into bonds, and keeps rates low.
Now, Iran will trade for Euro's and I believe a lot of other currencies, which many see as creating a problem for the demand of the U.S. Dollar and could create a dollar crisis/ run for the door.It could. There are also a whole host of other things that could too, like GM going bankrupt, or a 2 hr long presidential speech on how Jesus is returning soon and will help win the war in Iraq for Bush.
I don't know if "it" ( being the Iran Oil market) will create an economic meltdown in the U.S. The dollar fell damn near 40% in Bush's first term, and hardly anyone in the U.S. seemed to notice or care. In other countries, there would have been a run on banks, and the currency, and a bunch of other nasty things. In the United States, people don't seem to care, because they do not travel that much out side the country and do not see this as "inflation".
As to a dollar crisis, well, that may be here regardless of Iran's oil market because the Federal Reserve is going to stop raising interest rates soon, probably around March. They have rasied them 13times, and the dollar is trading around 90 on the USD Index. That is not a strong recovery. And the European Central Bank is just now starting their interest rate hikes, so logic says that the smart money will go to Euro's, and the dumb money stays in the U.S. Dollar. And with Iran now trading oil for Euro's at the same time, there is even more incentive to invest in the Euro.
Again, we could have a dollar crisis, and it will be 11pm news, back page small articles, and hardly and American will look up from their WalMart Shopping spree. However, if a dollar crisis turns into a bond and stock market crisis, ( which it could and probably will), then one class of Americans will look up, and those are the Baby Boomers, because they are planing on retirement, and they check their 401K's a lot.
I think terms like "economic war", and "meltdown" are a little too extrem. However, the risk is very real. What the risk factor is, I am not sure. Is it 50% or is it 10%. Who knows? When it happens, then we will know.
http://tinyurl.com/dgfhw
The rest here.
I said in my first post above "I have noticed that the origin of most commentary on the change in M3 reporting is from entities long on gold."
Take a look at Rob Kirby's website. (http://www.kirbyanalytics.com/)
I have a feeling gold salesmen are behind more of the pessimism and scare tactics than they it seems on the surface.
I am curious as to what the consensus is as to why the Fed has chosen to hide the size of M3 come March 2006. What benefit do they expect to gain by doing this? What negative effect are they trying to prevent? What are the implications regarding foreign confidence in the dollar?
Any thoughts out there as why this is being done now and what it really means?
TO understand better the monetary issues try the Daily Kos link furnished above.
News reports on brush fires burning Dallas/Fort Worth Area homes:
http://www.dallasnews.com/
Note that this was predicted in war gaming exercises by the Pentagon:
CLIMATE COLLAPSE
The Pentagon's Weather Nightmare
The climate could change radically, and fast. That would be the mother of all national security issues.
Fortune Magazine
http://www.fortune.com/fortune/technology/articles/0,15114,582584,00.html
Excerpts:
Though triggered by warming, such change would probably cause cooling in the Northern Hemisphere, leading to longer, harsher winters in much of the U.S. and Europe.
Worse, it would cause massive droughts, turning farmland to dust bowls and forests to ashes.
Megadroughts would afflict the U.S., especially in the southern states, along with winds that are 15% stronger on average than they are now, causing widespread dust storms and soil loss.
What about Europe?
Drudge Report headline: "Blizzards bring travel chaos to Europe"
http://www.guardian.co.uk/weather/Story/0,2763,1674492,00.html?gusrc=rss#article_continue
So many (apparently) well-reasoned opinions that oppose each other. It's said opinions are like assholes, as everyone has one, but I think this is wrong because there seem to be more opinions than can be accounted for by this theory (IMHO). I cannot be an expert in everyone else's field as well as my own, but the implications for my family are too high to ignore it, so I must try to figure out as best I can what is likely to come. Sometimes being the grownup sucks.
There are basics that are clear to me, but it is the implications for complex economic, environmental, and political systems that I don't have the skills or time to evaluate. In the end I cannot avoid using a healthy dose of intuition to pick among the scenarios that "feel" right to me, and simply accept that this is how I must arrive at my picture of the future. And of course stand ready to change as new things come into focus.
Sigh - I look at my paltry choices for my 401K and try to decide where to put them - stocks or bonds is what it comes down to. I don't really expect to ever get that money, but you have to try anyway.
OK, rant over for now, let's get on with it - bring on the next theory!
My sentiments exactly, Twilight!!! It is tough to wade through the information coming from all of the different 'channels' - and then decide what to believe.
All of our future family decisions will take into account Peak Oil - where to move, if to move at all...how to invest our money...what skills to teach our children and learn ourselves...what is important to buy and what is not...etc...
We live in interesting times. My husband says that with great adversity comes great opportunity - I think that is true now more than ever. I just wish more people were aware about the 'adversity' we face.
You have the right outlook on this whole thing. No one knows exactly what is going to happen when. Well, no-one that will talk about it anyway! The people in Dallas and Houston call all the shots. The Bush's have served them well for several decades. There is a reason that John D. Rockerfeller's GREAT, GREAT, Granddaugter still owns 125,000 acres of land in West Texas - when crude hits $150 a barrel, do you think she is going to make any money?
And she is just one of numerous kin to all sorts of rich oil industry people with vast holdings all over the globe.
This party ain't over until the fat lady starves to death -and she won't if she lives in Texas!
Welcome to the board...
The Iranian euro borse is not too important of itself, more a symptom. That oil is globally priced in US$ is important, however. It does create additional circulation and demand for US$, especially outside the US. This does support the US$ in its role as global reserve currency and, probably, the US$ exchange rate to a small extent.
One of my pet freaky concepts is to have a global 'resource currency' that all basic raw materials (oil, gas, coal, metals...) will be traded in. It would be administered by the UN and would be their source of funding by levying, say, a 1% transaction tax. Of course, the US would never agree to this while oil etc are traded almost exclusively in US$ since it would signal the end of the US$ as de facto global reserve currency, as well as too many other reasons to mention. But being global reserve currency is a two edged sword, as the US will find out within a few years.
Pensions (401k's): well, there is a possibility that they may be worth something in 5 or 10 years but I would not bet my future on them. If you have one and are within 20 years of retiring I would keep it going as a kind of hedge, just in case things stay OK, but not stuff too much into it. Better to spend money on reducing outgoings on food, energy, other bills - becoming less dependent and more self reliant. BTW, I'm 51 and have ceased contributing to my pension funds.
I have the unfortunate feeling that 'opportunity' will be more to survive than to make money, would be wise to take that into account.
M3, now that's a quite important thing. Basically the only thing that M3 reports which M2 doesn't is Fed 'money printing' to intervene in the markets. Ceasing to report it (though they will continue to manitain stats!) is tantamount to them hiding their manipulation of the markets. Folks have got too good at reading between the lines so the Fed plans to make that more difficult. The association with the Iranian borse is probably not significant, they had to pick some date. How about other things happening about that time: Israeli election, my feeling that late March is iffy, what their psychics say... ? Helicopter commander Ben wants a free hand, inflation here we come.
One can only make money from oil if it can be refined and has a market infrastructure ;)
I vaguely remember reading about 20 years ago that one of the predictions of climate change was the US mid west turning into a dust bowl and Russian grain production increasing significantly. Not sure what current consensus is.
Gold will increase significantly in price in 2006. I reckon the chance of a 50% increase is about the same as a 10% drop. The value of gold tends to increase in response to feared inflation and uncertainty, both are increasing. M3 is basically irrelevent to gold.
The feds have been giving us false reports of inflation for the past 25 years thereby creating the illusion of economic growth. By leaving food and energy prices out of the core CPI the effects of the Reagan and Bush I and II deficits means true economic growth figures have been greatly overstated. It explains the tripling of bancruptcy rates in the 80s despite the "boom times". It explains why wages did not rise in the 90s. The last 4 years of "wartime" deficits have given us true inflation rates nearly triple the offcial rate. Maybe things will get so bad next year that the body politic reaches the tipping point like it did in 1930 and 32. Maybe we will see a return of democracy in America.