How to Survive the Gas / Petrol Crisis

Sean Brodrick

With gasoline prices up 15 cents a gallon in the last two weeks — and about 63% in the last 18 months — American drivers are feeling a pinch at the pump. Consumers are demanding that Congress "do something" to drive down the price of gasoline.

Two weeks ago, I listed seven things you could do to prepare for $200 per barrel oil . They included tips on getting the most miles from every gallon. Today, I have ideas for how we can get gasoline back to $3 per gallon — maybe even lower.

And we have to start now. Because if you hate paying nearly $4 a gallon for gasoline now, you're really going to hate paying close to $5 per gallon gasoline 12-18 months from now. That's right — if we continue on as we are and don't change a thing, the pain at the pump will become excruciating!

First, let's take a look at what we're up against ...

Everybody Wants to Drive Like Americans!

The U.S. consumes about 20.6 million barrels of oil per day, or roughly 25% of global demand. China is the second-largest consumer, at 7.2 million barrels per day. Japan, with 5.2 million barrels per day, is third.

Gasoline demand has soared across China, which is home to over 200 cities with populations of one million people or more. By contrast, the United States has just nine cities with at least a million residents.

As you can see, we use A LOT more petroleum than other countries. Heck, China has more than four times the people that America does, and uses only a third of the oil.

They're catching up, though. According to the International Energy Agency, China's overall oil demand rose by 7.8% in February from a year earlier, much higher than earlier estimates of a 5.3% gain. And gasoline demand rose by 22.8%!

As a result of that surge in demand, China's crude oil imports rose 15% in the first quarter and 25% in March. Its imports are rapidly accelerating! And every barrel the Chinese buy is one that we can't buy.

It's not just China. According to preliminary data from India, oil product sales — a proxy of demand — surged by 10.9% in February compared to a year earlier. That's the fastest pace of growth in demand since 2006. Transportation fuels — gasoline, jet fuel/kerosene, and gasoil — jumped by 13.4% year-over-year.

Across the developing world, oil use is ramping up. This year, emerging markets combined (China, India, Russia and their other "life in the fast lane" buddies) will pass the U.S. in oil use.

So even if our use stays the same — even if there's no big emergency, hurricane in the Gulf of Mexico's Energy Alley, war with Iran, etc. — the global demand for oil is going to get worse.

And the new oil production coming online can barely keep pace with declining production.

Here's what I mean: Every year, producers need to find an additional 3 million to 3.5 million barrels per day of oil production per day just to offset declines from older fields. According to researchers, there are 546 giant oilfields in the world that currently account for just more than half of production. Only 80 of those fields are not fully developed. In other words, the easy, low-hanging fruit has already been picked.

In fact, oil production is already shrinking in 60 of the world's 98 oil producing countries. For example, Great Britain saw its output peak in 1999 and since then it has plunged by more than half.

So it's no surprise that in March, global oil supply fell by 100,000 barrels per day, led by lower supplies last month from OPEC, the North Sea and non-OPEC Africa.

Do you think that, if we ask them nicely, those folks in China and India will stop using so much gasoline? Ha-ha-ha! Heck, their governments subsidize the price of oil at ridiculous levels as a way of promoting economic growth and keeping a lid on their restless populations.

So the ball is in our court.

Three Things We Can Do to Lower The Price of Oil

The good news is that prices for oil and gasoline are made on the margins — if America cuts its oil use by 10% or even 5%, that should send the price lower ... maybe a lot lower.

After all, 5% of the 20.6 million barrels we use every day is about 1 million barrels per day. That's more than the current spare capacity on the global market.

So let me tell you what we need to do to get there — and I'll start by saying you aren't going to like it.

1) Bring Back 55-Mile-Per-Hour Speed Limits . America has amnesia. That's the only explanation for why our elected leaders don't know how to deal with an energy crisis. After all, we've had one before. And how did we solve it? One part of the solution was driving 55 mph.

The 55-mph speed limit was repealed in 1995. With apologies to Sammy Hagar and his song, " I Can't Drive 55 ," we all have to start driving at slower speeds again.

The average driver uses 22.8 barrels of oil per year. Driving at 55 mph, depending on what speed you have been driving previously, could increase your fuel efficiency anywhere from 7% to 21%. For every mile per hour faster than 55 mph you go, fuel economy drops by about 1%.

According to fueleconomy.gov, you can assume that each 5 mph you drive over 60 mph is like paying an additional 20 cents per gallon for gas. In other words, if you're paying $3.60 per gallon gasoline, and you drive 80 mph, you're actually paying $4.40 per gallon.

Driving at slower speeds, along with other tips I talked about last week including regular maintenance for your car and keeping your tires properly inflated, could — and should — be our first attack against higher oil and gas prices.

2) Telecommute. These are the facts: Nearly half of all commuters travel more than 20 miles round-trip to and from work; 22% travel more than 40 miles; and 10% travel more than 60 miles. And ALL of them could save a lot of money by telecommuting.

According to a report by the American Electronics Association, an estimated 1.35 billion gallons of gasoline could be conserved annually if every U.S. worker with the ability to telecommute did so 1.6 days per week (in other words, some people do it one day a week, some work in their bathrobes two days per week).

Your boss may not agree to let you telecommute. In that case, see if he or she will let you adjust your hours to come in and leave 30 minutes later or earlier, so you can avoid rush hour. Traffic congestion cuts your fuel efficiency by 10% to 15%. According to the U.S. Department of Transportation, in 2003, drivers in the 85 most congested urban areas in the United States experienced 3.7 billion hours of travel delay, and as a result they burned 2.3 billion gallons of wasted fuel.

3) Peer Pressure. Humans are pack animals, and we respond to group-think like any herd. If the leaders of the herd (President and Congress) get up and say it's our patriotic duty to do away with fuel economy exemptions for SUVs ... if movies and TV shows in Hollywood show that conserving is "cool" and people who drive big fat SUVs 80 miles roundtrip to work are "not cool" ... if the government, Hollywood and industry together lay out the case for how telecommuting and conserving gas is the plain ol' smart thing to do, it could really help.

A few years back, humorist Bill Maher wrote a book called "When You Ride Alone, You Ride With bin Laden." It was a riff on a propaganda poster from World War II, "When You Ride Alone, You Ride With Hitler."

If it was good enough for the "greatest generation" to conserve gasoline, it should be good enough for us, too. And peer pressure — real leadership on this issue — will magnify the results from points #1 and #2.

Now let's have more fun with math and determine ...

Just How Much Can We Save?

According to data from the state of California, Americans use 456 gallons of gasoline per person per year. Roughly, that's 400 million gallons of gasoline per DAY.

Simply rolling back the speed limits and doing the other gas-saving tips I talked about cuts our gasoline use by 10%. That's 40 million gallons of gasoline per day, or 14.24 billion gallons of gasoline a year.

Now, there are 42 gallons in a barrel, right? But wait! Not all of the oil in a barrel is made into gasoline — some is made into heating oil, jet fuel, diesel, etc. On average, only about 20 gallons of gasoline comes out of your average oil barrel.

But bear with me and let's assume a straight 42/1 ratio. That's 339 million barrels of oil per year.

And let's say that HALF of the people who can telecommute actually do so, one or two days a week. Half of 1.35 billion gallons is 675 million gallons, or 16 million barrels.

So these two steps together could potentially save 355 million barrels a year. And that's nearly 5% of what America uses.

The aftermath of Hurricane Katrina cut America's gasoline use by 6%, and we saw gasoline futures contracts drop by 33%. I'm not saying things would work out exactly the same — we do have that rip-roaring demand from Asia to account for — but a 33% drop at my corner gas station would bring the price down to less than $2.50 a gallon.

And that, my friend, is how you get cheap gas.

Already a regular sight on the streets of Paris, Rome, Barcelona and London, the Smart fortwo coupe has now arrived in the United States.

BONUS TIP: Buy a more fuel efficient car. A vehicle that gets 25 MPG will cost you $900 less to fuel each year than one that gets 15 MPG (assuming 15,000 miles of driving annually and a fuel cost of $3.60). Over five years, that increases to a savings of $4,500.

Americans are already cluing in to this solution. Last month, about one in five vehicles sold in the United States was a compact or subcompact. When the SUV craze was at its peak a decade ago, only one in every eight vehicles sold was a small car.

What's more, sales of big SUVs are down more than 25% this year. And last month saw sales of vehicles with four-cylinder engines pass those of six-cylinder models.

It takes four to five years to turn over America's auto fleet, so this isn't a short-term solution. In fact, it may take longer than that. But it's one we're going to have to take. American cars get on average 22 miles per gallon. In Europe, the average car gets 32 miles per gallon.

Energy Outlook 2008 and Beyond

Prognosis by Ken Egli for ISN Security Watch

The tense situation on the world energy market is unlikely to change in 2008. A return to an oil price of US$50 per barrel or below is an unrealistic scenario, as a massive increase in demand over the past few years has put pressure on oil-producing countries to keep up with the production of additional supplies.

According to the US Energy Information Agency (EIA), the largest increase in energy demand in the near future is to be expected in the non-OECD (Organization for Economic Cooperation and Development) countries.

Many developing countries - especially China and India - have rapidly growing national economies, which, like their OECD counterparts, are run on fossil fuels. Most of them are unable to cover their energy demand with their own production capabilities.

China for example, despite having considerable energy reserves, is an increasing net importer of oil and other fossil fuels. At the same time, energy demand in the OECD countries is also likely to remain high.

In contrast, oil production in non-OPEC countries has been stagnating over the past few years, leaving OPEC to pick up the slack. The grouping, however, has been reluctant to massively increase oil production to dampen prices, claiming that speculation is responsible for the high prices, not the actual supply on the market. Whether the OPEC countries are keeping their production growth on a modest level for profits or are hindered by technical difficulties is unclear.

However, many investors seem to expect rising demand to exceed supply. Several political scenarios in the Middle East are further adding to this expectation and are increasing the volatility of energy prices. Such scenarios include the conflict over Iran's nuclear program, or a widening of strife in Iraq and a subsequent regional armed conflict, which could compromise the production and transport of fossil fuels around the Persian Gulf.

The importance of this region for global energy security can also serve as an explanation for the nervous reaction of the market to terrorist activity in the area.

There have been several attempts by militant groups on the Arab Peninsula to interrupt the production or transport of energy resources.

On 24 February 2006, militants driving two vehicles packed with explosives attempted to enter the Abqaiq oil processing facility in Saudi Arabia, which removes hydrogen sulfide from crude oil and reduces the vapor pressure from the liquid, making it safe for transportation in tankers. When guards opened fire, the vehicles exploded, killing two militants and two guards but leaving the facility's operations unimpaired.

Had the attack succeeded, Saudi Arabia's export of and the world's supply of crude oil would have been seriously interrupted. Such terrorist activity against critical energy infrastructure poses a severe danger to the world's energy security.

A comparably cheap militant operation possibly can create billions of dollars in economic damage. It is very likely that such attempts, successful or not, could lead to spikes in energy prices during the next year. At the same time, the price level will also remain high given the fact that a sudden end of political troubles in the Middle East in 2008 is highly unlikely.

Another area of concern that could drive up prices is Russia and Eastern Europe. Russia is the most important supplier of natural gas on the regional European gas market and therefore vital for Europe's energy needs. Gas, unlike oil, can only be transported in large quantities via pipelines running through the former Soviet republics of Eastern Europe. Almost all of those countries are consuming a considerable amount of gas from northern Russia and are therefore subject to political pressure by the Kremlin and Russia's state-owned gas giant, Gazprom.

When a dispute about the price of natural gas between the Ukrainian government and Gazprom escalated in late 2005, supplies to the country were cut on New Year's Eve 2006, driving up gas prices in Europe and leading to supply decreases of up to 27 percent of the EU's total consumption. The scenario of another crisis between the Russian energy giants and the politically weak non-EU countries in Eastern Europe cannot be dismissed in the coming year and could lead to price spikes on the European energy market.

Russia's willingness to use its energy deliveries to exert political pressure has also triggered concerns in Europe about its own energy dependence. Some politicians and interest groups have repeatedly warned that Russia could use its resource power to push its political agenda in Europe.

The most alarmist experts have voiced concern that Russia could directly use the "energy weapon" against Europe. However, this scenario is unlikely in the near future, as Russia's economy is heavily dependent on the European market to sell its natural gas.

Substituting the European market is rather difficult for Russia, as the existing pipeline infrastructure is oriented toward Europe and no connection exists between the resource-rich northwest of the country and the emerging markets in the Far East. In order to reach the wider world market with its natural gas, Russia must either build pipelines into the Far East or develop a considerable capacity to liquefy natural gas, neither of which is likely to happen in the coming years.

A real danger however, is the deteriorating state of Russia and Eastern Europe's pipeline infrastructure. As Stratfor reported early in December, a section of the Europe-bound Urengoi-Pomary-Uzhhorod natural gas pipeline was destroyed by an explosion on 6 December.

According to Stratfor, deferring maintenance is the most likely explanation for problems with the Russian-Ukrainian energy infrastructure.

In July 2006, a similar incident hit the Druzhba oil line. Transneft, the company that operates the pipeline was forced to temporarily close the Druzhba-1 line, which carries one-eighth of Europe's crude oil imports, after a spill on the Russian border with Ukraine and Belarus. Such technical problems combined with Russia's growing domestic energy consumption could in the long run severely compromise Europe's energy security.

In the short run, however, smaller incidents like the explosion in the Ukraine could lead to price spikes on the markets and need to be taken into consideration.

The resource race

The coming year will certainly see a continuation of the open and covert race for energy supplies by the major world powers. It is very likely that the situation between governments could intensify, especially concerning the disputed northern polar region, which, due to climate change, is becoming increasingly accessible by sea.

Russia staked its claim in August 2007 in planting a small flag on the seafloor on the North Pole. Canada soon thereafter announced a plan to modernize its naval fleet in order to protect its interests in the region.

Although an open conflict over such resource-rich areas remains unlikely over the next few years, it could trigger major diplomatic disputes. At the same time, the foreign policy agenda of many western governments will be heavily influenced by their energy interests, which could soften the stance toward autocratic regimes possessing such energy resources.

China will continue to be a major player in the quest for energy assets, actively seeking deals with energy-rich countries in Africa and the Middle East, including Iran. The country's efforts to build a strategic partnership with regimes hostile to the US could negatively influence the relationship between the two powers. China's ever-increasing hunger for foreign fossil fuels will put more pressure on other countries to enter the race.

Enter alternative energy

Increasing energy prices have made alternative or "green," energy sources more attractive over the past few years. The year 2008 will likely see an increase in the use of wind, hydro- and solar energy. Their overall importance however, will remain marginal: In 2006 the share of renewable energies of the EU (25) countries' energy consumption was only 6 percent. In the near future, this share might increase, but only on a small scale.

Ethanol as an alternative source of fuel has been the focus of intense discussions as it may be the West's only feasible way of substituting the use of fossil fuels on a large scale. However, this alternative seems to cause its own economic problems.

In a 6 December article, the UK weekly magazine the Economist reported that the increasing demand for corn from the ethanol industry seemed to be driving up the price of grain, which was leading to higher food prices. Although this line of thinking may be a bit alarmist, the ethanol industry will certainly face tough questions about the repercussions of its fuel production. Nevertheless, the popularity of ethanol as cheap fuel will certainly increase in 2008.

Nuclear power

At the moment, the only serious alternative to carbon-based fuels seems to be nuclear power, which is neither very popular among many western countries nor easily achievable for others.

In 2008, the discussion over who has the right to possess nuclear technology will likely continue. Whether new nuclear power plants should be constructed will also be on the table. The whole overall dialogue will be centered on one question: Which is more important, the reduction of carbon emissions or the safety concerns regarding the use and proliferation of nuclear technology.

Soaring Crude Oil and Gasoline Prices Worry US Consumers

By: Jennifer Yousfi

On Friday, oil futures hit a new record of over $126 per barrel. Prices jumped 7.4% last week, with crude oil for June delivery trading as high at $126.20 on the New York Mercantile Exchange.

" Oil is a safe haven because of the weak dollar and how badly the financial sector has been doing," Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, told Bloomberg News . "There are also geopolitical concerns about places like Nigeria and Venezuela that are propping prices up."

News that the European Central Bank (ECB) would hold rates steady at 4% helped to strengthen the euro against the dollar. Meanwhile, continued attacks on oil holdings by the rebel group Movement for the Emancipation of the Niger Delta, or MEND, have severely curtailed Nigerian oil production.

Also on Friday, The Wall Street Journal reported that Venezuelan President Hugo Chavez could have ties to Columbian rebels, increasing the likelihood that the United States could be forced to place trade sanctions on one of its key oil suppliers. If Chavez is aiding the rebels, who are attempting to overthrow the Columbia's government, Venezuela could find itself deemed a "state sponsor of terror" The Associated Press reported.

" If we put on sanctions I'm sure Chavez would threaten to cut off our oil supply ," Phil Flynn, an analyst at Alaron Trading Corp., told the AP "Obviously that would have a major impact on oil prices."

But while political turmoil and a weak greenback are putting upward pressure on the price of oil, concern about how the high prices could put a damper on consumer demand dragged on stocks in the energy sector .

Exxon Mobil Corp. ( XOM ) shed $1.11, a 1.23% decline to close at $88.82 on Friday. Exxon stock was down 0.88% for the week. Chevron Corp. ( CVX ) slightly better and was up 2.17% for the week, having slumped only 0.05%, with a $0.05 loss per share to close at $97.39 on Friday. Royal Dutch Shell PLC ( RDS.A , RDS.B ), a victim of the MEND attacks, also saw declines in its class B shares over the course of the week.

Pain at the Pump

Oil has been reaching new highs for the past several months, but only recently has the impact of the soaring commodity reached the prices at the pump.

The average price for a gallon of diesel climbed to a fresh record of $4.269 Friday, up from $4.251 the day before, and up 47% from a year ago, according to AAA's Daily Fuel Gauge Report, MarketWatch reported. Meanwhile, the price for regular gasoline hit its own record high of $3.671 Friday, the report also showed.

The sluggish U.S. economy is curtailing consumer spending and the high cost of gasoline is finally starting to effect consumer behavior. People are driving less and seeking out the lowest prices at the pump according to a recent Gallup poll. From May 2 – 4, 71% of adults surveyed said that high gas prices have caused them a "financial hardship," USA Today reported.

Strong international demand for diesel fuel is also taking a toll on the cost of gas, as refiners choose to produce more diesel and heating oil at the expense of gasoline.

" Currently underway in the United States and around the globe refiners are investing to maximize diesel capacity … for obvious economic reasons," said Ryan Todd, an analyst at Deutsche Bank, in testimony prepared for a Tuesday House hearing, MarketWatch reported.

Diesel currently demands a higher price than gasoline even though production costs are quite similar. In addition to the industrial demand, diesel is more often used for autos in Europe. And a strong euro is encouraging U.S. refiners to export diesel to the European Union.

Most consumers feel the pain at the pump is here to stay for the long-term and are taking steps to deal with the added costs.

According to Federal Highway Administration data, the number of miles driven by in the United States fell in February for the fourth consecutive month. People are consolidating trips and staying home more. Interest in fuel-efficient cars and mass transit is on the rise and some consumers are even considering relocating closer to their employers.

"This is a more significant shift in behavior than I've seen through other fluctuations in gasoline prices," Steve Reich, a program director at the Center for Urban Transportation Research at the University of South Florida, told USA Today . "People are starting to understand that this resource … is not something to be taken for granted or wasted."

Jennifer Yousfi
Managing Editor
Money Morning/The Money Map Report

Perhaps 60% of today's Crude 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 Jeff rey 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.”

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.

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.

F. William Engdahl
www.engdahl.oilgeopolitics.net

Crude Oil Heading for $134 During 2008 Despite Near-term Weakness

By Donald W. Dony, FCSI, MFTA

Thursday's downward trading of oil brought some relief to the equity markets. Don't expect the decline to last. Technical models are indicating short-term downward pressure until the end of April. As May unfolds, increasing upward pressure should return. The first level of support is at $110 followed by solid support at $100.

Bottom line: The selling pressure in crude oil prices is expected to be brief but swift with good support levels close to current prices. Look for for oil to move back to $120 in May. The near term target is $127 with $134 as the upward target in 2008.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

Energy Sector Outlook: Bullish Oil and Gas Trends Still in Place

By: Joseph Dancy

The price of crude oil hovered around $100 a barrel last month, while natural gas futures pushed toward $10 per thousand cubic feet. Both are impressive due to the fact we are in ‘shoulder season' – a time when moderating weather tends to weaken prices. Long term demand and supply trends remain powerfully bullish. Last month the following events occurred in the energy sector:

• The International Energy Agency updated their 2008 energy forecast. They project world oil demand would grow by 1.7 million barrels per day (b/d), up from 0.9 million b/d in 2007. The IEA projected demand would average 87.5 million b/d in 2008 – a record. The agency noted that transport fuel demand in China remained “very strong”. Year-on-year imports of crude oil to China increased more than 12% in 2007, and the trend continues into 2008. (Financial Times)

• A UBS report compiled a roster of major crude oil projects – those with expected production of more than 100,000 barrels a day – due to come on stream through 2015. With rising demand, plus declining production from existing fields, the industry needs to add at least 4.5 million barrels a day of new supply each year. But relying on major projects won't meet that target according to UBS. In the current year the analysts estimate new supply sources will produce 4.4 million barrels a day, but that figure drops to 2.9 million in 2009 and a paltry 1.7 million in 2010.
  

• The Wall Street Journal had an interesting chart last month which illustrated the trends in excess crude oil production capacity from the OPEC countries. As demand rockets upward – demand is estimated to increase 1.7 million barrels per day in 2008 – the excess productive capacity has fallen to around 1.8 million barrels per day. The lack of excess capacity supports the higher global oil prices we have seen the last few years. (see chart above)
  

• Two interesting charts were published by Gail Tverberg on the OilDrum.com last month. They illustrate the trend in crude oil prices to much higher levels – while at the same time global production seems to have leveled off. If production does not increase, expect prices to continue to trend upward. (see charts below)

• Oil and natural gas discoveries in the Gulf of Mexico hit a 10-year low in 2007. According to Wood Mackenzie, a research firm, companies found the equivalent of 553 million barrels of oil in the Gulf last year, half as much as in 2006 and the lowest figure in a decade. The number of exploration wells drilled in 2007 was also down and close to the 10-year-low. The Gulf of Mexico will continue to be a huge source of energy as it accounts for 25 percent of U.S. oil production and 15 percent of natural gas production. ( Houston Chronicle)

• The oil import bill for the U.S. has skyrocketed 300% since 2002. The oil import bill in 2007 was $327 billion. It should easily top $440 billion this year. The projected increase for 2008 is based on an average $90 per barrel. In 2002, before the current bull market for oil began, U.S. oil imports cost less than $103 billion. (Petroleum Intelligence Weekly)

• The recent run-up in U.S. natural gas prices can be partially attributed to the low level of liquefied natural gas (LNG) imports into the Lower 48 States according to the U.S. Energy Information Administration (EIA). LNG cargoes have been heading to Europe and Asia , where buyers continue to purchase LNG at much higher prices than have prevailed in U.S. markets. The reduction in imports to the U.S. reflects changes in global demand for LNG. Japan , the world's largest LNG importer, is relying more on LNG as a fuel for electric power generation. Some countries in Asia and Europe rely on LNG imports as a primary source of natural gas.
  

• China 's only LNG facility may double purchases of individual liquefied natural gas in 2008 according to official sources. The terminal bought seven individual cargoes for immediate delivery last year. The company is in talks to buy additional LNG on multiyear terms as it increases import terminal capacity. Utilities in Japan and South Korea paid as much as $20 per million British thermal units this winter, more than double the U.S. benchmark price at Henry Hub, Louisiana .
  

• Ocean shipping regulators and industry participants are debating how to reduce harmful sulfur dioxide emissions from their ships. Part of the industry, led by an independent tanker owners' organization, advocates a total ban on high-sulfur marine fuels in favor of lower sulfur diesel fuels. The International Maritime Organization (IMO), the UN agency responsible for preventing pollution from ships, will consider the controversial fuel proposal. The switch to diesel at sea would increase global demand for that fuel by the equivalent of one-and-a-half times the annual automotive diesel consumption in Europe .
  

• China 's fast-growing economy adds one coal generating plant a week. With raw-materials prices rising and the global economy slowing, what has surprised some analysts is how insatiable the appetite for energy is—and the implications that has for the rest of the world. China 's nuclear power sector is also growing faster than expected. The Chinese government is now shooting for 50% more nuclear power than originally planned, with generation capacity coming very close to the output of France . In France this level of generation equates to 80% of the nation's electricity supply; the same amount in China would meet roughly 4% of demand. What this demand will do to global uranium prices, which have already gone vertical in the last five years, is anybody's guess.

• China 's leaders are facing renewed pressure over shortfalls in diesel and gasoline, with lines growing at filling stations in major cities as the gap widens between international crude oil values and centrally controlled fuel prices. The shortages, first reported in southern and inland China , appeared to be spreading to the wealthier coastal areas as filling stations struggled to get shipments from refiners. More imports might be required to address these shortages.

Joseph Dancy
Adjunct Professor: Oil & Gas Law, SMU School of Law
Advisor, LSGI Market Letter