Friday 16 March 2012

'Forcing Down the Price of Oil': Good Luck With That

So Obama and Cameron, this pair of Cnuts, intend to bring down the price of oil ? I recall Gordon Brown of evil memory scuttling to Saudi Arabia in 2008 with the same objective last time around. If he claimed the credit for lowering it from $147 to $30 well, no-one gave him any. Markets, dear boy, markets.

Of course the Big Boys have Big Levers to hand, and the Americans are not averse to using them. And hey, it's Election year ! Let them recall how futile was their last essay in flooding the market with strategic oil stocks, however. The effect lasted about a month: and the (Brent*) oil price has still never been below the $100 it reached 14 months ago.

Gasoline at the pumps may be slightly different, particularly in the UK, because there is so much tax in the final price, which can of course be reduced if so determined. But there is far less tax
in the US price, and hence far less scope. The American 'driving season' will soon be in sight and as we know from 2008, if retail gasoline is in excess of $4/gallon, the driving season is spontaneously cancelled and everyone feels heartily pissed off. In Election year !

So we wait with interest to see what intervention they have in mind. Don't be surprised if we see another May Massacre - the concerted attempt to flatten the prices of commodities and precious metals at the beginning of May last year. It was dramatic, it had an impact. But not for long. There are many months before that Election and only GlobalRecession2 will bring down the price of oil fundamentally. The market is bigger than the politician - even the POTUS.

For which we may be grateful.


suggestion to POTUS - if you don't like today's price of oil, you'll just hate what happens if you mallet Iran ... jus' saying ...

WTI has been below $100 but that is a quirk of the delivery system at Cushing and has nothing to do with world oil prices


Barnacle Bill said...

The thing that got me scratching my head was where are the UK's strategic reserves hidden?
Is it sloshing around down in the cellars of No.10?
But you are right Paddy O'Bama is looking desparate with his attempts to bribe the US sheeple to re-elect him.
Almost as bad as the Buffty frae Kirkcaldy with his aircraft carrier bribes north of the border.

Steven_L said...

Well I think that the Fed could easily force down the price of oil simply by reversing QE and forcing rates right up.

Anonymous said...

Steven_L: "Well I think that the Fed could easily force down the price of oil .. "

An apposite point, given that oil is traded in US$ and given further that in the US QE1 ... QEx have devalued the US$ then the price in dollars of oil has appeared to rise.

Both Cameron and Obama are being disingenuous.

No change there then.

Budgie said...

ND, I really like your description of Obama and Cameron as "this pair of Cnuts". Works on so many levels.

How is it that statists like O'Barmy and the lesser Millis - MilliCam and MilliBand - all think that over taxing, over borrowing, and over spending by the state = good? Yet when they need a boost they reduce taxation (eg VAT). Have they not connected the dots? Are they Lizards or just thick?

Nick Drew said...

BB - yes and it will be a complex juggling trick: the easy bit was offing Osama but it gets trickier from here on out

imagine what the Israeli's shopping-list must look like ...

simply by reversing QE and forcing rates right up

indeed, Steven - aka GR2: more juggling, I'm afraid

anon - yes but note oil is even higher now in £ and € than it was in 2008

Budgie, glad you liked it (- but I can't much imagine you like this week's Economist ...)

alan said...

Best I can divine about this is they are expecting a rise in prices when the Iran embargoes kick in. Although I thought that didnt stop Iran from selling to China and so prices wont change much?

Plausible it is just for election year, but might be deeper reasons than Obama wants to win. The Republican party wants to bomb Iran into the dark ages so another 4 years of Democrats might be good for everyone.

And then there are the radical fundamentalist Christians in the Republican party. If Santorum ever became POTUS... I hate to think what craziness will follow. (Likely Romney will win the nomination race this time.)

alan said...

Just read this..

Iran is being removed from the world banking system Society for Worldwide Interbank Financial Telecommunication (SWIFT) this Saturday.

Oil prices 5% higher? Gold prices 5% higher? Both?

Nick Drew said...

seems there are still a few more screws left to turn, alan

though I imagine someone will offer them a 'facility' of some kind, for a small % ...

after all, S.Africa never had any real difficulty sourcing crude oil - at a price

Electro-Kevin said...

Budgie - 'pair of Cnuts' working on so many levels.

I can only count four - three of them basement.

rwendland said...

ND re the Economist article. In the video (good and balanced) the expert (Oliver Morton) said @5:40 "onshore windpower looks cheaper than nuclear in many markets" as if it was an uncontentious statement. I thought this was the general opinion amongst well informed economic observers, but you thought differently in an earlier thread. Has this view now spread to be the general opinion amongst financial energy insiders?

A large part of the reason for this is onshore wind has now become a predictable technology, build time and cost wise - so attracts much lower cost finance that for nuclear. Nuclear needs to tap into state finance at low discount rates to be able to compete on cost.

I notice the recent Cour de Comptes (~French NAO) report on French nuclear power economics says EPR electricity per MWh will cost about double that from the old fleet, and that is I believe using a pathetically low state 5% discount rate:

"... Cour des Comptes only knows the estimated construction cost of E6 billion for the Flamanville EPR, which gives a generating cost of at least E70 to E90/MWh, and bearing in mind that this is not the cost of a standard EPR."

If it is E70 to E90/MWh on a 5% discount rate, the economics looks hopeless with any private finance. Thats roughly the cost of onshore wind leccy using private finance.

I'm even beginning to become bored with the detail of nuclear economics now! It seems a completely lost war now, assuming EDF cannot tap directly into state finance, and hardly worth the trouble of commenting any more.

Nick Drew said...

"onshore windpower looks cheaper than nuclear in many markets" as if it was an uncontentious statement. I thought this was the general opinion amongst well informed economic observers, but you thought differently in an earlier thread

my concern on both nuke and wind, Mr W is that (for different reasons) we don't have a good grasp on the full-cycle costs

I am starting to get a handle on the effects of wind in the German market and it's worse than just balancing the unpredictable load, as I would have said a while ago

analysis is still work-in-progress, but I am beginning to see nuke in a (very slightly) more favourable light (Budgie, you reading ?)

consistent with what you are saying, part of the problem with nukes is the sheer scale - no-one, not even the French, can be insouciant about costs & liabilities & financing & uncertainties on that scale

and as you say, many aspects of wind are 'predictable' now, and relatively bite-sized in any event

though unreliability and breakdown is starting to become a previously rather overlooked issue for wind ...

Budgie said...

Sorry, I missed all this, so I will only add one comment.

It is no use being ever so particular about capital costs and discount rates for Nuclear, whilst failing to be clear whether the Wind figures quoted include the necessary 100% Gas backup costs. I can well believe that Wind has a lower capital cost than Nuclear. But Wind + Gas cheaper than Nuclear? - no way.

rwendland said...

We've been around this 100% gas backup claim for wind before. You would not claim a 98% reliable technology (like HVDC) requires 100% backup for the 7 days/year it is failed for - we need to look at this in a system wide fashion to ensure the overall system is reliable.

First thing to notice is the huge daily demand changes, outside the peak ~4 hours per working weekday there is plenty of spare capacity already.

Part of wind's reserve could eg come by greatly expanding the grid's existing Standing Reserve, which is hundreds of backup diesel generators at large consumer sites (~660MW) already contracted to the Grid to start on 20 minutes notice. Expensive power, but if only needed on a handful of winter windless working days for 4 hours not much on the annual costs. (These diesel generators already need to be run a few hours per quarter for best reliability, so the owners quite like a bit of extra money for doing it when the Grid asks.)

We can also use demand management more, so large consumers agree to shutdown for an hour or so for money - some users like huge cold stores can do so with little operational consequence.

The other thing to note is that wind on average is well aligned with seasonal UK demand - more wind in the winter & less overnight, aligned with demand. UK wind capacity winter daytime is 44%, summer nighttime is 13%. So at an average level helps UK generation more when most needed - compensating to some degree for the variability difficulty.

Wind variability is an important issue, but it certainly does not need anywhere near 100% backup. With careful use of old marginal & backup generation, and some demand management, might need no new backup generation built at all, at some reasonable level of wind generation.