Kudlow – “Drill, drill, drill, so that the futures traders will flee.”

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Oil_barrel Larry Kudlow, the financial whiz, was on the Joe Scarborough show on MSNBC today.  He repeated his unending mantra of "drill, drill, drill," as a way out of the current wilderness of high priced crude.

His insistence on this simplistic solution to the short term price situation has never made a lot of sense to me.  Kudlow is a smart man.  He gets around enough in the right circles to know that short term traders in oil futures are the fire behind the crude prices we see now.

When pressed by one of the hosts on the show to explain how favorable congressional action on drilling both on and off shore would affect the price in less than several years, he "came clean."

"Ah," he said (roughly).  "Approval of drilling will frighten the futures traders out of the market and the price will go a long way down."  "They are already leaving the oil futures market" he went on.  "This will push them out even faster."

Need I say more?  pl

http://en.wikipedia.org/wiki/Larry_Kudlow

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63 Responses to Kudlow – “Drill, drill, drill, so that the futures traders will flee.”

  1. drauz says:

    “Kudlow is a smart man.”
    Perhaps, but he is also an unabashed wanna-be manipulator of market opinion & behavior… Why would futures traders flee if the true impact of drilling is both negligable & far into the future (18 mos or so, by market standards)?
    I think he simply hopes for a short-term downdraft in crude prices… say, till around early November.

  2. linda says:

    you ‘drill, drill, drill’ so you can be ‘sell, sell, sell’ to furriners — who probably speak french…:
    ANALYSIS-US oil firms seek drilling access, but exports soar
    Thu Jul 3, 2008 8:04pm BST
    http://uk.reuters.com/article/oilRpt/idUKN0325640920080703
    By Tom Doggett
    WASHINGTON, July 3 (Reuters) – While the U.S. oil industry wants access to more federal lands to help reduce reliance on foreign suppliers, American-based companies are shipping record amounts of gasoline and diesel fuel to other countries.
    A record 1.6 million barrels a day in U.S. refined petroleum products were exported during the first four months of this year, up 33 percent from 1.2 million barrels a day over the same period in 2007. Shipments this February topped 1.8 million barrels a day for the first time during any month, according to final numbers from the Energy Department.
    The surge in exports appears to contradict the pleas from the U.S. oil industry and the Bush administration for Congress to open more offshore waters and Alaska’s Arctic National Wildlife Refuge to drilling.

  3. fnord says:

    Meanwhile, here in Norway todays headlines was “Oil below 100 within a month”… Two points to you, colonel.

  4. ISL says:

    This is a particularly lame explanation, and outside the media echo box shouldn’t even exist.
    When Brazil “found” the massive deep oil water find of a possible 33 billion bbl (proposed third largest in world) back in April 2008, had no effect on scaring futures traders. There is no question, either about permission to drill.

  5. Clifford Kiracofe says:

    1. “Federal lands hold an estimated 650.9 trillion cubic feet of recoverable natural gas, enough to meet the natural gas heating needs of 60 million households for 160 years (approximately 60 million households in the United States are heated by natural gas).
    Federal lands also hold an estimated 116.4 billion barrels of recoverable oil, enough to produce gasoline for 65 million cars and fuel oil for 3.2 million households for 60 years.”
    http://www.api.org/policy/exploration/expanded-access.cfm
    2. Anent Access Restrictions, graphic at: http://www.api.org/policy/exploration/upload/Watson_Access_Restrictions_map.ppt
    3. Anent Natural Gas/US note data at:
    http://www.npc.org/
    4. Anent Coal:
    http://www.nma.org/statistics/pub_facts_coal.asp
    5. Future for US, see section “Energy Ooutlook” at:
    http://www.npc.org/
    6. Here are some photos of Bloemenveiling Aalsmeer, largest commercial flower auction center in Europe…plenty of tulips there.
    http://images.google.com/images?hl=en&q=Bloemenveiling+Aalsmeer&btnG=Search+Images&gbv=2

  6. Matthew says:

    Col: Robert Bryce in his book the “Gusher of Lies” remarks that energy independence is not only unattainable, it is bad policy. Kudlow, Friedman, Woolsey, et. al. just have to realize the oil-producing countries are going to be richer and we have will have less leverage against them. To which I say, so what? The last decade has been one of “opportunity” without a counterforce. Isn’t that the exception historically?

  7. Patrick Lang says:

    ISL
    Professor, I would be more impressed if you did not clearly “have a dog in this fight.”
    Mongoose
    Do you and ISL work together? Your e-mail address indicates another professor or graduate student.
    All
    I suppose I will get e-mail from dogs who want anonymity on the internet. (New Yorker cartoon reference) pl

  8. Mongoose says:

    Kudlow smart? That remark is hard to swallow Colonel given the thin reed of evidence on which to base such a conclusion. Kudlow is smart in one way only: he makes every proposed solution sound so simple, kinda like Bob Novak when he was not just a crotchety ole ideologue but an entertaining crotchety ole ideologue. For Novak, tax cuts were the cure for everything from scrofula to abortions. I’m sure Kudlow “knows” that drilling for offshore oil is key to reducing obesity in the U.S. See how simple some problems are to solve?

  9. Patrick Lang says:

    Matthews
    Sounds like moralizing is driving your thinking. I prefer 60 dollar oil. pl

  10. Richard Whitman says:

    The trouble with Kudlow and his followers is that they have an almost mystical belief in “free, unregulated markets”. The last three recessions were brought to us by free, unregulated markets with a heavy dose of criminality thrown in. No wonder the Fed and the Treasury are calling for more financial regulation.

  11. Mongoose says:

    Colonel:
    Sorry, but I don’t know ISL. I’m a history professor at a small regional university in the southwest. I prefer to remain “anonymous” on the off chance that I will embarrass myself by unwittingly revealing my own level of ignorance and/or stupidity. In other words, if I get called out as an ignoramus only I will know that it’s me.

  12. Alex says:

    Kudrow now thinks the possibility of a little more oil for a while in the indeterminate future will spook the market down. Back in 2002, he thought destroying Iraq’s export pipelines would send the stock market way up and the effect on the oil price wouldn’t be a problem. He also wanted to simultaneously invade Iraq and Pakistan using only SOCOM!

  13. Patrick Lang says:

    All
    As you know the PPB dropped momentarily to under $120 this morning.
    The dummies on the finanacial cable channels are unhappy because they can’t explain the fall in crude prices from 147. Until it fell, they were all looking for a virtually infinite run up. wonderfully, they are now trying to rationalize their analytic failure with the usual easter egg hunt for shreds of “evidence.”
    It is unfair to expect them to analyse. My bad. They are actually the equivalent of sports reporters. pl
    100/bbl in a month, 60/bbl later on. pl

  14. Jose says:

    Just another Jacobin pushing their agenda:
    http://blogs.wsj.com/politicalperceptions/2008/08/03/can-4-gasoline-drive-mccain-campaign/
    Anybody know if the negotiations with Iran had any impact on the price drop?
    Here another article that claims how to really lower the price of oil, much to the Jacobin’s amusement:
    http://www.huffingtonpost.com/robert-naiman/want-lower-gas-prices-lif_b_116341.html

  15. zanzibar says:

    There seems to be a few more blow-ups coming in the hedgie world as there were a few who were long oil/short financials as a leveraged trade.
    The double whammy of the short squeeze in financials and the oil shorts taking the short-term bacon is causing an unwind of this pair trade as the margin calls come in. The mo-mo quants once again getting burned!

  16. ISL says:

    Dear Colonel,
    Really wish I had a dog in the fight (or an investment – or rather any investment other than a depreciating house.
    Actually, I agree with you that in the short term chasing the speculators out of the market will drop oil prices. However, my point is that the speculators are not chased by news of potential oil reserves a decade or more in the future (lets lease lease lease), but rather firstly changes in demand and secondly interruptions (hurricanes, geopolitical) and cessation of those eruptions.

  17. alnval says:

    Col. Lang:
    Larry Kudlow? This may be one of the few times when an ad hominum argument may make some sense.
    Unlike Arthur Schlesinger who, when asked why he never got his doctorate is supposed to have replied, “There was no one to examine me,” Kudlow doesn’t have the same excuse. He just didn’t finish.
    A man with an uneven, marginally productive if not unstable intellectual history and 13 years into a period of ostensible rehabilitation from a publicly acknowledged and professionally devastating polysubstance addiction, his intellectual bearings appear to have stabilized sufficiently to continue to qualify him as an intellectual hack who is willing to attach himself like a limpet to whatever economic position has popular currency and personal financial reward.
    Like the monkeys in the British Museum it is inevitable that Kudlow might eventually say something worthwhile but the amount of due diligence required to confirm it would quickly make its value outdated and worthless.
    Unless you were engaging in an enormous irony alert, or, I totally misunderstood the purpose of your post (which is very possible), I find it hard to believe that you would either define Kudlow as a “smart man” or use his thinking to support your own.

  18. SAC Brat says:

    Working in the airline industry “100/bbl in a month, 60/bbl later on. pl” is a big deal. Above 80/bbl the economic equation of flying planes versus selling tickets gets unstable because an increase in ticket costs leads to less tickets sold. 60/bbl means a really happy airline industry which will likely find the scratch for new planes.

  19. Patrick Lang says:

    All
    I keep trying to persuade you all that you have to consider information separate from its source. pl

  20. Curious says:

    Uncle Saudi come to the rescue.
    (Boy if this isn’t a sign the planet is controlled by few people, I don’t know what else.)

  21. Jonathan House says:

    For me the key post in these oil threads was that of Shephard who wrote:
    What I’m missing in this discussion is a “how.” Everyone seems to be assuming that the market is being manipulated, and speculators are making a killing, but what I’d like to know is the mechanism by which they’re doing it. I can explain to you how mortgage securities were manipulated, I can explain how Lehman’s stock has come under pressure, I can explain how Enron drove up the price of electricity in California. What I don’t understand is how speculators are influencing the price of oil through futures markets. Perhaps there is a way this can be done, but I don’t know what it is.
    Posted by:shepherd | 25 July 2008 at 08:18 AM
    Here are some old posts in which I too question the role of speculation and the futures market AND some predictions about price that were made.
    Pat Lang on 19 July
    … The short term problem is not the same. This is and has been a bubble generated in the ways that have been discussed in previous articles. Short term investment in the futures and spot markets have driven prices to levels unrelated to present supply and demand. The markets have recently been a fantasy world without real limits for movement on the up side.
    The bells are now tolling for that fantasy. The smart people who stand to lose from this festival of childish greed have been kicking the psychological props out from under the process of finding bigger and bigger fools.
    You don’t think so? Good. It will be amusing to see how much money is lost in your disillusionment.
    Sometime in the next few months the price per barrel will fall below 100/barrel. It will be interesting to see how far it falls below that level… pl
    Dear Pat,
    It seems to me that your intuition is that the recent decline in the price of crude from about 145 to about 125 suggests something about the questions of “bubble” and/or “speculation” and/or the question of whether, how, and by how much the futures market affects the spot market or vice versa.
    I am not sure what you are saying about any one of these “issues”. So I don’t know how what evidence would count as tending to disconfirm your intuition.
    For instance, if the spot price spends the next 6 month largely between $110 and $130 would that change your view in any way?
    Posted by:Jonathan House | 19 July 2008 at 11:43 AM
    [Pat replying to a challenge to make a prediction]
    OK. I think we will see $80/barrel sometime before 1 January, 2008. pl
    Posted by:Patrick Lang | 23 July 2008 at 12:07 AM

  22. rc thweatt says:

    Source: Former offshore oil “boat trash”.
    Information: The estimates of seven years before any oil is produced from new offshore fields is very likely accurate, and may be optimistic. It would take 3-5 years assuming adequate resources, which don’t exist. If the Federal ban were lifted, and Florida decided to risk her beaches(actually, not much of a risk), nothing much would happen for years- there are not enough offshore drilling rigs and ships, pipe-lay barges, boats, or people. Fifteen years of cheap oil have seen to that. The traders know this perfectly well- they can google ‘offshore oil rig utilization rate’ just like I did and note it’s well over 90% world wide.
    I consider that the perception that an attack on Iran is less likely is far more potent- remember the spike after that Israeli exercise?

  23. Patrick Lang says:

    Jonathan House
    OK. “Giving me the high hat…” as the man says in Miller’s Crossing.
    If I am right are you going to say so? pl

  24. Patrick Lang says:

    b
    Surely you are not one of those people who think that trends will necessarily continue.
    If by “technical” you mean the chartist shamans, that has nothing to do with me.
    My whole point has been that the markets are exercises in mass psychology. That has nothing to do with drawing imaginary models on graph paper. pl

  25. Bobo says:

    Now that we have seen $4.00 per gallon gasoline our politicians are falling over themselves to come up with a new Energy Policy.
    We the Public should hold their feet to the fire until a bill is signed into law that aims to make the USA self sufficient utilizing a mix of energy sources, new and old.
    It may take twenty to thirty years but a least our energy needs will be met without meddling into other areas of this world.

  26. Jonathan House says:

    Pat,
    If the price averages below $110 for any three month period between now and August 2009 I will say – on this list – that you were right and further will contribute $100 to any charity you name.
    However, even if that happens, barring a coherent answer to Shephard’s question, I will conclude that the cause of the large variations in price during this period was, in your words, that “markets are exercises in mass psychology” (namely the spot market) and not that speculation in the futures market was what moved the spot market.
    Jonathan

  27. Patrick Lang says:

    Jonathan House
    Are you really a photographer from Portland Oregon whos is working as a staffer? That’s what Google says?
    You are being tedious and sophistic. Investor=speculator=capitalist. Get it now? There is nothing sinful about speculation.
    Short term trading in oil futures and the spot markets ran up the price. How hard is that to understand?
    Someone here posed the same question and then answered it. I am not going to search for the answer. pl

  28. Ingolf says:

    PL, the slightly surprising thing (for me at least) is the sheer enthusiasm you’re displaying for this whole business. A bit of schadenfreude when market lunacies are at last unveiled is understandable (indeed, pretty much unavoidable for those of us who watched the absurdities of recent years with amazement), but this almost feels personal. In any case, it’s not as if there’s a shortage of equally good examples of cretinous market activity in recent years. Like, for example, the lemming like behaviour of much of the financial sector.
    As it happens, I’m pretty much in your camp on this one, both when it comes to the influence of speculative (or, I think perhaps more accurately, institutional money) in the recent runup and the chances of a real washout over the next 6-12 months. Still, I don’t know that it’s a lay down misere. Sentiment on crude has dropped back to levels not seen since late last year/early this year (when prices were around $90-100) and large speculators (as per the CFTC COTs report) are no longer net long (something not seen since early 2007 when crude was around $60-70). I appreciate the exchange traded business tracked by the CFTC is only a fraction of the OTC activity in crude (or anything else for that matter) but it’s nevertheless an interesting (and visible) indicator. Oil may just plummet but it might also be a pretty wild ride.
    Jonathan, you pose an interesting question. As far as I can tell the various contract prices for physical crude have for some time keyed off futures based benchmarks (see the link below for quite a lengthy discussion of this issue). If this is right, it seems to provide the transmission mechanism you’re looking for. My own view, FWIW, is that a good deal of the move in commodity prices of all kinds has been driven by the entry in the last few years of sizeable mainstream institutional money for the first time ever (the estimates I’ve seen suggest about US $250 billion has poured into direct commodity related investment vehicles and that’s just in the US). However that exposure is attained, whether through futures based funds (like many of the commodity ETFs), or through custom derivatives put together for the institutions by houses like GS, I can’t see how this sizeable (and entirely new) net buying interest wouldn’t have significantly effected the markets it was entering. Equally, of course (and this is where I think PL is spot on) when a decent chunk of this money wants to leave, I doubt it’ll be a smooth exit. In fact, it wouldn’t surprise me if it got very messy indeed.
    Here’s that link to a discussion of crude pricing:
    http://www.nakedcapitalism.com/2008/07/futures-prices-determine-physical-oil.html

  29. Patrick Lang says:

    Ingolf
    Thanks for explaining it to him. Do you have a charity you would like him to send the money to?
    Yes. It is true. I am enjoying the failure of group think in this matter.
    My bad. pl

  30. Colonel, with all the respect of a niece or daughter, I must say that I am enjoying your high dudgeon in this exchange. This is probably my bad. I am not really following the actual issue. Just appreciating your attitude and glad I’m not the one incurring your ire.
    My fondest regards to you, sir. If I were your daughter I’d give you a big ole’ hug and a kiss right now. (OK I miss my dad).
    Sorry to go so sappily off-topic on such a serious blog.

  31. Colonel, sir, did you try using the quote marks to narrow your search? “Jonathan House” returns the author of _Combined Arms Warfare in the Twentieth Century_ published by University Press of Kansas. Cannot be the same as that 27 year old blogger, the Scorpio with the three-day beard. Also see _The Battle of Kursk_ co-authored with David Glantz from U Kansas Press as well.

  32. PeterE says:

    About Kudlow’s argument: Martin Feldstein, a real economist, made a similar prediction about futures markets, but the prediction is at best speculation and the recent behavior of the futures markets suggest that if offshore drilling is approved, the prediction will be refuted.
    The price of crude seems to be falling because demand is falling.

  33. zanzibar says:

    All contracts that I am aware for purchase and sale of physical crude over a period of time is indexed to the futures price.
    It is quite similar to the ag complex in that regard. If you want to buy rail tank car loads of soy oil or canola oil from ADM or Bungee over a period of a year the monthly price on the purchase contract will be indexed to the average monthly price of the near CBOT futures contract.
    In recent months more and more money entered the commodity markets through ETFs and other vehicles for example PIMCO’s Commodity Real Return Fund which is a mutual fund. Many of these index funds purchased futures contracts and or swaps.
    In addition many hedge funds in recent months had a leveraged pair trade which was long oil/short financials. They made a killing in the month of June. But that same trade is now underwater. In July non-commercial investors were net short oil. Like Pat, I had made an observation when the discussions on oil prices came up here on SST that the oil market was in contango and that was historically well correlated with subsequent changes to the downside that we have now seen.
    I believe Pat has absolutely nailed the definition that “markets are exercises in mass psychology” with pendulum swings between greed and fear. Many of the quant funds which trade on momentum and relative strength pile on to rising or declining markets accentuating the rides.
    Having said this a point will come when the short oil trade will become crowded and the better risk trade will be to take the bet on the long side. However, since the momentum crowd is on the other side getting the timing right is absolutely imperative unless you want the margin clerk ringing your bell.
    Now in defense of speculators and shorts in particular these are the folks that risk their own or other peoples capital and enhance market liquidity. Now Chairman Cox wants to blame shorts for the debacle in Bear Stearns and Lehman and Fannie Mae. He however fails to inform the public that the shorts never played a role in the decision making by these banks to pile on the CDO and leverage loan asset binge. The Chinese stock market bans all short selling yet it is down 50% year-to-date as bids have disappeared. It would be more useful for JoePublic investor if Chairman Cox would investigate for example John Thain and if he has committed investor fraud by his statements and withholding of material information during his many public pronouncements on Merrill Lynch’s balance sheet and capital position. Isn’t it ironic that as oil prices were rising federal regulators were on the case of speculators for market manipulation but now as it declines there is no such outcry? The flip is true in financials – as their stocks were rising regulators were cheerleading their leveraged investments in illiquid securities and now when there is no bid for these OTC trades the regulators focus on shorts who had nothing to do with management of these firms shareholder capital. Of course such cognitive dissonance is part of a normal days work when uber-capitalist and ex-CEO of Goldman Sachs – Hank Paulson becomes Comrade Paulson and showers his generosity with our hard earned money on those like him that screwed up big time with bad investment decisions but made a ton while the going was good. I understand it must suck as the market price gets close to your option strike price. But I am sure Chairman Cox will look the other way as the options are way backdated and earnings are manipulated with accounting shenanigans to goose the stock price.

  34. Ingolf says:

    Yes, it is hard not to take at least a little enjoyment out of watching reality (finally) intrude upon some of the more vaporous schemes . . . . so perhaps my bad too.
    I appreciate the offer but given how bumpy I suspect the ride to the promised land may turn out to be, leaving the choice of charity to you (whenever the time comes) seems best.
    By the way, how do you prefer to be addressed? Colonel feels a bit unnatural to me and Pat (at least uninvited) seems too familiar.

  35. SAC Brat says:

    I didn’t get a chance to add earlier that the airlines have been accusing speculators of running up oil prices. While I am always on the look-out for prestidigitation, I think the airlines are upset that the financial carnival showed up in their neighborhood and shot their business in the chutes. Since the airlines had leaned their operations this was supposed to have been good year for them, but high oil prices screwed that up.

  36. Buff52 says:

    All avenues of energy self sufficiency must be invested in and explored by American entrepreneurs. Americans engaging in “free” enterprise, taking chances, have always brought us prosperity, with God’s blessing, in the past. Why not let us use this formula for success today regarding energy?
    In 1763, King George III decreed an artificial “Demarcation Line” across which he said Americans could not go west beyond the Appalachian Mountains. Today Congress has set a “Demarcation Line” across which Americans can not drill for oil. We have to stop Congress from holding us back like King George III did.
    We must plant “seed” into every EVERY form of oil, wind power, liquified natural gas, solar, and alternative energy enterprise that we can find.
    We know enough today about how to do this while taking care not to pollute.
    We must vote out and/or impeach every politician in Congress who blocks oil drilling in the oceans next to American, on Federal Lands, or in Alaska.
    Lets do it all today.

  37. zanzibar says:

    Buff52
    The biggest bang for your buck in the short term is conservation and improved efficiency.
    More fuel efficient automobiles, better home insulation, lower thermostats in the winter, less aircon in summer, telecommuting, rideshares, mass transit and re-urbanization around public transport will get better returns in the short term than any other strategy.
    There’s no reason why we need to eat grapes in winter! Become a “locavore” instead.

  38. J says:

    Colonel,
    had it not been for the stone-walling by standard oil, we as a nation today would be well on our way towards the beginning stages of oil independence. remember the fully electric cars that general motors in the 90s produced and were fixing to release/sell to the public, then all of a sudden the totally electric car by gm was no more. standard oil had the patent on the battery that gm used to develop/produce their totally electric car, standard oil refused to release patent rights and forbid gm from using ‘their’ battery in the gm produced total electric car. gm was then stuck in a real pickle. the full production line that gm had produced all went to the crusher.

  39. searp says:

    As a long term investor, I am willing to suffer the volatilityin order to capture the trend. Pat Lang’s comments are all about volatility. Personally, I am holding and will add when I have more money. Oil and fossil fuels are going to be the favorite commodity investment for the next generation. That alone will guarantee good returns for the long term investor.

  40. Jonathan House says:

    Dear All,
    I do not want to sully anyone’s reputation. I am neither the photographer nor the historian.
    I am not sure what the significance of demographics are in this context but to distinguish me from those others, I am a 61 year old psychiatrist who practices in NYC.
    On reflection, what I thought of as tenacious insistence on an important distinction was tedious.
    Sorry about that.
    Jonathan House MD

  41. Jonathan House says:

    I have now read the source posted by Ingolf and the source’s source. I was wrong. I now understand how money in the futures market can affect the spot market price.
    Thanks for the education.
    The link Ingolf provided was:
    http://www.nakedcapitalism.com/2008/07/futures-prices-determine-physical-oil.html
    Jonathan

  42. fnord says:

    zansibar: One of the main problems is the freighting of luxurygoods through air. As earlier mentioned, a investment in blimp-technology for the slow movement of cargo seems like a interesting national investment, as opposed to, say, a missile shield wich will be obsolete by the time it gets constructed.
    J. House: Barring all out war in the ME, I can see very small odds on you not having to fork out those monies. At least Norwegian oilexperts of all ilks are getting ready for 80-90 per barrel. Wich is still ridicolously much higher than the estimates 2 years ago, so in a sense you can say that the speculators have managed to raise the plataeu of the oilprices. New spikes will go from there, not 23 and spare change as just a few years ago.

  43. If my memory is correct PL asked his blog readers to give their best estimate of oil prices the end of 2008! Time will tell. Speaking of facts not sources, any speculation on impact of markets, oil or others, depending on outcome of US elections? My guess is that international interest in the outcome is at a all-time high and inflow of FDI (Foreign Direct Investment) although illegal in the Presidential election is also at an all time high. Question for both candidates in debate, have you made any foreign policy committments to foreign governments that are not public? If so what are they? The same question but as to their large donors?

  44. Fred says:

    On a related energy note:
    Daimler sues battery maker
    Detroit Free Press 08/05/08
    “Daimler AG, maker of Mercedes-Benz luxury cars, sued Cobasys LLC, saying the company won’t provide battery packs as agreed for a planned Mercedes-Benz gasoline-electric SUV.
    .
    .
    .
    The Orion Township -based company is jointly owned by Energy Conversion Devices Inc. and a division of Chevron Corp.”
    (Think there might be any conflict of interest between the battery supplier owners and the auto maker?)

  45. R.W. Bloomer says:

    Last fall The Chicago Mercantile Exchange and the Chicago Board of Trade discontinued floor trading of PORK BELLIES. Here in my little corner of Colorado, the retail price of BACON fell by half within two weeks

  46. Bill D says:

    Its all Cheney’s fault. As long as it looked like he was driving the Iran policy. The Shorts had to stay out of the game. As soon as a slight sign of sanity appeared, they jumped in and started screwing over the Longs. The market can now look for the price that balances everything out.
    $147 kills a lot of demand. $75 did not look to be a problem for the overall world economy. The balance price may not be to far South of where we are now. My guess is $105.

  47. Jon T. says:

    Interesting that so many people comment on Larry Kudlow. I went to undergrad school with him. It’s illuminating to see who evolves where.
    Yes he’s smart. So is Vandana Shiva and she has a very different take on markets, having been a founder of Navdanya.

  48. Clifford Kiracofe says:

    Drill, drill of course. Exploration and production contribute to supply.
    But…haven’t the radical enviros blocked US exploration and production here at home??? And didn’t the Zionist Lobby block a major US deal for Iranian hydrocarbons during the Clinton Administration and continues same and more???
    Logically to find data about drilling here at home one turns to API.
    This is their Exploration and Production page. Note in particular the map. http://www.api.org/policy/exploration/index.cfm
    Context? API says:
    “Federal lands hold an estimated 650.9 trillion cubic feet of recoverable natural gas, enough to meet the natural gas heating needs of 60 million households for 160 years (approximately 60 million households in the United States are heated by natural gas).
    Federal lands also hold an estimated 116.4 billion barrels of recoverable oil, enough to produce gasoline for 65 million cars and fuel oil for 3.2 million households for 60 years.”

  49. Mongoose says:

    Clifford,
    Just a guess on my part, but anecdotal evidence here in the oil/gas patch would suggest that rigs are in tight supply. Halliburton and other oil & gas service providers are crawling around the southwest like an army of hungry ants–you literally can’t drive a highway or byway without seeing several of them. Lots of drilling, lots of exploration going on. More telling, I think, is the capacity or lack thereof of big oil and gas in the U.S. to refine more product. How much elasticity is there in the existing refineries? Off the top of my head, I’d guess not much, given the lack of expansion of refining facilities over the last few decades. So even if exploration/production ramps up, how is that going to push prices down? For McCain’s drilling panacea to take hold it seems to me that not only would more rigs be needed, but oil & gas interests would have to invest massive funds to expand refining capacity–something I don’t see happening anytime soon.

  50. Cieran says:

    Dr. Kiracofe:
    But…haven’t the radical enviros blocked US exploration and production here at home???
    No, actually.
    While environmental groups have opposed opening up sensitive areas to drilling (as they ought to in some cases, since the long-term environmental costs to society of such development far outweigh the near-term benefits to oil companies), anyone who believes that environmental organizations control the exploration agendas of energy companies during the Bush/Cheney administration really needs to get out more.
    Instead of quoting the American Petroleum Institute’s opinions (that’s like asking the fox for policy guidance on protecting the henhouse), you might instead examine oil corporate data that can’t be as readily massaged for public consumption because its accuracy is required by law, e.g., Exxon-Mobil’s most recent quarterly earnings report.
    As virtually every major media outlet has reported this week, Exxon-Mobil spent $8B this quarter on stock buy-backs, compared to $7B on exploration and production combined. That tells us pretty clearly where their corporate priorities lie.
    And decreasing investments in production are why opening up every square inch of the U.S. to exploration won’t do all that much to increase near-term supply, because production infrastructure is already tightly constrained, and often by oil company designs (as I pointed out to you earlier regarding U.S. refinery capacity).
    Finally, please note that what radical enviros have been doing lately is firebombing the homes of university professors, e.g., this week’s attack on UC Santa Cruz faculty. That’s domestic terrorism of a completely different variety than what you assert.

  51. Clifford Kiracofe says:

    Mongoose, All
    I am concerned with strategic energy policy and results for the medium and long term.
    The White House and Congress have not effectively addressed this issue as we all know. And as we all know there is a lot of volatility right now for a zillion reasons.
    Investments in domestic infrastructure which produce, transport, refine, store etc. hydrocarbons and jobs I should think would be most welcome.
    I would rather be spending the money on infrastructure and energy development here at home than pouring it down the toilet in the Iraqi sandbox quagmire. Where are we now in Iraq? One trillion or more for what? (I know the Neocons and International Zionism….)
    Natural Gas is another area of great promise. See the reports by the National Petroleum Council. We do have one by the way but it doesn’t seem to get listened to.
    http://www.npc.org/

  52. Clifford Kiracofe says:

    Cieran,
    As Col. Lang has observed it is useful to evaluate the source and the data separately.
    I noted the map at the API site…would you have any comments about the map? And a definition of “sensitive areas” for us?
    Just why have these areas shown on the map been locked down? Off the Atlantic Coast? Off Florida? In the Gulf of Mexico? In the Rockies? Is it not the environmental lobby?
    Can you quantify “environmental costs”? How?
    My concern is with medium and long term strategic energy policy. I know this thread relates to near term volatility. Our country does not have a serious energy policy thanks to the White House and Congress. The politicians of whatever party have not been able to put one forward and implement it. Yes, this is a problem.

  53. Cieran says:

    Dr. Kiracofe:
    Good questions, as always. Here’s some hopefully-helpful answers:
    I noted the map at the API site…would you have any comments about the map? And a definition of “sensitive areas” for us?
    The map looks reasonable, once the fine print is read. The acronyms reflect origins in the Minerals Management Service (MMS) of the Interior Department and the amounts and portions made currently unavailable look right. The treasure trove of such data is found at the DOE’s Energy Information Administration site, at http://www.eia.doe.gov.
    The fine print is that the map shows “undiscovered technically recoverable” energy supplies, which means that their existence is inferred from geological efforts, and thus not yet proven as reserves, hence some attendant uncertainties would be a good idea.
    But if I remember my petroleum-geologese properly, the “technically” part indicates that current extraction technology can be used to exploit these potential resources, so that at least no deus ex machina extraction efforts are needed once reserves are proven.
    This naturally leads to the sensitive areas question, which is a catch-all term to reflect the environmental costs (economic and otherwise) of actually proving and extracting said reserves. These costs may include aesthetic components (e.g., drilling in national parks), economic externalities (e.g., road-building for exploration may damage other local industries, e.g., fisheries and tourism), compromised health and safety for citizens living nearby (e.g., sour gas extraction is notorious for this problem, and wrongful death suits can eat into profit margins quickly), and of course, the prospect of global climate change (for which increased drilling likely makes the long-term problem worse).
    Just why have these areas shown on the map been locked down? Off the Atlantic Coast? Off Florida? In the Gulf of Mexico? In the Rockies? Is it not the environmental lobby?
    The notion that the environmental lobby has that much influence over energy policy is closer to a canard than a real reason for U.S. energy woes. As in the case of refining, the reasons for not exploring are generally more about corporate bottom lines and less about birdwatchers.
    For example, there is plenty of good geological evidence supporting the existence of large oil and gas reserves off the California coast, but there are also very large earthquake faults in this same area, so extraction can be a risky business, as profits can quickly turn to losses in the case of a large oil spill, because the costs of litigation and cleanup can be substantial. As in building refinery capacity, the energy industry must weigh likely costs against the potential profits of extraction, and if those costs are both feasible and large enough, then energy supplies will be sought elsewhere.
    As far as Gulf Coast offshore resources, these are some of the best venues for exploration and production in the U.S., and while hurricanes can damage these rigs, such risks are much easier to mitigate than those of earthquakes (and the Gulf is seismically inactive, especially compared to the Pacific Coast).
    But the moratorium on Gulf drilling isn’t the work of “radical enviros” as much as it’s the work of radical Bushes. Don’t forget that it was Bush 41 who signed the executive order restraining offshore energy development, and that Bush 43 was against Gulf drilling before he was for it (and he was likely against it in large part because his brother Jeb opposed it for purely political reasons).
    But we like our scapegoats to be obvious and preferably latte-sipping, so we blame the Sierra Club for such decisions.
    My concern is with medium and long term strategic energy policy. I know this thread relates to near term volatility. Our country does not have a serious energy policy thanks to the White House and Congress.
    That’s my concern, too, but I wouldn’t blame the White House or Congress or even environmental organizations for the lack of an energy policy. The American people don’t want an effective energy policy: they want to drive their cars and if their energy consumption habits risk the quality of life for their children, then that’s just tough.
    No politician can survive by telling Americans the simple truths about our own energy use, and IMO, that’s the biggest reason why we don’t have a federal policy.
    And in the interest of full disclosure, I don’t belong to any environmental organizations (never have), and my first real professional consulting work was in the design of ice-resistant offshore oil platforms for Arctic explorations, funded by a coalition of major oil companies. But I do have kids I love dearly, and I wonder what kind of messes we are leaving for our children to clean up, both environmentally and economically.

  54. Clifford Kiracofe says:

    Cieran, thanks for your comments.
    Yes, we have noted the DOE and BP and other useful data bases in our past discussions. I would again point to the various studies of the National Petroleum Council particularly per natural gas. And of course we have vast coal resources.
    Petroleum geology was an interest of mine in college but I didn’t pursue the field outside some basic courses in geology. A cousin of mine is active in the oilfield service industry.
    My point about the White House and Congress is that the elected officials are responsible and accountable. I agree with you that the public has apparently not suffered enough pain (if that is what it takes) as if the Iraq War is not enough. I also agree with you per our past exchanges that we need to work on efficiency and conservation and all the rest.
    My view is that the Iraq war had hydrocarbons as ONE central driving factor…President Bush43 himself said so in public for the record. I take the President at his word on this one, it was for oil and strategic position and etc. On the other hand, I thought the US should have engaged Iran during the Clinton years and expanded American participation in those energy resources. Our policy of “Dual Containment” was due to the Zionist Lobby which dominates BOTH parties. The Lobby got its war with Iraq and now wants one with Iran.
    The Russians, Chinese, Indians, Japanese, and EU are quite focused on energy policy and energy security issues. We are not and whether the American people like it or not IMO there is a lot more pain to come. I am persuaded at this time that our energy policy will not change substantially as neither political party is really serious. The blood and treasure meter is going to run for a while, quite a while possibly.

  55. shepherd says:

    Mr. House,
    Actually, I did the research on this and found out that we’re a little off. We were assuming that the futures market operates independently of spot markets–which is the classic definition. In fact, since 80s, spot markets have been taking their cue directly from futures markets. Spot markets, by agreement, simply make a local adjustment to the futures price. In other words, money poured into the buy side of the futures market directly affects the price of oil in an upward direction.
    There’s a pretty good explanation of how it works here:
    http://energycommerce.house.gov/cmte_mtgs/110-oi-hrg.062308.Masters-testimony.pdf
    As for Col. Lang’s point that “markets are exercises in mass psychology,” this is true in the short term, especially in commodities markets. But isn’t there a good deal of truth as well to the rising demand side of the question, which is a long term problem? All of our ideas here are not mutually exclusive.
    Kudlow’s drilling argument proposes fixing a short term problem (speculative price hike) with a long term solution (drilling). The problem is that this will only work once (if it works at all). The next time you have a speculative price spike–and there’s no reason why you shouldn’t, given the way these markets work–you don’t have the drilling card to play. And then you’re stuck with a bunch of worthless oil pumps fouling a pristine environment. And then you look back in 2050 and say, why did we do this to this beautiful place, and the answer is that in the summer of 2008, we thought gas was too high and this was the way we chose to fix that problem.
    I agree that Kudlow is an intelligent man. But he is also an idealist, and I think it makes sense to take his ideology into account when assessing how he comes up with drilling as a cure for speculation. The long term cure for speculation would be to increase margin requirements. But Kudlow can’t come to that conclusion because it amounts to interference in markets. Heaven forbid!

  56. Cieran says:

    Dr. Kiracofe:
    I agree completely with your summary observations here, and especially on how other nations are paying attention to energy policy when we are not.
    One important question remains for me, however, and that is “so how and when can we purchase your new book??!!”.
    Inquiring minds want to know!

  57. Clifford Kiracofe says:

    Cieran, thanks for your kind words.
    The book “Dark Crusade: Christian Zionism and US Foreign Policy” is in the early production phase and my editor at IB Tauris (London) believes we can have it out in December 08 or January 09. Palgrave Macmillan will handle distribution in Europe and US and elsewhere. Cover and blurb in the IB Tauris catalog on page one of catalog (page 3 of pdf):
    http://www.ibtauris.com/acrobat/07-08_Religion.pdf

  58. shepherd says:

    Mr. House,
    Actually, I did the research on this and found out that we’re a little off. We were assuming that the futures market operates independently of spot markets–which is the classic definition. In fact, since 80s, spot markets have been taking their cue directly from futures markets. Spot markets, by agreement, simply make a local adjustment to the futures price. In other words, money poured into the buy side of the futures market directly affects the price of oil in an upward direction.
    There’s a pretty good explanation of how it works here:
    http://energycommerce.house.gov/cmte_mtgs/110-oi-hrg.062308.Masters-testimony.pdf
    As for Col. Lang’s point that “markets are exercises in mass psychology,” this is true in the short term, especially in commodities markets. But isn’t there a good deal of truth as well to the rising demand side of the question, which is a long term problem? All of our ideas here are not mutually exclusive.
    Kudlow’s drilling argument proposes fixing a short term problem (speculative price hike) with a long term solution (drilling). The problem is that this will only work once (if it works at all). The next time you have a speculative price spike–and there’s no reason why you shouldn’t, given the way these markets work–you don’t have the drilling card to play. And then you’re stuck with a bunch of worthless oil pumps fouling a pristine environment. And then you look back in 2050 and say, why did we do this to this beautiful place, and the answer is that in the summer of 2008, we thought gas was too high and this was the way we chose to fix that problem.
    I agree that Kudlow is an intelligent man. But he is also an idealist, and I think it makes sense to take his ideology into account when assessing how he comes up with drilling as a cure for speculation. The long term cure for speculation would be to increase margin requirements. But Kudlow can’t come to that conclusion because it amounts to interference in markets. Heaven forbid!

  59. Ingolf says:

    Shepherd, I don’t think speculation needs a long term cure. In the slightly bigger picture, the impact will be close to nil.
    To the extent that speculation manages to move a market well away from its fundamentals, reality will in due course right the balance and those who pushed it higher through their buying will become sellers, quite possibly at a loss. It’s the perennial story of markets. The only difference this time around is that our dysfunctional financial system enables more spectacular short term distortions.

  60. zanzibar says:

    Backwardation. Are we there yet?

  61. fnord says:

    It will be interesting to see how the Georgian war will affect prices.
    At least to me, this sudden conflict came out of the blue. I wonder what the Georgians were thinking? How in ****s name does this reflect the georgian state as a US client? Did Bush give the go-ahead for this? If so, it is yet another miscalculation. Since the presedence of Kosovo, the russians have a bloody good cause. Why did the Georgians feel this was doable?

  62. shepherd says:

    Ingolf,
    “In the slightly bigger picture, the impact is close to nil.”
    In the slightly smaller picture, unfortunately, the impact is financial distress and food riots. Which one you experience depends on geography.
    Of course, speculation is an inherent and necessary feature of futures markets. But allowing too many players into the market seems to have led to excessive volatility. Markets already have mechanisms to restrict (but not eliminate) speculation. Perhaps by deploying them a little more agressively, we could make the pendulum swing a little less wildly.

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