Da Oil Back Stopping

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Oil Economics page 1 of 38

Oil Economics
Oil Economics ..................................................................................................................................................................................................1 Backstopping Shell............................................................................................................................................................................................2 Backstopping Uniqueness..................................................................................................................................................................................4 Backstopping Link Extensions..........................................................................................................................................................................5 Backstopping Link Extensions..........................................................................................................................................................................6 Backstopping Link Extensions..........................................................................................................................................................................7 AT: Backstopping..............................................................................................................................................................................................8 High Oil Price Good Links: AE.........................................................................................................................................................................9 High Oil Price Good Links: RPS.....................................................................................................................................................................10 High Oil Price Good Links: Wind Power........................................................................................................................................................11 High Oil Price Good Links: Solar Power........................................................................................................................................................12 High Oil Price Good Links: Solar Power........................................................................................................................................................13 Oil Prices Dictated by Supply/Demand...........................................................................................................................................................15 Futures Market Timeframe/Internals...............................................................................................................................................................16 a/t “speculation causes volatility”....................................................................................................................................................................17 a/t Speculation Drives Market.........................................................................................................................................................................18 a/t Speculators Drive the Market.....................................................................................................................................................................19 a/t Speculators Drive the Market.....................................................................................................................................................................20 a/t Oil Companies Drive Prices.......................................................................................................................................................................21 a/t OPEC drives prices.....................................................................................................................................................................................22 a/t OPEC drives prices.....................................................................................................................................................................................23 a/t OPEC drives prices.....................................................................................................................................................................................24 a/t OPEC drives prices.....................................................................................................................................................................................25 a/t dutch disease...............................................................................................................................................................................................26 a/t Dutch disease: Russia.................................................................................................................................................................................27 a/t High Oil Prices kill the economy...............................................................................................................................................................28 Market Solves Oil Consumption.....................................................................................................................................................................29 Market pushes alt transition.............................................................................................................................................................................30 Oil prices high.................................................................................................................................................................................................31 Oil Prices will Stay high..................................................................................................................................................................................32 Price Crash Inevitable......................................................................................................................................................................................34 Price Crash inevitable......................................................................................................................................................................................35 Demand Collapse Now....................................................................................................................................................................................36 Price Fixing causes spikes, not supply/demand...............................................................................................................................................37 Price Fixing causes spikes, not supply/demand...............................................................................................................................................38

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Oil Economics page 2 of 38

Backstopping Shell
Alternative energy makes oil producers flood the market – this destroys the market and makes the transition harder Longmuir and Alhajji 07
(Dr. Gavin Longmuir, consulting petroleum engineer, petroleum appraiser, and Dr. A.F. Alhajji, associate professor of economics, “West should consider ramifications of its off-oil rhetoric”, Oil and Gas Journal, 2/12/07, l/n) Environmental and political enthusiasm in the West for getting rid of oil as an energy source may have major unintended consequences
through its impact on decisions by a handful of key oil exporters. Such consequences could paradoxically include increased Western dependence on oil and higher energy prices. An energy crisis is imminent if oil-exporting countries believe Western rhetoric and decide to reduce their investment in capacity expansions at a time when the West is failing to find a suitable substitute. In this case, consumers will pay a dear price for the ill-considered statements of their leaders. If, by contrast, oil producers attempt to counter a policy-induced decline in demand and kill oil substitutes by raising production to lower crude oil prices, or if demand actually declines, a different set of problems might emerge. Either scenario could wreak havoc on the economies in the Middle East, supposedly one of the least stable areas in the world. The cost of such political instability in terms of lives, money, and pollution will render all the positive results from weaning consuming countries off oil negligible. If oil-consuming countries wish to lead the world safely to a future without fossil fuels, they will have to consider energy-market realities and how to meet the revenue needs of current oil exporters, as well as how to ensure adequate oil supplies during the transition and investment sufficient to develop new energy-supply technologies. The new energy vision must adhere to market realities. Otherwise, market forces will soon defeat these efforts. Market realities The main threat to sustainability of energy supplies is not a terrorist attack on energy facilities or the imposition of an oil embargo by an oil producing country. These threats are short-term events that can be dealt with quickly and effectively through various measures that include the use of the Strategic Petroleum Reserve, increased production, and diversion of oil shipments. The main threat to sustainability of energy supplies in the medium term is the mismatch between investment in production capacity and energy infrastructure, on one hand, and growth in demand for energy, on the other. One of the most plausible scenarios is a relative decline in investment supporting additional production capacity in the oil-producing countries in response to calls around the world to reduce or even eliminate dependence on oil.

An energy crisis in this case is imminent if those who are calling for eliminating dependence on oil fail to provide the ultimate replacement in a timely manner. Most likely, these efforts will fail to replace oil within a reasonable time. Most of the efforts to replace oil are not market-driven and are heavily subsidized. They cannot sustain the pressure of markets in the long
run. Oil is still abundant. But much remaining conventional oil is in the hands of a very small number of governments, primarily in the Middle East. Will all the talk about reducing dependence on oil have an impact on the behavior of those governments? Major oil exporters have tended to view their remaining oil in the ground as an appreciating asset, one which should be exploited at a measured pace so that some is left for future generations. To them, the call for security of demand becomes very attractive when the other side is exerting pressure on the producing countries to insure security of supply. Talk about moving away from oil through coercive policies seriously challenges the sustainability of oil producers' societies. To add insult to injury (or injury to insult), much of this kind of talk comes from European governments that take a high share of the economic rent on the exporters' oil through extremely high taxes on end-consumers. Those consumer-country governments are thus claiming much of the current revenue stream from the oil producers' major asset while simultaneously planning to eliminate the demand for it. Even hopes for a peaceful, democratic Iraq cannot come to fruition without oil revenues. Major oil exporters treat talk of eliminating dependence on fossil fuels as an existential threat to their societies, especially when the talk is based on hostile ideological agendas rather than market principles. Possible responses To these apparently hostile statements from across the political spectrum in oil-consuming countries, oil producers might react in a number of ways: * Their simplest response would be to ignore escalating Western claims about weaning themselves off oil as some bizarre form of liar's poker among Western political classes. Oil exporters might look at the actual continuing growth in oil demand and conclude that oil consumers do not intend to follow through with the necessary hard choices. Additionally, oil exporters could sit and watch Western developments, comfortable in the knowledge that currently popular carbon capture and storage is very energy-intensive and, if implemented, will substantially increase the demand for fossil fuels, thus rendering their oil resources even more valuable.

Their logical response to this threat would be to accelerate production of oil while their resources still have value. This would of course drive down the price of oil and undermine the economic feasibility of alternative energies. A collapse in the price of oil would kill several new energy technologies and ultimately increase demand for oil. In fact, the oil-producing countries might view increasing oil production and lowering prices as a logical policy to counter the antioil policies of the governments of consuming countries. Historical data from periods of oil price collapses support this point: Low oil prices increase oil demand, decrease efficiency improvements, choke alternative energy resources, and increase waste. * Alternatively, expecting a decline in demand for their oil, oil-producing countries might decide to reduce their planned investments in production capacity expansion and maintenance and mothball some planned projects, which would shortly lead to declining oil supplies. If new technologies do not come on line by the time oil production starts declining, the world will face a serious energy crisis, probably unparalleled in history. Reversing such a trend of declining investments would take years, despite massive increases in oil prices. This alternative is not a mere possibility: Several major projects have been mothballed in the past when the oil-producing
* Oil exporters could take Western commentators seriously and assume that oil importers will indeed reduce their demand for oil, leaving them with then-unmarketable oil in the ground. governments deemed these projects not needed. * If oil-consuming countries do begin to reduce their dependence on oil, major oil exporters could seek to use their now less-valuable oil within their own borders as cheap fuel with which to expand heavy industries. Instead of exporting oil directly, they could export the

The net result would be a loss of jobs and economic strength by the West without having any impact on the overall global consumption of fossil fuels. Even if Western countries successfully replaced imported oil with indigenous alternative energy sources, they would still have to live on the same planet as oil-exporting countries, whose fragile societies would then face the loss of their main source of revenue. Energy independence for current oil importers, if somehow achieved, would aggravate political instability in oil-exporting countries. In addition, it is unclear what will happen to the world monetary system without trade in oil and the associated recycling of petrodollars. A change to a world where most industrial countries depend on their own domestic energy resources would require a major change in the global financial system. Such a change would create its own difficulties, impacting even the industrial countries.
energy from that oil embedded in metals, chemicals, and manufactured products at prices that far undercut Western products, constrained as Western manufacturers would be by having to use higher-cost alternative energy sources.

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Oil Economics page 3 of 38

The renewable signal trigger a deliberate price collapse that destroy host economies, our competitiveness and turns the case. Longmuir and Alhajji 07 (Gavin Longmuir, Stanley, NM-based consulting pertroleum engineer, and AF Alhajji, Energy economist
and associate professor at Ohio Northern University, "Need for a Balancing Act: Reducing Oil dependence Without triggering A Global Crisis", Middle East Economic Survey, 2/26/07, How Might Major Oil Exporters React? Activists and politicians in oil-consuming industrialized countries may not intend their remarks to be seen as hostile by oil exporters. The sad reality is that Western advocates have likely not given even a moment's thought to the implications of their antioil stance for oil exporters. Nevertheless, oil exporters can be forgiven for finding such statements quite threatening. In the face of such apparently hostile statements from across the political spectrum in oil-consuming countries, oil producers might react in a number of ways - depending on their perception of the seriousness of the threat. Their simplest response would be to ignore escalating Western claims about weaning themselves off oil as some bizarre form of Liar's Poker among Western political classes. Oil exporters might look at the actual continuing growth in oil demand and conclude that consumers do not intend to follow through with the necessary hard choices. Additionally, oil exporters could sit and watch Western developments, comfortable in the knowledge that currently-popular Carbon Capture & Storage (CO2 sequestration) is very energy intensive and (if implemented) will substantially increase the demand for fossil fuels, thus rendering their oil resources even more valuable. Oil exporters could take Western commentators seriously and assume that oil importers will indeed reduce their demand for oil, leaving them with then-unmarketable oil sitting in the ground. Their logical response to this threat would be to accelerate production of their oil resources while they still have some value. This would of course drive down the price of oil and undermine the economic feasibility of alternative sources of energy. A collapse in the price of oil would be a death sentence for several new energy technologies, which would consequently increase the demand for oil. In fact, the oil-producing countries might view increasing oil production and lowering prices as a logical interventionist policy to counter the anti-oil interventionist policies of the governments of the consuming countries. Historical data from periods of oil price collapses support this point: low oil prices increase oil demand, decrease efficiency improvements, choke alternative energy resources, and increase wastage.8 Alternatively, expecting a decline in demand for their oil, producing countries might decide to reduce planned investments in production capacity expansion and maintenance and mothball some planned projects, which would quickly lead to declining oil supplies. If new technologies do not come on-line by the time oil production starts declining, the world will face a serious energy crisis, probably unparalleled in history. Reversing such a trend of declining investments would take years, despite a massive increase in oil prices. This alternative is not a mere possibility: several major projects have been mothballed in the past when the oil producing governments deemed these as not needed, given perceived future demand and prices. As yet another alternative, if oil-consuming countries begin to reduce their dependence on oil, major oil exporters could seek to use their now less-valuable oil within their own borders as cheap fuel for a greatly expanded heavy industrial sector. Instead of exporting oil directly, they could export the energy from it embedded in metals, chemicals, and manufactured products at prices that far undercut anything Western producers could match, constrained as they would be by using higher-cost alternative energy sources. In fact, cheap energy in those countries might make their new industries completive with cheap labor industries in China, India, and south Asia. The net result would be a loss of jobs and economic strength, by West and East, without having any impact on the overall global consumption of fossil fuels. Thus, Western posturing over reducing the demand for oil could cause major oil exporters to react in a variety of ways, most of which would exacerbate rather than help the global energy situation. Even in a scenario where Western countries successfully replaced their demand for oil from alternative indigenous energy sources, they would still have to live on the same planet as former major oil-exporting countries whose fragile societies would then be faced with the additional economic strain of the loss of their main current source of revenue. Energy independence for current oil-importers may carry a high moral price. If a sharp decline in oil revenues leads to instability in the oil producing areas, the West will not be able to turn a blind eye to such conflicts. In the age of globalization, these countries are economic and political partners of the West. Political instability that results from declining oil revenues must be added as a potential cost of oil independence.

Zarefsky Juniors MG, KN, SS

Oil Economics page 4 of 38

Backstopping Uniqueness
OPEC is reserving some production capacity
"World Oil Demand Up, Says IEA; OPEC Unwilling to Ease the Pressure " by Kerry Laird Rigzone 1/16/2008 URL: http://www.rigzone.com/news/article.asp?a_id=55410 The International Energy Agency (IEA) has revised the 2007 world oil demand, increasing the estimate by 150 kb/d to 85.8 mb/d. The IEA states that demand forecasts for 2008 are slightly higher, yet the Organization of Petroleum Exporting Countries (OPEC) has refused to increase oil outputs despite pleas from IEA and world leaders. According to the IEA report issued Jan. 16, 2008, the hike in demand is based on stronger-than-expected deliveries in Asia and the Middle East, as well as poor developments in the globalization of the economy. The report indicates that the 2008 demand remains "virtually unchanged" at 87.8 mb/d. The report shows that for December world oil supply averaged 87.0 mb/d, up 870 kb/d from November on increases in OPEC-10, North America, the FSU, Brazil, and China. U.S. President George Bush made a plea to OPEC for an increase in oil output during his trip to the Middle East in mid-January. Last summer, the IEA made a similar request, as did the Energy Information Administration. At the time, long before Bush's trip to Saudi Arabia where his plea was made, the head of the IEA said that "OPEC needs to raise its crude oil output in the coming months to ensure an adequate supply." OPEC responded by claiming that the oil market remains "well supplied" and an additonal supply is not needed. The OPEC statement released last summer is much the same as the one Bush received in January 2008. OPEC Secretary General Abdullah al-Badri said Jan. 16, 2008 that there is no need for OPEC to increase oil output. He said in a statement issued to AFP that high oil prices have little to do with demand and more to do with political tensions in non-OPEC countries and the plummeting value of the U.S. dollar, among other things. "OPEC is constantly monitoring the oil market and if at any time fundamentals justified such a move, the Organization stands ready to raise production," said al-Badri. "I would like to reiterate that this price trend is a consequence of persistent geopolitical tensions, the weakening of the U.S. dollar, ongoing limitations and restraints in the U.S. refining system, and the increasing role of speculators in the oil market." In a phone interview with Dow Jones, Libya's top oil official agreed with OPEC, saying that consumers have enough supply and that the price of crude is already dropping. As if to corroborate that statement, the IEA report shows that the global supply in the fourth quarter was indeed more than 1.0 mb/d higher than a year earlier, though it averaged at or below levels of a year ago in the previous three quarters. All eyes will be on OPEC Feb. 1 when the group will meet in Vienna to review its production policy.

Saudis haven’t decided on overpumping because alternative energy signals are still unclear
Dourian, King, Kumagai, and Amie 07 (Kate Dourian, Geoff King, Takeo Kumagai, and Miriam Amie, Platts Oilgram News, “Saudis hold to 12.5 million b/d capacity plan; Post-2009 target depends on conservation, efficiency, alternative fuels effects”, 5/3/07, l/n) Saudi Arabia sees no need for now to increase capacity beyond the targeted 12.5 million b/d in 2009 because the impact of energy conservation and efficiency measures and use of alternative energy sources on future demand is still unclear, oil minister Ali Naimi said May 2. Asked whether the Kingdom, the world's leading oil exporter, needed to boost capacity beyond its 2009 target of 12.5 million b/d, Naimi said: "This is a dynamic process. We thought reaching 12.5 million b/d by 2009 is what is needed to give us spare capacity of 1.5-2 million b/d. As we approach 2009 we will look at our plans and see if demand warrants an additional increase in capacity." However, Naimi said, "our feeling now, with the thrusts and push for conservation, for efficiency of use, for use of alternative sources of energy, we probably need not go beyond 12.5 million b/d. But that is guessing right now, not a reality, because we don't know what the impact of conservation of alternative fuels ... will do for total demand." The Saudi minister was speaking at a news conference after talks in Riyadh between leading oil producers and key Asian consuming countries. Capacity in Saudi Arabia, which holds a quarter of global reserves at 259.9 billion barrels, stands at 11.3 million b/d. It is investing more than $70 billion to expand capacity to 12.5 million b/d by the end of the decade. Naimi has said in the past that state-owned monopoly Saudi Aramco has identified the fields from which to raise capacity further to 15 million b/d if there was demand. The Saudi minister, now serving a fourth term in office, also said that current supply was enough to meet demand and there was no shortage of spare capacity. But he did not say what it would take for the Saudis to engineer an OPEC production increase before the end of the year, which the International Energy Agency suggested may be needed to cool oil prices. OPEC Secretary-General Abdulla al-Badri said on the sidelines of the same conference that he did not see a need to increase the OPEC production target of 25.8 million b/d for the 10 members bound by output curbs until the end of 2007. OPEC has cut production by a total of 1.7 million b/d since last October.

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Oil Economics page 5 of 38

Backstopping Link Extensions
Alternative energy signals make the Saudis overpump to drop prices
Posted by Star-Ledger editorial board June 16, 2008 10:30PM ("A Downside to low oil prices" http://blog.nj.com/njv_editorial_page/2008/06/a_downside_to_low_oil_prices.html) The Saudis have indicated that they'll increase petroleum production by 200,000 barrels a day in July -- on top of an increase of 300,000 barrels a day this month -- a move that may moderate the rising price of gas. Mind you, no one is predicting gas prices falling back to $1 a gallon. Good thing, too. Perversely, the long-term problems that stem from seductively low oil prices are as serious as those from freakishly high ones. Drivers flock back to gas-guzzling big cars, trucks and SUVs. They move farther away from work, so commutes lengthen. Businesses and ordinary citizens don't bother turning down the heat or dialing back the AC. The impetus for more mass transit disappears. Dependence on oil from the Mideast and other unfriendly places grows. Worst of all, research into the alternative energy that could get us out of the oil mess evaporates. Americans proved all this and more between 1973 and the mid-1980s. Remember the vows of energy self-sufficiency? Cars that would get 50 miles a gallon? Advanced solar technology? Major efforts were made and significant progress was achieved (including a near-doubling of average gas mileage), but it all stalled, even reversed, when the price of a barrel of crude fell to the teens and stayed there for a decade. The Saudis aren't planning to increase production because they sympathize with the average American -- or any other oil consumers around the world, for that matter. They understand that oil at current levels will fuel an international economic slowdown. That's bad for their business. But Americans should remember that the Saudis and other oil producers also fear that record-high prices will refocus the U.S. and other nations on the need to cut petroleum use. That would be even worse for their business. It also would cause instability at home, where oil is the only thing fueling the economy as a source of jobs and revenue. The Saudis would love to bring prices down just enough to lull Americans into forgetting about gas costs again. The fallingprices part would be a wonderful economic boost. Forgetting would not. We did that once, and it is costing us dearly. We cannot afford to lose focus again.

Moves to promote alternative energy cause OPEC to flood the market and collapse the price Brandon, 2001 (Hembree, “OPEC as the Cheshire cat”, Delta Farm Press, 11/16,
http://deltafarmpress.com/mag/farming_opec_cheshire_cat/) But just when it appears something will in fact be done toward increasing domestic energy supplies, getting serious about alternative sources, and making a long-term commitment toward reducing our dependence on foreign oil — well, miraculously, prices go down. OPEC magnanimously increases supply, refineries begin humming, and once again thoughts of a national energy policy fade like the Cheshire cat. Only the cat's grin is left. And the cat is OPEC and the energy industry. They've seen it all before. They know they have only to wait; that we in the United States have a short memory, and that as long as they toss us a sop of energy “bargains” from time to time, we'll moan and groan and pay their price the rest of the time.

OPEC will flood the market in response to competition with oil Campbell, 2002 - Oil Depletion Analysis Centre, London, (Colin, Population and Environment, November, proquest)
Oil is traded on international markets at a price set by the marginal barrel, giving rise to an unpredictable volatility that obscures the underlying trends of supply and demand. Prices collapsed in 1998 from a combination of unseasonably warm weather; an Asian recession that reduced the demand for swing Middle East production; the devaluation of the Russian ruble, encouraging Russian exports; and under-estimation of supply by the International Energy Agency, which misled OPEC. Furthermore, there were more sinister motives to talk down the long-term price of oil, as oil companies and their financial advisers planned acquisitions and mergers, which successfully concealed their real predicament from the stock market. Budgets were slashed and staffs purged in a climate of uncertainty. There was an improvident draw on stocks as demand overtook supply. The OPEC countries, for their part, did everything possible to foster the notion that they could flood the world with cheap oil at the flick of a switch. It was a strategy aimed to inhibit investments in gas, non-conventional oil, renewable energy or energy saving that they feared might undermine the market for their oil, on which they utterly depend. Their populations are growing fast in an economy dominated by oil.

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Oil Economics page 6 of 38

Backstopping Link Extensions
Saudis empirically overpump to stave off renewables
International Herald Tribune Saudis plan to increase oil output By Jad Mouawad Sunday, June 15, 2008 http://www.iht.com/bin/printfriendly.php?id=13723782

Saudi Arabia, the world's biggest oil exporter, is planning to increase its output next month by about a half-million barrels a day, an increase of nearly 6 percent, according to analysts and oil traders briefed by Saudi officials. The increase could raise Saudi output to a production level of 10 million barrels a day, which, if sustained, would be the highest ever by the kingdom. The move was seen as a sign that the Saudis are becoming increasingly nervous about both the political and economic effects of high oil prices. In recent weeks, soaring fuel costs have incited demonstrations and protests from Italy to Indonesia. Saudi Arabia is now pumping 9.45 million barrels a day, which is an increase of about 300,000 barrels from last month. While they are reaping record profits, the Saudis are concerned that the record prices reached this month might eventually dampen global economic growth and lead to lower oil demand, as is already happening in the United States and other developed countries. The current prices are also making alternative fuels more viable, threatening the long-term prospects of the oil-based economy. President George W. Bush visited Saudi Arabia twice this year, pleading with King Abdullah to step up production. While the Saudis resisted the calls then, saying the markets were well supplied, they seem to have since concluded that they needed to disrupt the momentum that has been building in commodity markets, sending prices higher. Abdullah has also taken the unprecedented step of arranging on short notice a major gathering of oil producers and consumers to address the causes of the price increase. The meeting will be next Sunday in the Red Sea town of Jidda. On Sunday, Saudi state-owned Al Arabiya Television said that the country had yet to determine the size of the planned oil output increase and that doing so would be premature "before the meeting of consumers and producers" on Sunday. Oil prices have gained 40 percent this year, rising to nearly $140 a barrel in recent days and driving gasoline costs in the United States above $4 a gallon, or $1.06 a liter. Some analysts have predicted that prices could reach $200 a barrel this year as oil consumption continues to rise rapidly while supplies lag. The growing volatility of the markets, including a record one-day gain of $10.75 a barrel on June 6, has persuaded the Saudis that they need to step in, analysts said. Tony Fratto, a White House spokesman, said, "We would welcome any and all increases in oil production, including from Saudi Arabia." But the measure carries some risks to the kingdom and is not guaranteed to bring down prices, analysts said. Some investors doubt that Saudi Arabia has the capacity to increase its production beyond current levels. "This clearly represents the biggest test for them," John Kilduff, a senior vice president of the brokerage firm MF Global, said. He added that the move could backfire if investors failed to respond to the extra Saudi supplies. No other producer has the capacity to quickly expand production. "They see these prices as a threat," he said. By increasing production now, they are using their "last bullet to fight high prices."

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Oil Economics page 7 of 38

Backstopping Link Extensions
OPEC will manipulate prices to make alternative energy not competitive. AFP, 11/1/2007. “Future demand at risk because of high oil prices: Ecuador minister,” Agence France Presse, Lexis.
Record high oil prices risk hurting future demand and OPEC must find a "price equilibrium", Ecuador's oil minister said in an interview published Thursday. Speaking to the Financial Times via telephone, Galo Chiriboga, whose country will re-join OPEC next month, said that crude oil prices topping 94 dollars a barrel could spark increased investment in alternative energy sources. He said that the biggest challenge for the Organisation of Petroleum Exporting Countries in the coming years would be to "preserve a price equilibrium that keeps crude oil positioned favourably against other alternative energy sources."

OPEC has increased production before to combat alternative fuels Herrick 04 (Thaddeus Herrick, “OPEC raising output target”, 9/14/04, The Globe and Mail, l/n)
OPEC agreed to raise its oil-output target by one million barrels a day,
a largely symbolic gesture since the cartel is pumping flat out, but one that indicates a growing concern among members that petroleum prices are too high. Yesterday's decision, effective Nov. 1, is a victory for Saudi Arabia, the largest and most influential producer in the Organization of Petroleum Exporting Countries. The Saudis, who are trying to reassert control of oil markets after prices neared $50 (U.S.) a barrel last month, faced opposition from Indonesia and Venezuela, among others. Unable to boost their production capacity, some OPEC producers fear they won't be able to take advantage of higher output ceilings. The move, coming at the last meeting before the U.S. presidential election in November, follows Saudi Arabia's pledge this week that it would increase its oil-pumping capacity nearly 8 per cent. In the meeting yesterday, the kingdom also delayed a move to raise OPEC's target oil price, in another rebuke to the cartel's price hawks. In recent years, OPEC's price target helped keep a basket of crude oil types at around $25 a barrel. ," said Ali Naimi, Saudi Arabia's Oil Minister and the cartel's de facto leader. Mr. Naimi added, "We haven't seen that yet." OPEC has been pumping oil flat out to meet surging demand and has been enjoying a huge windfall, with members' oil revenue likely to top $320-billion this year, up from $240-billion last year. In pulling out the stops to sate markets, the cartel is taking a small risk. Kuwait, in addition to Saudi Arabia, is moving to bring some new production capacity on-line. If oil inventories continue a recent trend of building in the industrialized world above year-ago levels, according to the Parisbased International Energy Agency, any weakening in demand could force prices down faster than the cartel wants them to go. "We are worried about that," said Obaid bin Saif al Nasseri, Oil Minister of the United Arab Emirates. "Nobody wants to see a price collapse." So far, such a crash seems remote. Supply constraints and rising demand could just as easily send prices rising even further out of the control of OPEC, which is producing 27.5 million barrels of oil a day, well over its official output ceiling of 26 million barrels. That ceiling will rise 4 per cent under the new arrangement to 27 million barrels a day. Oil prices rose yesterday, after the U.S. Energy Information Administration reported a decline in U.S. commercial oil inventories, but later retreated. In New York, October crude oil futures fell 81 cents to

"There are concerns that high prices will slow demand

OPEC is aiming to bring the oil price down to a range that will allow for robust revenue, but that will neither push the world economy into recession nor cultivate competition from alternative energy sources. "OPEC wants to get prices down," said Gary Ross, chief executive of PIRA Energy, a New York consulting firm. "That's not to say they are going to succeed."
$43.58. Adjusted for inflation, oil still is much less expensive than it was in the early 1980s.

OPEC will flood the market to prevent alternative energy development Milwaukee Journal Sentinel, 2000 (11/15, lexis)
OPEC generally wants lower prices to encourage long-term growth in demand, discourage development of alternative energy sources and limit investment in non-OPEC oil fields. The group is concerned, however, that prices will sink if they produce too much oil, as they did in 1998 and sent the market to around $10 a barrel.

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Oil Economics page 8 of 38

AT: Backstopping
Empirically disproven – the Saudis are ALREADY pumping at capacity, but they cant’ control the market
The Economist 08 (The Economist, U.S. Edition 6/21/08, “The puzzle of oil production; Saudi Arabia”, l/n) With oil prices nudging $140 a barrel, Saudi Arabia stands to receive a windfall this year of up to $400 billion, double what it earned from selling oil last year. Gloom at the world's petrol pumps, it may be assumed, can only mean hand-rubbing glee for their biggest supplier. Such is the case with some of the kingdom's rivals in the Organisation of the Petroleum Exporting Countries (OPEC), the cartel that supplies over one-third of the world's crude. Iran, for instance, has consistently argued against doing anything to bring down prices. Why, then, have the Saudis mounted a risky bid to do just that, by boosting oil output and summoning the world's top energy officials to an emergency meeting in Jeddah on June 22nd? The reasons span history, economics and geopolitics. No one in the Saudi oil ministry has forgotten what happened after the oil shock in the 1970s. The Arab boycott called in 1973 to protest against Western backing for Israel tripled oil prices. But it also prompted oil exploration in tricky places such as the North Sea and conservation measures that reduced demand. The result was a long-term slump in crude prices and a drop in the Saudis' market share. The Saudis fear that the intensified search by the West for alternative energy will result in the same thing happening again. But the more immediate worry is that high oil prices may slow not just America's but the whole world's economy. That would trigger a sharp fall in demand for Saudi oil. Just as bad, a sharp global slowdown would slash the value of the kingdom's hundreds of billions of dollars in overseas holdings. No wonder Ali alNuaimi, like his predecessors as Saudi oil minister, often cites "customer satisfaction" and "market stability". Saudis retain another nasty memory from the 1970s. Branded as gluttons, they became a stock figure of ridicule in Western cartoons. And sudden wealth brought social strains at home that helped create a fundamentalist backlash that produced, among other things, al-Qaeda. The Saudi desire not to be stigmatised for the world's woes, this time, may be gauged by their donation, last month, of a generous $500m to the UN's World Food Programme. Today's sky-high oil price carries another political risk. It empowers Iran, the revolutionary Shia state that the conservative Sunni Saudis view as their main rival for regional influence. Even as the world has ratcheted up sanctions to punish Iran for its suspected nuclear ambitions, the Islamic Republic has cashed in the rewards from soaring fuel prices. The tightness of the oil market has become, in effect, a line of defence for Iran, letting its radical leadership hint, truthfully, that any hostile act that may impede the flow of Iranian oil would risk a global economic decline. So Saudi Arabia's motives for wanting to lower prices are clear. The trouble is that it cannot manipulate markets as before. The kingdom has a fifth of known reserves. It supplies an eighth of the world's oil and remains, crucially, the only producer with at least some spare capacity. A huge investment plan under way should raise its capacity from 11.3m barrels a day in 2007 to 12.5m by next year. Noting pleas from George Bush and Ban Ki-moon, the UN's secretary-general, the Saudis have upped actual production twice in the past month, raising it by 500,000 barrels a day to its present level of 9.5m. But much of that new output, and most of the reserve capacity, is in the form of heavier oils that are costlier to refine and for which there is less thirst. The Saudis are unlikely to bring new, lighter crude, or bigger refining capacity for their heavier oils, onto world markets until next year. Even then the incremental rise may not offset demand. So energy watchers hope the Jeddah conference will reveal something bolder than promises of more oil.

Zarefsky Juniors MG, KN, SS

Oil Economics page 9 of 38

High Oil Price Good Links: AE
SHELL EVIDENCE Even small scale alternative energy shift is sufficient to collapse rpices
Chris Isidore, 2008 (CNN Staff Writer, "Is OPEC becoming irrelevant?", http://money.cnn.com/2005/09/19/news/economy/opec_future/index.htm) Chris Isidore is a CNN/Money senior staff writer. The current oil prices are enough to cause some nations, particularly in Europe, to be looking at oil price regulation and other controls, as well as more significant government investment in alternative energy, said Fadel Gheit, oil analyst at Oppenheimer. That's got the potential to hurt some OPEC countries more than the current prices are helping, he said. "They don't want to trigger projects that take even 1 or 2 percent off of demand," he said. He and Alhajji said even that small percentage of current oil usage being by alternative energy can have a serious effect on long-term oil prices. "Prices are determined at the margin. We don't need a lot of alternative energy to depress prices," he said. While some economists and traders now believe that $40 a barrel is the new floor for oil prices, Gheit said prices still have the potential to fall below those levels, and that could cause some regimes to fall. "These governments are totally unpopular and repressive. The only thing they have going for them is buying stability, throwing money at their friends and enemies," said Gheit.

Alternative Energy drastically decreases the demand for oil, collapsing prices Byrd 08 (Jim Byrd, “Why Oil is Not Trading at $70 per Barrel”, 7/15/08, The Conservative Voice,
http://www.theconservativevoice.com/article/33265.html) Oil prices that are sustained at the current prices are something that OPEC would rather not see perpetuated. Saudi Arabian Oil Minister Ali al-Nuaimi stated, "We are concerned about high prices. The market has no shortage of physical crude." Each county has a vested interest in reasonable oil prices and subsequently cheaper gasoline prices. Alternative sources of energy are starting to achieve the type of momentum that is sustainable and will only pick up speed and garner a solid foot hold, if oil prices stay at their current levels. The consequences of a mass produced, viable alternative energy source would be a dramatic drop in demand for oil, and the subsequent drop in the price per barrel. Once enough capital, energy, and success have been demonstrated in alternate energy sources, the process will not be reversed, and OPEC is acutely aware of this.

Zarefsky Juniors MG, KN, SS

Oil Economics page 10 of 38

High Oil Price Good Links: RPS
RPS drops the price of oil
Toman et al. 08 (Michael Toman, PhD. in Economics, Senior economist, Environment Division, Sustainable Development, InterAmerican Development Bank; Senior Fellow, Resources for the Future; Senior Staff Economist, Council of Economic Advisers, Executive Office of the President, James Griffin, Robert J. Lempert, Ph.D. in applied physics, S.M. in applied physics and science policy, Harvard University; B.A.S. in physics and political science, Stanford University “Impacts on U.S. Energy Expenditures and GreehousGas Emissions of Increasing Renewable-Energy Use”, RAND Corporation, 2008, http://rand.org/pubs/technical_reports/2008/RAND_TR384-1.pdf) A renewable-fuel requirement reduces demand for petroleum and lowers the international price of crude oil. This oil price impact from fuel diversification can be seen as enhancing energy security through increased competition with petroleum exporting countries in a position to exercise market power.

Zarefsky Juniors MG, KN, SS

Oil Economics page 11 of 38

High Oil Price Good Links: Wind Power
Shift to wind power frees up natural gas supplies, pushing an oil transition also
Anderson 08 (, Emily, CNN Staff writer, “Oil billionaire Pickens puts his money on wind power”, May 2008, http://www.cnn.com/2008/TECH/science/07/08/pickens.plan/index.html) Billionaire oilman T. Boone Pickens is putting his clout behind renewable energy sources like wind power. The legendary entrepreneur and philanthropist on Tuesday unveiled a new energy plan he says will decrease the United States' dependency on foreign oil by more than one-third and help shift American energy production toward renewable natural resources. "The Pickens Plan" calls for investing in domestic renewable resources such as wind, and switching from oil to natural gas as a transportation fuel. In a news conference outlining his proposal, Pickens said his impetus for the plan is the country's dangerous reliance on foreign oil. "Our dependence on imported oil is killing our economy. It is the single biggest problem facing America today," he said. "Wind power is ... clean, it's renewable. It's everything you want. And it's a stable supply of energy," Pickens told CNN in May. "It's unbelievable that we have not done more with wind." Pickens' company, Mesa Power, recently announced a $2 billion investment as the first step in a multibillion-dollar plan to build the world's largest wind farm in Pampa, Texas. Pickens said Tuesday that if the United States takes advantage of the so-called "wind corridor," stretching from the Canadian border to West Texas, energy from wind turbines built there could supply 20 percent or more of the nation's power. He suggested the project could be funded by private investors. Power from thousands of wind turbines that would line the corridor could be distributed throughout the country via electric power transmission lines and could fuel power plants in large population hubs, the oil baron said. Fueling these plants with wind power would then free up the natural gas historically used to power them, and would mean that natural gas could replace foreign oil as fuel for motor vehicles, he said. Using natural gas for transportation needs could replace one-third of the United States' imported oil and would save more than $230 billion a year, Pickens said. "We are going to have to do something different in America," Pickens told CNN. "You can't keep paying out $600 billion a year for oil.

Wind power supplants natural gas, which in turn can fuel cars
Timothy Gardner, 2008 (“Pickens says gas and wind would slash oil imports”) http://news.yahoo.com/s/nm/20080708/bs_nm/energy_pickens_plan_dc Texas energy tycoon T. Boone Pickens on Tuesday called for a massive switch to natural gas as a transportation fuel and a boost in wind power in a plan aimed at reducing U.S. foreign oil dependence by a more than a third. The Pickens Plan, which includes exploiting domestic natural gas supplies in new areas like East Texas and Appalachia, could replace 38 percent of U.S. oil imports, he said. "U.S. natural gas can replace foreign oil. It's the only natural resource we have that can do that," Pickens said during a press event for his energy plan. The 10-year plan would reduce the annual U.S. oil import bill of $700 billion, at oil prices of $140 a barrel, by hundreds of billions of dollars, he said. The country imports about 70 percent of its crude. His plan comes as U.S. consumers who have already been hit by the credit and housing crunches are now facing record gasoline prices as oil prices rally on rising demand from developing countries and violence in the Middle East. Pickens, a life-long Republican, hopes to discuss the plan with both U.S. presidential candidates. He is launching a television advertising campaign, to cost tens of millions of dollars, for the plan. Earlier this year, Pickens announced he would spend $10 billion to build the world's biggest wind farm in Texas that should start generating power by 2011. When asked if his plan is a way to ensure his investments would make him even richer, the 80-year-old billionaire said he's not concerned about making still more money. Pickens' vision has two steps. First, investors would boost development of wind farms, particularly in what he called the U.S. wind corridor, a slice of the country from Texas to North Dakota. It's an "unbelievable asset that's not been touched," he said. The extra wind power, according to the plan, would replace the natural gas the country burns to generate power. Currently the country gets 22 percent of its power from natural gas. Then, the freed-up natural gas could be used to power vehicles, but the country would have to convert a large share of its vehicles to run on compressed natural gas. Pickens said the cost savings would reduce oil prices "substantially."

Zarefsky Juniors MG, KN, SS

Oil Economics page 12 of 38

High Oil Price Good Links: Solar Power
Solar conversion spurs plug-in hybrids cars
Zweibel, Mason, and Fthenakis, 08 (Ken Zweibel, James Mason and Vasilis Fthenakis, scientists, “A Solar Grand Plan”, Scientific American, Jan 2008, http://www.sciam.com/article.cfm?id=a-solar-grand-plan&sc=WR_20071225) By 2050 solar power could end U.S. dependence on foreign oil and slash greenhouse gas emissions High prices for gasoline and home heating oil are here to stay. The U.S. is at war in the Middle East at least in part to protect its foreign oil interests. And as China, India and other nations rapidly increase their demand for fossil fuels, future fighting over energy looms large. In the meantime, power plants that burn coal, oil and natural gas, as well as vehicles everywhere, continue to pour millions of tons of pollutants and greenhouse gases into the atmosphere annually, threatening the planet. Well-meaning scientists, engineers, economists and politicians have proposed various steps that could slightly reduce fossil-fuel use and emissions. These steps are not enough. The U.S. needs a bold plan to free itself from fossil fuels. Our analysis convinces us that a massive switch to solar power is the logical answer. Solar energy’s potential is off the chart. The energy in sunlight striking the earth for 40 minutes is equivalent to global energy consumption for a year. The U.S. is lucky to be endowed with a vast resource; at least 250,000 square miles of land in the Southwest alone are suitable for constructing solar power plants, and that land receives more than 4,500 quadrillion British thermal units (Btu) of solar radiation a year. Converting only 2.5 percent of that radiation into electricity would match the nation’s total energy consumption in 2006. To convert the country to solar power, huge tracts of land would have to be covered with photovoltaic panels and solar heating troughs. A direct-current (DC) transmission backbone would also have to be erected to send that energy efficiently across the nation. The technology is ready. On the following pages we present a grand plan that could provide 69 percent of the U.S.’s electricity and 35 percent of its total energy (which includes transportation) with solar power by 2050. We project that this energy could be sold to consumers at rates equivalent to today’s rates for conventional power sources, about five cents per kilowatt-hour (kWh). If wind, biomass and geothermal sources were also developed, renewable energy could provide 100 percent of the nation’s electricity and 90 percent of its energy by 2100. The federal government would have to invest more than $400 billion over the next 40 years to complete the 2050 plan. That investment is substantial, but the payoff is greater. Solar plants consume little or no fuel, saving billions of dollars year after year. The infrastructure would displace 300 large coal-fired power plants and 300 more large natural gas plants and all the fuels they consume. The plan would effectively eliminate all imported oil, fundamentally cutting U.S. trade deficits and easing political tension in the Middle East and elsewhere. Because solar technologies are almost pollution-free, the plan would also reduce greenhouse gas emissions from power plants by 1.7 billion tons a year, and another 1.9 billion tons from gasoline vehicles would be displaced by plug-in hybrids refueled by the solar power grid. In 2050 U.S. carbon dioxide emissions would be 62 percent below 2005 levels, putting a major brake on global warming {and that is with a more than doubling of our population by then—jk}.

Zarefsky Juniors MG, KN, SS

Oil Economics page 13 of 38

High Oil Price Good Links: Solar Power
High oil prices boost demand for solar energy, which has a potential to decrease oil demand worldwide. Seager 08 (Ashley, staff writer, “Solar future brightens as oil soars”, The Guardian, 6/12/08, http://www.guardian.co.uk/environment/2008/jun/16/renewableenergy.energy) Soaring oil prices have led to such a boom for solar power that the industry could operate without subsidies in just a few years, according to industry leaders. At the solar industry trade fair in Munich over the weekend, there was growing confidence that the holy grail known as "grid parity" - whereby electricity from the sun can be produced as cheaply as it can be bought from the grid - is now just a few years away. Solar photovoltaics (PV), which convert sunlight into electrical power, have long been dismissed as too expensive to make a meaningful contribution to the battle against climate change. But costs are falling as PV production booms, and with electricity prices rising rapidly in line with soaring oil and gas prices, demand for solar panels is increasing sharply. Germany, the world leader in PV thanks to its "feed-in tariff" support, installed 1.1 gigawatts of capacity last year - the equivalent of a large power station. It now has nearly half a million houses fitted with PV panels. The feed-in tariff pays people with solar panels above-market rates for selling power back to the grid. "High oil prices have boosted demand even more. The market will probably expand another 40% this year," said Carsten Körnig, of the German solar industry association, referring to both PV and solar thermal systems, which produce hot water. He said his previous assumption - that grid parity would be reached in Germany in five to seven years - now looked very conservative since it allowed for only a 3% rise in electricity prices each year. In many countries increases of 20% a year are becoming the norm. All the companies at the Intersolar fair are planning large increases in production of solar panels. The China-based Suntech, the world's biggest maker of PV panels, plans to double production from 540MW this year to 1GW in 2009. Jerry Stokes, head of Suntech Europe, thinks grid parity in Germany can be reached within five years. In California and Italy, where there is lots of sun and high electricity prices, he said grid parity for PV systems had already been achieved. "The great thing about solar power is that although you have an upfront cost, the fuel is free and is not controlled by another country," he said. PV costs were falling rapidly and would continue to do so as the efficiency of panels improved and installation costs dropped, Stokes said. Moreover, the price of silicon - which can be 70% of panel costs - is also likely to fall as new production comes onstream. Although spot silicon prices have passed $400 (£200) a kilogram up from $25 five years ago - many firms have secured long-term supplies at about $50-$70 a kilogram. Nitol, a Russian chemicals company, is building a new silicon production plant in Siberia that will take its output from 300 tonnes this year to 3,700 by 2009. Dmitry Kotenko, chief executive, said: "We expect to build five times that capacity in the coming years." Q Cells, the world's largest maker of PV cells from which panels are made, is relaxed about silicon supply. "By 2010 there will be easily enough silicon, maybe even too much," said spokesman Stefan Dietrich. Q Cells plans to increase production of cells from around 600 MegaWatts this year to 2GW by 2010. The company now employs 2,000 people and is based in eastern Germany. Eight years ago it did not even exist. Like other companies, Q Cells are also investing heavily in a newer technology called "thin film" PV which which is cheaper to make than conventional panels but less efficient. The Norwegian company REC, which produces silicon, cells and solar panels, plans a 10-fold rise in production. REC's Jon André Lökke said new plants were much more efficient than older ones and cut costs by at least 30%. REC predicts that several countries would reach grid parity for PV by 2012, although rising oil prices could mean those targets are met earlier. REC also expects panel costs to fall by 30% to 40% by 2012. But rising demand could mean panel prices remain high even as costs fall. "It all depends on demand and that could remain high for a long, long time," Lökke said. Suntech's Stokes agrees: "When we reach grid parity the demand could well be infinite.

Zarefsky Juniors MG, KN, SS

Oil Economics page 14 of 38

Zarefsky Juniors MG, KN, SS

Oil Economics page 15 of 38

Oil Prices Dictated by Supply/Demand
Consensus proves supply/Demand balance sets the current price of petroleum
Investment Adviser, 2008 (“Is the world on the tipping point for oil demand?” Lexis Nexis) The tight supply and demand balance has contributed to the huge rise in oil prices, but there is growing evidence that consumers are cutting back Efforts to explain the breathtaking rise in oil prices to a recent high of $135 on the July West Texas Intermediate futures contract have touched off a flood of commentary and written work from Wall Street analysts, oil industry executives, politicians, economists, academics, traders, market pundits, television commentators and the major news and print media. Unlike the Arab Oil Embargo of 1973-1974, the Iranian Revolution of 1979 and the Gulf War of 1990-91, the rise in oil prices from 2002 to the present has primarily been driven at least in its initial stages by the inexorable growth in world demand, turbocharged by demand growth in emerging market nations, especially China and India. There is not much debate about whether the relatively tight supply and demand balance for crude oil that has developed in recent years has been an important contributor to the rise in oil prices.

Zarefsky Juniors MG, KN, SS

Oil Economics page 16 of 38

Futures Market Timeframe/Internals
A perception that oil prices are falling causes the futures market to collapse
Leonard 06 (Andrew, “The oil bubble- How the World Works”, Salon, 8/21/06, http://www.salon.com/tech/htww/2006/08/21/oil_bubble/index.html) First, there's the supposition that some portion of the spike in oil prices over the last couple of years is speculator driven. Traders are stockpiling oil for sale to buyers at some later date, hoping that in the intervening period prices will continue to rise. Such speculation naturally pushes the price of oil even higher. This is a classic pattern in markets, going back at least as far as the great tulip mania of the 17th century, and there's no reason why oil should be any different from any other traded commodity. And as with all bubbles, once traders start thinking that the price might fall, whoooosh -- the air rushes out. In the last week, while How the World Works was pretending that the spot market price for crude had no relevance to life in the woods of southern New Hampshire, much has been made in the press of a report by Sanford Bernstein oil expert Ben Dell that an oil price shift downwards is imminent, in part because the global storage capacity for oil is getting tight. So many traders (and governments) are hoarding oil that we are rapidly approaching a point where there is no more room to put it -- one estimate predicts that date could arrive within four to six months. In that scenario, the cost of storage will naturally begin its own rise, encouraging traders to unload their holdings, and thus depressing the price of oil as the market gets glutted with supply.

Speculation means the oil bubble can pop overnight By John W. Schoen, 2008
Senior Producer MSNBC
What's pushing oil prices higher? 7 reasons why crude has soared to record levels COMMENTARY URL: http://www.msnbc.msn.com/id/13862677/

Investor demand. Oil prices also are being stoked by investors in the futures market who have no intention of ever taking delivery of a barrel of crude. The rapid run-up in prices over the past two years has drawn billions of dollars worth of bets that prices will move higher. If the other forces driving prices higher persist, expect investors to continue bidding up futures contracts. The flip side is that with all this extra capital sloshing around the oil markets, a pullback in prices could be amplified as speculators bail out. “Instead of going crazy fretting over high gasoline prices, why shouldn't we invest enough in oil companies to hedge like the big boys do? If oil rises, we profit enough to fill our tanks.

Futures speculation drives massive oil volatility
Kepple July 13 (Benjamin Kepple, Writer, Union Leader, “Oil options weighed as prices skyrocket”, http://www.unionleader.com/article.aspx?headline=Oil+options+weighed+as+prices+skyrocket&articleId=0ab87473-2e81-49c9-8c831b2b5bdd4f35) But the major driver behind the higher cost of heating oil is the underlying cost of crude oil, which is now trading in the $130- to $140per-barrel range. Speculation has been a big part of that increase, as evidenced by volatility in the market. High prices hike the price for dealers to hedge their oil commitments to their pre-buy customers. Dealers hedge in a variety of ways, such as buying futures contracts or futures options, to protect themselves against prices rising or falling. But these strategies take cash. With prices higher, it takes more cash to implement them. "In the crude markets, I know the margin requirements have increased," said Chris Barber, another oil market analyst for ESAI. "They try to keep it close to a percentage (of the contract's value). As the price has gone up so far, they just keep increasing." Also, high prices and volatility have increased the risks for those underwriting the dealers' hedging strategies -- meaning higher dealer costs. "Last year, the downside protection was a lot less. This year it's considerably higher," said Donna Buxton, the owner of Buxton Oil Co. in Epping. "There's a lot more risk involved for the big suppliers as well. Nobody wants to take that risk on."

Zarefsky Juniors MG, KN, SS

Oil Economics page 17 of 38

a/t “speculation causes volatility”
Speculation hasn’t increased price swings – their overnight timeframe assertion’s ludicrous
Investors Chronicle 08 (Investors Chronicle, “Oil’s worrying Stability”, 6/24/08, l/n) Oil prices are more stable now than in previous years - just at a higher level The widespread belief that oil prices have become more volatile is wrong. According to one reasonable measure, the market has recently been more stable than usual. In the last six months, the annualised volatility of weekly changes in Brent crude has been 27 percentage points - less than the 36.2 per cent average volatility we have had since 1988*. The notion that oil prices are volatile is a statistical illusion caused by the high price. People forget that a $5 per barrel price move today is, in percentage terms, equivalent to only a 75 cent move in the 1990s. And no one worried much about moves of that size. This stability implies that speculation in the commodity has not had a significant destabilising influence upon the market; it might have raised prices, but not volatility. It also implies that strong demand has been a bigger force behind high prices than supply restrictions. Traditionally, the latter have been associated with high volatility; the most volatile prices in the last 20 years come around the time of the supply disruptions in 1990 as a result of Iraq's invasion of Kuwait. Demand growth, being more stable, is associated with lower volatility. A third implication is that high prices might be here to stay, as producers have little incentive to boost supply. To sell oil is to convert reserves into cash. But with expected returns on safe financial assets so low - inflation-proofed bonds yield less than 1 per cent - producers have little incentive to do this. Ordinarily, one counterweight to this is that cash is at least a safe asset while reserves, because of the volatile oil price, are a risky one. But with oil prices now less unstable than usual, this argument for pumping more carries less weight than usual. Until oil price volatility or interest rates rise, hopes of a big rise in supply are ill-founded. * Another measure tells the same story. In the last 26 weeks, the average weekly change in the oil price (regardless of sign) has been 3.2 per cent. That compares to a post-1988 average of 3.7 per cent.

Zarefsky Juniors MG, KN, SS

Oil Economics page 18 of 38

a/t Speculation Drives Market
Speculators have minimal impact on oil Prices.
Jul 14, 2008 By Madhu Unnikrishnan/Aviation Daily http://www.aviationweek.com/aw/generic/story_channel.jsp?channel=comm&id=news/SPEC07118.xml AVIATION WEEK Copyright 2008, The McGraw-Hill Companies The role of speculative investors in high oil prices is dividing the U.S. airline industry from economists, who say targeting institutional investors is more politically expedient than economically sound. The U.S. Air Transport Association last week launched a Web site to prevent speculative institutional investors — pension, index and hedge funds and investment banks — from buying and selling large numbers of oil contracts. As part of the outreach program, the CEOs of several U.S. carriers sent letters last week to frequent flyers imploring them to write Congress to crack down on speculators. "A barrel of oil may trade 20-plus times before it is delivered and used; the price goes up with each trade, and consumers pay the final tab," the letter said. Sen. Byron Dorgan (D-N.D.) has introduced legislation that would order the Commodities Futures Trading Commission to put an end to excessive speculation in the oil markets (DAILY, July 11). "Oil has become a financial instrument," ATA President James May told reporters on Friday. Speculative investors are eclipsing oil consumers on the oil markets, May explained. This is driving the price of a barrel of oil up by anywhere between "$20 and $60 per barrel," May noted, citing industry experts. "If Congress would pass meaningful speculation reform, oil prices would drop significantly within a matter of days or weeks," said Michael Masters, founder of Masters Capital Management, who also spoke at the meeting. The cost of extraction of a barrel of oil is between $65 and $75, May and Masters noted, and much of the difference between that cost and the $140-plus that oil is selling for now is due to speculation. But when asked for a precise percentage of the difference due to speculation, Masters said, "Nobody really knows." Economists say speculation plays only a little role in the price of oil. "Trying to pin down an exact number for how much of the price of oil is due to speculation involves a lot of speculation," said Adam Sieminski, chief energy economist for Deutsche Bank. Tight supplies and ever-increasing demand — economic fundamentals — are the primary reason behind the stratospheric price of oil, he said. OPEC and non-OPEC production is down. "OPEC cut production in 2007 because it overestimated nonOPEC production," Sieminski said, adding that oil production in Russia is down 500,000 barrels per day from last year's forecast. Geopolitics also plays a role. "Resource nationalism" and political tensions in Nigeria, Venezuela, Iran and even Mexico are further constraining supply, Sieminski said. Demand in China and other large developing economies continues to grow beyond all forecasts, Sieminski said. Many countries in Asia and the Middle East also are facing an electricity shortage, and these regions are turning to oilfired generators to make up the shortfall. This is adding to already torrid demand, he said. Given this, going after speculative investors makes little sense. "Blaming speculators is convenient," Sieminski said. "Politicians are looking for someone to blame." Sieminski's views mesh with those of the International Energy Agency, the energy watchdog for the Organization for Economic Cooperation and Development. In its Medium-Term Oil Market Report, the IEA said it is "a case of political expediency" to blame speculators for the runup in oil prices.

Zarefsky Juniors MG, KN, SS

Oil Economics page 19 of 38

a/t Speculators Drive the Market
Speculation follows supply and demand fundamentals – it’s a link amplifier not a linkt akeout
Associated Press 08 (“US Energy chief: Low oil production drives price”, 6/21/2008, http://news.aol.com/story/_a/us-energy-chief-lowoil-production/n20080621151709990001) JIDDAH, Saudi Arabia (AP) - The U.S. energy secretary said Saturday that insufficient oil production, not financial speculation, was driving soaring crude prices. Secretary Samuel Bodman's comments on the eve of an energy summit in the Saudi port city of Jiddah set the stage for a showdown between the U.S. and conference host Saudi Arabia, which has largely blamed speculation in the oil markets for record prices. The U.S. and many other Western nations have put increasing pressure on Saudi Arabia, the world's top oil exporter, to increase production. Saudi officials have been hesitant to do so, arguing that soaring prices have not been caused by a shortage of supply. Bodman disputed that assertion Saturday, saying oil production has not kept pace with growing demand, especially from developing countries like China and India. "Market fundamentals show us that production has not kept pace with growing demand for oil, resulting in increasing prices and increasingly volatile prices," Bodman told reporters. "There is no evidence that we can find that speculators are driving futures prices" for oil. He said commodities markets have experienced a huge influx of money from financial investors in recent years, but they have been following the market upward rather than driving the increase in the price of oil. Saudi Arabia called the unusual meeting in Jiddah between oil producing and consuming nations as a way to show that it was not deaf to international cries that high oil prices have caused social and economic turmoil. The Gulf nation has also become increasingly concerned that record oil prices could hinder growth in the U.S. and other major industrialized economies, potentially leading to a decline in oil demand and a sharp drop-off in prices. While Saudi Arabia has been reluctant to drastically increase production, it has announced several small increases recently that it says were made to satisfy increased customer demand. The country has consistently said that it will produce enough oil to ensure the market is supplied. The kingdom increased oil production by 300,000 barrels a day in May, and a Saudi official confirmed Saturday that the country would add another 200,000 barrels a day in July. The official spoke on condition of anonymity because of the sensitivity of the information. Saudi Oil Minister Ali al-Naimi also confirmed the increase ahead of the conference. But neither announcement has done much to stem the run-up in the price of oil, which closed near $135 on Friday. Saudi assistant oil minister, Prince Abdulaziz bin Salman, told a news conference Saturday that the delegates were "congregating to achieve results" and try to draw "a collective way forward for how to attend to this situation." "This situation as we see it today as it exists needs everybody's attention simply because it no longer is a luxury to talk about it or ... to keep bouncing back and forth blame," he added. The prince said that Saudi Arabia has been working with several international organizations to put together a background paper to focus Sunday's discussions and reiterated that the kingdom was ready to meet demand from its customers and foster stable prices. He said it would be "wrong" to judge the success of the meeting by oil prices the day after it ends. Many countries around the world have experienced social unrest by populations angry that rising fuel prices have driven significant increases in the cost of food and other basic goods. Bodman said that every 1 percent increase in the demand for oil requires a 20 percent rise in price to balance the market. Demand in China, India and the Middle East has been soaring in recent years as the countries consume more energy to fuel economic growth. Rising demand in the developing world has coincided with historically low levels of spare oil production capacity, which fell below two million barrels per day among OPEC countries in May for the first time since the third quarter of 2006, according to the International Energy Agency. Bodman made clear that the responsibility for reducing oil prices did not simply fall on the shoulders of producing nations, saying consuming countries must increase energy efficiency and invest in the development of alternative fuels. But he saved his strongest words for oil producers like Saudi Arabia, who he said must step up long-term investment in production and spare capacity. "The incentive (for investing) is simply reasonable prices so that we're not faced with having to drop everything and race to Jiddah for a meeting that was called on a week's notice," said Bodman. Saudi Arabia is completing a $50 billion plan to increase capacity to 12.5 million barrels a day but has signaled it would not go beyond that. CNBC said Saturday that Saudi Arabia's current capacity is 11.3 million barrels per day, quoting al-Naimi's adviser, Ibrahim al-Muhanna. Previous estimates by the International Energy Agency put current Saudi capacity at about 10.7 million barrels per day. The kingdom currently produces about 9.5 million barrels per day.

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Oil Economics page 20 of 38

a/t Speculators Drive the Market
Best available data proves speculation is the root cause of price runups
Mouawad and Henriques 08 (“Speculators aren't driving up oil prices, report finds” By Jad Mouawad and Diana Henriques ,Wednesday, July 23, 2008 , http://www.iht.com/bin/printfriendly.php?id=14705356) As Congress debates how to curtail the role of speculators and rein in rising oil prices, a U.S. government task force said Tuesday that it had so far found no evidence that those investors are systematically pushing up the cost of energy. Instead, in an interim report made public on Tuesday, the task force said that its research "does not support the hypothesis that the activity of these groups is driving prices higher." The preliminary study concluded that the rise in oil prices over the last five years was "largely due" to fundamental factors like rapidly rising consumption and sluggish growth in energy supplies worldwide. The analysis was spearheaded by the Commodity Futures Trading Commission with help from six other agencies, including the Federal Reserve and the Treasury. It offers the government's most authoritative view to date on whether investors, using specialized instruments known as index funds and commodity swaps, have contributed to the sharp run-up in oil prices since 2002. The issue has been hotly debated as oil surged above $140 a barrel and gasoline rose above $4 a gallon, prompting consumer groups to put fierce pressure on lawmakers and regulators. Congress has held dozens of hearings since January to explore proposals that range from expanding offshore drilling to expelling institutional investors from the commodity markets. But the notion with the most political traction so far is a proposal from the Senate Democratic leadership that would restrict speculators' role in futures markets, apply those restrictions to any foreign exchange open to traders in the United States, and extend the CFTC's authority to cover swaps trading that does not occur on public exchanges. In debate on that bill this week, its supporters have repeatedly predicted that reducing the growing role of speculators would allow energy prices to fall. In its report, the federal task force acknowledged that investors had flocked to the energy futures markets in recent years, attracted by high returns. But the task force said that a review of both public and non-public data shows that speculators could not be fairly blamed for rising prices. For example, swap dealers, who privately offer investors a future return linked to commodity markets, were roughly balanced between purchases and sales of energy futures contracts. And in the first five months of 2008, more of these swap positions were selling than buying. In that same period, oil prices rose 28 percent. The report's key finding was that speculative investors more often changed their positions after prices had moved, not before. That suggests that these traders "are responding to new information — just as one would expect in an efficiently operating market," the report said. The task force, led by the CFTC, includes staffers from the departments of Agriculture and Energy, the Treasury, the Federal Reserve, the Federal Trade Commission, and the Securities and Exchange Commission. It will release a complete study in September.In identifying the drivers of energy prices, the report noted that oil consumption grew 3.9 percent between 2004 and 2007. At the same time, oil supplies lagged that demand, with production growth from nations outside the Organization of the Petroleum Exporting Countries slowing to levels far well below the historic averages. After a record close of $145.29 a barrel on July 3, oil futures on the New York Mercantile Exchange have been sliding in recent weeks. On Tuesday, oil fell $3.09 to $127.95 a barrel. Average gasoline prices have also been declining recently, from a record of $4.11 a gallon on July 17 to $4.05 a gallon on Tuesday.

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Oil Economics page 21 of 38

a/t Oil Companies Drive Prices
Oil companies don't manipulate prices, they just reflect spot markets Felix Salmon 2008arrived in the United States in 1997 from England, where he worked at Euromoney magazine. He also wrote daily
commentary on Latin American markets for the former news service Bridge News, freelanced for a variety of publications, helped set up the New York bureau of a financial website, and created the Economonitor blog for Roubini Global Economics. He has been blogging since 1999 and now writes the Market Movers blog for Portfolio.com. Salmon is a graduate of the University of Glasgow.
Howell Raines was the executive editor of The New York Times from 2001 to 2003. Under his stewardship, the paper won an unprecedented seven Pulitzers in a single year. Prior to becoming executive editor, Raines served in a variety of roles at The Times, including editorial page editor, White House correspondent, deputy Washington editor, London bureau chief, Washington bureau chief, and Atlanta bureau chief. posted on: July 17, , http://seekingalpha.com/article/85458-oil-company-economics?source=bnet, Seekingalpha, Seeking Alpha's editors are tasked with selecting outstanding articles from credible authors and editing them for clarity, consistency and impact.

What would constitute price manipulation in the oil industry? Howell Raines doesn't blame speculators for high prices in his latest column; instead, he blames the oil companies themselves. Supply and demand? Sure, but as John Lee, a business journalist at the Wall Street Journal and the New York Times for many years, reminds me, supply and demand in oil are not just "two pie charts-- where it comes from, where it goes, measured maybe five years ago." There are more complex reasons for pain at the pump. "American gasoline prices have always reflected the latest spot price, namely what you have to pay to buy bulk gasoline on the open market. This is last-in pricing, rather than pricing based on inventory costs." Now, let's say you're an oil company selling bulk gasoline, and suppose your inventory contains some gasoline made from $140-a-barrel oil and some that was purchased for $75 a barrel. That leaves a lot of room for price manipulation. It seems that Raines thinks the oil companies should sell gasoline according to what they paid for it, rather than what they could sell it for on the wholesale market. But they're privately-owned companies: they have an obligation to their shareholders to sell at the market price, when prices are rising. Gasoline prices are always determined primarily by the latest spot price for oil, rather than inventory costs, just as you'd expect: there's nothing new going on here.

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Oil Economics page 22 of 38

a/t OPEC drives prices
OPEC can’t manipulate prices – it’s pumping at capacity to meet demand
Schoen 05 OPEC says it has lost control of oil prices, Cartel producers say they can't keep up with strong global demand ,By John W. Schoen, Senior Producer , MSNBC ,updated 4:13 p.m. CT, Wed., March. 16, 2005, URL: http://www.msnbc.msn.com/id/7190109/ Despite a pledge by OPEC ministers to increase oil production, don't expect much of a break on oil prices. With crude oil prices hitting a record $56 a barrel Wednesday, OPEC ministers meeting in Iran have been grappling with a problem they haven’t confronted in the cartel’s 45-year history. In the past, OPEC tried to cool overheated prices by pumping more when supplies got too tight. But most OPEC producers say they’re already pumping as fast as they can. And despite the high cost of a barrel of crude, world demand shows no signs of slowing. To help stop the surge in prices, OPEC ministers agreed to pump an extra half million barrels of oil a day beginning April 1. OPEC said it would consider pumping more later if the extra oil doesn't push prices lower. But even before the decision was announced, some ministers had openly expressed doubts that the move will do any good, saying they’ve run out of options in trying to rein in the price of crude. Global oil demand has taken up most of the slack in extra OPEC capacity. Consumption is now believed by many analysts to be pressing up against the limits of what the world can produce. Saudi Arabia is the only country believed to have any surplus production left, and even then the Saudis are pumping close to 90 percent of capacity, according to the U.S. Department of Energy. "There is not much we can do,” Algerian Oil Minister Chakib Khelil told reporters Tuesday in Isfahan, Iran, the site of Wednesday’s meeting. "OPEC has done all it can do.” Qatar Oil Minister Abdullah al-Attiyah said. “This is out of the control of OPEC." The oil markets seem to agree. After word came that OPEC pledged to pump harder, oil prices surged Wednesday on concerns about the latest weekly reports on inventories. Crude for April delivery rose $1.41 to settle at $56.46 a barrel Wednesday, the highest price for the commodity on the New York Mercantile Exchange since it introdguced crude oil futures trading in March 1983. Crude prices soared after the EIA reported that domestic gasoline stocks in the March 11 week fell 2.9 million barrels to 221.4 million barrels -- nearly three times the decline forecast by analysts. A year ago, gasoline stocks stood at 202.4 million barrels. And even as President Bush expressed concern Wednesday about rising oil prices, he cited tight global supplies -- not OPEC policies -- for the price surge. “I think if you look at all the statistics, demand is outracing supply and supplies are getting tight. And that’s why you’re seeing the price reflected,” Bush said.

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Oil Economics page 23 of 38

a/t OPEC drives prices
It’s supply and demand, not OPEC, pushing prices. OPEC has no control, and isn’t very effective in the first place.
Schoen 05 OPEC says it has lost control of oil prices, Cartel producers say they can't keep up with strong global demand ,By John W. Schoen, Senior Producer , MSNBC ,updated 4:13 p.m. CT, Wed., March. 16, 2005, URL: http://www.msnbc.msn.com/id/7190109/ Though data on OPEC’s oil production capacity have always been hard to come by, there’s little disagreement on the rapid growth of global consumption -- especially in China and India. With worldwide demand this year rising by roughly 2 million barrels per day, whatever excess capacity is out there will be gone soon, according to Marshal Adkins, an oil industry analyst at Raymond James “Maybe this year, but certainly in ‘06 there won’t be any excess capacity,” he said. “We haven’t been in that kind of market in our lifetime. You’ve always have more capacity than demand.” That’s little solace to energy consumers, who are watching rising crude oil prices push pump prices to record levels. Though U.S. economy has yet to show signs of slowing and inflation remains low, a continued rise in oil prices will eventually slow growth, analysts say. “We will find the price level that will slow demand,” said Adkins. “It may be $60; it may be $100. I think it’s fair to say its going to be in that price band.” Seasonal lull? Analysts say OPEC typically eases back on production at this time of year because demand slows as the winter heating season winds down and drivers haven’t yet hit the road for summer vacations. But with prices nearly double levels just 18 months ago, production cutbacks are unlikely, say analysts. “OPEC’s only real option is to maintain the status quo for now," said Smith Barney Citigroup oil analyst Doug Leggate in a recent research report. Oil prices have also risen for a variety of other factors over which OPEC has no control, according to Adkins. Tanker prices haven jumped from $3 a barrel to $10 a barrel during the recent run-up in crude prices. To increase output, Saudi Arabia has been selling lower grade crude, which has boosted the price of more desirable light, sweet crude. And the falling dollar has effectively cut the value of oil payments to OPEC producers. “When were looking on our screens seeing $45 oil, Saudis are cashing checks for $25 oil,” he said. “So in their mind -– their $25 price (target) -– that’s what they’re getting.” As rising demand has approached the world’s production limits, OPEC’s decisions have less impact on prices. In the past, the cartel has "controlled" oil prices (or tried to) by adding or withholding production. By holding back oil, the market remained "tight" and prices stayed relatively high. The "oil shortages" of the 1970s were engineered by OPEC -- not the result of a true lack of supply. But production quotas have had mixed success. For starters, many OPEC producers have "cheated" over the years -- agreeing cut back at OPEC meetings but then pumping more when they went home. A big run-up in inventories in 1997, for example, came just in time for the Asian economic meltdown in 1998. OPEC couldn’t cut production fast enough and oil prices fell to $10 a barrel. But eventually cutbacks sent prices back up above $30 a barrel by 2000. Then came the U.S. stock market crash, Sept. 11 and recession -- which sent oil back down to $15. OPEC cut production again, and prices began their run back to $30 -- and beyond. Now, with prices above $50, OPEC risks seeing prices tumble again if high energy costs put a damper on world growth. That’s why – despite relatively high crude oil inventories for this time of year – Saudi Arabia has proposed boosting production by 2 percent, to 27.5 million bpd."We're concerned about prices, we're also concerned about economic growth and we're particularly concerned about economic growth in developing countries," said Saudi Oil Minister Ali al-Naimi. "Hopefully I will be convincing enough to move the rest to my thinking."But ministers from Iran, Kuwait and Nigeria have recommended postponing any increase until May 1 to see if demand eases as it usually does in the second quarter. And some OPEC ministers don’t think oil prices at current levels will slow the global economy. Some U.S. analysts concur, noting that the U.S. economy is less dependent on oil than it was during the “oil shocks” of the 1970s, when oil hit $80 a barrel when measured in today’s dollars. "Even at $60 we see no economic impact," Libyan Energy Minister Fathi Omar Bin Shatwan told reporters.

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Oil Economics page 24 of 38

a/t OPEC drives prices
OPEC’s irrelevant – the price runup crushed them
Chris Isidore, 2008 (CNN Staff Writer, "Is OPEC becoming irrelevant?", http://money.cnn.com/2005/09/19/news/economy/opec_future/index.htm) Chris Isidore is a CNN/Money senior staff writer. NEW YORK (CNN/Money) - While OPEC ministers met in Vienna Monday to discuss future production and price targets for oil, oil analysts and traders were instead focused on the waters off the Florida Keys. There Tropical Storm Rita had the potential to turn into a hurricane and again pound oil production and refinery capacity along the U.S. Gulf Coast. Private weather tracking service Weather 2000 Inc. estimates that Rita's path could hit four times as many energy rigs and platforms in the Gulf as Hurricane Katrina and 2004's Hurricane Ivan combined. Both those storms sparked record oil prices in their wakes. "With another storm threatening the half the Gulf that avoided Katrina, it has traders spooked this morning," said oil analyst Peter Beutel of Cameron Hanover about Monday's sharp rise in oil prices. But even if Rita misses oil faculties, traders and economists say that the once all-powerful oil cartel's official pronouncements have no real impact on the market and the price of oil. "OPEC became powerless the moment it sold its last barrel of excess capacity, and that was maybe a year ago," said energy economist A. F. Alhajji, a professor at Northern Ohio University. "They have at this point ceased to be a meaningful cartel at these prices," Beutel agreed. "The only reason they hold these OPEC meetings is have an excuse to get out of their own countries, go to Vienna and go on a shopping spree." With most of the OPEC member nations already operating at capacity, the power of the cartel to lift prices by keeping supply artificially low is lost, said economists. OPEC officials say they're looking for lower, rather than higher prices, so production cuts are not on the table. And even if OPEC did want to cut production, it's unlikely members would pass up the chance to sell the maximum amount of oil possible at current prices. While most oil ministers from OPEC countries are bullish about future production levels, there are growing doubts about what OPEC can and will be able to do to increase production. "The bigger question is does OPEC have excess capacity that it can tap into in the longer-term," said Jason Schenker, a Wachovia Securities economist in Vienna for the OPEC meetings. "It appears they're unlikely to raise their quotas, and that's not going to assuage market concerns about their capacity." Bill Adams, chief energy and capital market strategist, LaSalle Futures, said that OPEC nations are limited in how much they can increase capacity because they could hurt the quality and quantity of oil they can extract from fields long-term if they try to remove too much, too quickly. "Overproduction can lead to a production collapse," he said. That makes promises of future production increases seem somewhat hollow, he said. "I think if they had the capacity to meet the demand that exists right now, they would have done it already," he said. "It doesn't take a rocket scientist to figure out that China is going to have huge increased energy needs. If they haven't taken advantage of it, you have to assume they're not able to." While the recent spike in oil prices would appear to be good news for OPEC, the economists say it poses a risk for many of the OPEC nations. If consuming nations go into an oil-shock sparked recession, it could cause a sharp drop in demand, and maybe even government regulation of energy consumption. "In the long run it'll be a disaster for [OPEC producers]," said Alhajji. "Demand will start decreasing, economies will start collapsing, then they will suffer as they did in the 80s." So OPEC could be faced with the seemingly contradictory problems of not being able to meet world demand today, and having weaker prices in the future even if production stays relatively steady.

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Oil Economics page 25 of 38

a/t OPEC drives prices
Even if OPEC caused it, it’s losing control. Prefer our predictive ev
OPEC will soon not have control over the international oil prices. Jim Kingsdale, 2008 ( Market Investor and Writer, "The End of OPEC", http://seekingalpha.com/article/76725-the-end-of-opec) Churchill's assessment applies to the current oil situation: this is the beginning of the end of OPEC. That much is obvious; the more interesting question is "why?" OPEC was founded in 1960 to protect the interest of its members, major oil exporting nations. That interest is to stabilize world oil prices at levels that balance their competing objectives to maximize both long term oil demand and the short term oil price. The idea was to keep enough oil off the market during glut periods to elevate the price and insert enough oil onto markets and lower prices during crises to prevent a global recession and to subvert movements toward substitutions for oil. The cartel has struggled with both tasks. They have had some successes and some failures in keeping short term prices high. But since prices broke out of the $30 ceiling in 2003, OPEC had had little success in containing the price rise. Now analysts are increasingly questioning whether OPEC is able to contain oil prices. Whether they can or not will soon become evident. Regardless of whether OPEC can lower oil prices in the near term, it is clear that soon enough OPEC will not have that ability.

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Oil Economics page 26 of 38

a/t dutch disease
Dutch Disease is too simple of an explanation: It can't explain why Nigeria is low on production. Budina, Pang, and Wijnbergen 07 (Nina Budina, World Bank, Gaobo Pang, Watson Wyatt Worldwide, Sweder Van Wijnbergen, University of Amsterdam, "Nigeria's Growth Record: Dutch disease or Debt Overhang?", World Bank Policy Research Working Paper 4256, Jun 2007, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=995077) Traditional among explanations of poor performance in ORCs is the so called Dutch Disease (van Wijnbergen (1984a,b), Corden and Neary (1984)). This literature named after Holland's poor record in managing its natural gas wealth in the 1960s, points out that spending out of oil wealth increases demand for non-tradeables and so draws productive resources into that sector. Since the presumption is that technological progress is faster in T-sectors than in NT-sectors, the explanation of low-growth naturally follows. If moreover some of the higher growth is related to effects that are not captured directly by private entrepreneurs, such as sector-wide learning by doing effects, there is a case for an explicit government supported economic diversification strategy (van Wijnbergen (1984b)). However only when oil revenues are temporary, and, critically, capital market failures or misguided spending policies cause an associated temporary spending boom, a strong case for industrial diversification emerges. Countries following a Permanent Income rule, sharing the oil wealth with future generations and smoothing out expenditure into the far future, do not need to face a nearby future without oil wealth and with depressed economic activity, and therefore have no need to worry about future declines in exchange rates. In such circumstances there is no clear cut case in favor of intensified diversification policies after an increase in oil wealth (van Wijnbergen (1984b)). Nigeria has had periods of excessive spending, but also periods of underspending, and started an explicit expenditure smoothing policy in 20904. As long as that policy is maintained, there will be no real Dutch Disease problem now or in the foreseeable future. Moreover, there are other difficulties in simply labeling Nigeria as another instance of an ORC succumbing to the Dutch Disease. In particular, the mechanism through which high spending out of what in essence is a tradeable resource leads to low growth is a fight for scarce resources drawing labor and capital out of the T-sector. Critical in this explanation is that there is resource scarcity at going factor prices, otherwise increases in NT activity can be met without decline in T-sectors. And that is where the story of Nigeria as a Dutch Disease victim falters. In Figure 8 various measures of excess capacity are plotted against time. While capacity utilization surveys indicate higher capacity use in the early oil boom years than in later years, the utilization ratio never exceeds 75%, and, except 1980 and 1981, hovers at 60% or lower. Unemployment data that far back are unfortunately not available, but the figures that are available also point at considerable slack in resource utilization. Such numbers are at variance with Dutch Disease style pressure on scarce labor and 12 capital, with scarce resources being diverted from high productivity growth T sectors to a booming but low productivity growth NT sector. For an explanation of Nigeria's poor growth record we will have to look elsewhere.

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Oil Economics page 27 of 38

a/t Dutch disease: Russia
Dutch Disease is empirically disproven in Russia
Baev 06 (Pavel K. Baev, Jamestown Foundation, “Russian Economic Paradoxes and the power of “Stupid Money”, Eurasia Daily Monitor, http://www.jamestown.org/edm/article.php?article_id=2371201) Unlike Medvedev, most other ministers and lower-ranking officials emphasized their worries about Russia's economic health so that collectively they performed the role that former presidential economic adviser Andrei Illarionov once played (Gazeta.ru, June 15). Finance Minister Alexei Kudrin complained that too much oil income had slowed down reforms and reduced the efficiency of economic regulation, while Deputy Prime Minister Alexander Zhukov saw the limits of an economic development strategy depending primarily on the export of hydrocarbons (Rosbalt, June 15). Many experts argued that the period of "easy growth" was coming to an end, while the politically driven pumping of "petro-rubles" into populist "national projects" would inevitably fuel inflation. These arguments make absolute sense economically, but Russia's performance in the last few months has definitely defied the dire warnings. After a slow start, the GDP in the first five months of 2006 increased by 6.2% compared with 5.4% last year. But running against the "Dutch disease" diagnosis, it was the 10.6% jump in industrial production that contributed the most to this growth, and manufacturing led the pack (Kommersant, June 20). Inflation was also firmly under control with only 0.1% in the first half of June and an expected 6.3% in the first half of 2006, compared with 8% last year (Vremya novostei, June 20). Yevgeny Yasin, a highly respected Russian economist, warns against attaching too much importance to the spike of activity in the last few months and points out that many structural imbalances are left unaddressed (Nezavisimaya gazeta, June 20). It is clear, nevertheless, that the economy is expanding beyond most forecasts, and it is only the stock market, which was widely expected to reach new heights, that has in fact sharply contracted. Since early May, the stock market has lost some 25% of its total value, which is significantly deeper than the levels of most other emerging markets at this time (Kommersant, June 19).

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Oil Economics page 28 of 38

a/t High Oil Prices kill the economy
High oil prices improves global economy growth Andrew McKillop, petroleum engineer, April 19, 2004, Oil and Gas Journal
The real impact of higher oil prices , certainly up to the range of about $ 60/bbl, is to increase economic growth at the composite worldwide level. This is the main reason why demographic oil demand during 1975, with oil prices at $ 40-65/bbl in 2003 dollars, was significantly higher than it is today. It should be clearly understood that if the demographic demand rate in 2003 was the same
as in 1979, then world oil demand in 2003 would have been 95.4 million b/d. Relative to real total world oil demand at this time (about 78 million b/d), the additional capacity needed would be close to two times Saudi exports, more than three times Russia's export offer, or well above five times Venezuela's current export capacity. There is no certainty at all that world oil supply j,would or could have been able to meet this demand. Higher oil prices operate to stimulate first the

world economy, outside the member countries of the Organization for Economic Cooperation and Development, and then lead to increased growth inside the OECD. This is through the income, or revenue, effect on oil exporter countries, and then on metals, minerals, and agrocommodity exporter countries, most of them low income (per capita gross national product below $ 400/year). Almost all such countries have very high marginal propensity to consume. That is to say that any increase in revenues, due to prices of their export products increasing in line with the oil price, is very rapidly spent on purchasing manufactured goods and services of all kinds. During 1973-81, in which oil
price rises before inflation were 405%, the New Industrial Countries (NICs) of that period -- notably the so-called "Asian Tigers" Taiwan, South Korea, and Singapore -- experienced very large and rapid increases in solvent demand for their export goods. In easily described macroeconomic terms, the revenue effect of higher

oil prices "greasing economic growth" was and is much stronger than the price effect on industrial producers .

NICs as a group or bloc of economies rapidly expanded their oil imports and increased their oil consumption as prices increased in 1974-81, because demand for their export goods had increased, due to the global economic impacts of higher oil and "real resource" prices. This has very strong implications for oil demand of today's emerging and giant NICs with large populations and immense internal markets: China, India, Brazil, Pakistan, and Iran. For the much smaller NICs of 1975-85, their oil import trends during 1974-81 show dramatic growth only slightly impacted by the major price rises of the period. In general terms, the NICs Taiwan, South Korea, and

Singapore increased their oil demand by about 60-80% in volume terms in this period of a 405% increase in nominal prices (Table 2).

High prices empricially don’t crash or hurt the economy
Russ Wiles, 12-30-2007, Gannett News Service, “Oil prices aren't everything,” http://www.app.com/apps/pbcs.dll/article?AID=/20071230/BUSINESS/712300340/1003 When it comes to rising energy prices, it's easy to assume the worst and repeat the same old mantras that seemed to work in the past. Hardly a day passes when some economist or stock-market prognosticator doesn't warn about the danger of lofty oil prices and the damage they're certain to inflict on a teetering economy. Americans recall oil-price shocks of past decades and can't help but wonder what's around the corner, especially now that China, India and other developing nations are squeezing into the oil market, while supply lines stretching to the Persian Gulf, Venezuela and other trouble spots seem less tenable than ever. The natural assumption is that one more energy straw will break the economy's back. And yet the facts, to a large degree, speak otherwise. Crude-oil prices surged 96 percent this year from their mid-January low to a late-November peak near $100 a barrel — and they remain about 80 percent higher. Yet the economy didn't collapse, corporate profits didn't dry up, the stock market remains above where it started the year and inflation hasn't gone through the roof (although a November uptick bears watching). Even with dramatically higher oil prices, Gross Domestic Product rose a brisk 4.9 percent in the third quarter — and that despite the drag exerted by the real estate slump, tighter credit conditions and banking-industry struggles. So why didn't an 80 percent-plus spike in crude-oil prices cause more damage? One explanation relates to the imperfect link between oil and gasoline prices. Simply put, crude oil accounts for little more than half the cost of a gallon of gasoline, with taxes, refining and distribution expenses, profits and other ingredients representing the rest. These other inputs haven't risen nearly as much as crude itself, helping to dampen the impact at the pump. At about $3 a gallon, gasoline prices are up 30 percent this year. That's not insignificant, but it's not an 80 percent spike, either. More telling, people can afford higher prices now because energy doesn't count as heavily in the average consumer's budget as it once did. Household energy consumption is certainly much lower than the last time rising energy costs precipitated a recession in the 1970s, said James Swanson, chief investment strategist at MFS Investment Management in Boston. Energy accounts for about 6 percent of consumer spending these days, Swanson said, citing information from the Bureau of Economic Analysis. That's down from more than 9 percent in the late 1970s and early 1980s.

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Market Solves Oil Consumption
Price increases decrease demand – it’s elastic
Paul Roberts, energy expert and writer for Harpers,2004, The End of Oil, pg. 160 How inevitable are such scenarios? Clearly, the rise in energy consumption in China and elsewhere throughout the developed and developing world depends on a host of factors. If world economic growth slows to just 2 percent a year, instead of the current 2.6 percent, daily world oil consumption would reach just 101 million barrels by 2020, instead of 120 million barrels — and that difference would dramatically lessen the pressure on world oil markets. Likewise, a gradual rise in the world price of oil would also keep demand down. According to one estimate, if the price of oil were to climb from its historic average of twenty dollars a barrel to thirty dollars a barrel and remain there, in real terms, for the next two decades, demand would be pushed down to around 106 million barrels by 2020.

Price spikes depress demand and push alternative transition
Margaret McQuiale 2007 (“High prices to slow oil demand growth” Lexis Nexis) High international oil prices are set to slow down oil demand growth in the next few years, the International Energy Agency's chief economist Fatih Birol said as the IEA cut its projections of world oil demand by 200,000 b/d in 2010 and by 800,000 b/d in 2015. The IEA's latest World Energy Outlook, released November 7, shows world oil demand at 91.1 million b/d in 2010, 200,000 b/d lower than the November 2006 projection of 91.3 million b/d, and at 98.5 million b/d in 2015, 800,000 b/d lower than the 99.3 million b/d projected in late 2006. "The main reason is that ... we have increased our price assumptions substantially and we think that the higher prices will have a slowdown effect on the oil demand growth, even though it's still very strong," Birol told Platts in an interview. Increased energy efficiency and the impact of "alternative policies" are also seen contributing to this easing of oil demand growth, Birol said. The IEA has left its projection of world oil demand in 2030 unchanged at 116.3 million b/d. This unchanged total is merely "a coincidence," according to Birol, who points out that OECD demand has been revised downward and demand from China and India upward since the 2006 outlook. "We have decreased our expectations from OECD countries compared with last year.

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Oil Economics page 30 of 38

Market pushes alt transition
High oil prices are getting people to search for other fuels now Pinto 06 (Jim Pinto, Industry Analyst, Engineer, international consultant in strategic business planning, marketing sales channel
development, technology planning, and acquisition strategy, author, speaker, writer, and angel investor, “Why high oil prices are good”, 4/26/06, http://www.isa.org/Content/ContentGroups/News/2006/April31/pinto_Why_high_oil_prices_are_good.htm) For almost a century, cheap oil has undercut other fuels. Now growing demand is outrunning supplies and increasing prices. However, there is a good side. Skyrocketing prices are an incentive for developing other fuels. Many new technologies are beginning to tap energy supplies that have nothing at all to do with oil. With oil prices already at $70 a barrel, new energy sources are becoming attractive. Three billion dollars in U.S. federal research money is going into synthetic fuel programs, which aim to turn huge U.S. coal reserves into gasoline. In addition, corn, sugar, and soybean farmers are hoping that rising prices can make ethanol and bio-diesel cost effective, and using plant waste will prove more economical. It is hard to see demand for oil surviving long at current costs. Technology breakthroughs are coming fast, while alternatives like the hybrid car are emerging fast—yielding vastly improved mileage. Have you bought your Toyota Prius yet? You will notice there is a long waiting list. The good news is the world is not running out of hydrocarbons. The better news is many other reserves are located outside the Mid-East and Africa, right here in the Americas. The demand for oil and energy continues to rise, as billions of people throughout the world claim their share of global prosperity. At what price will oil hit the energy tipping point?

Alternative Energy is becoming more competitive with oil because of high oil prices The Advertiser 08 (The Advertiser, “High oil price good, says climate chief”, 7/4/08,
http://www.news.com.au/adelaidenow/story/0,22606,23967077-5006368,00.html) THE UN's top climate change official says record oil prices, which have surged to $US146 ($151.85) a barrel, are positive for the environment. "I think they are a net positive. First of all you see that through decreasing demand in Europe and North America where people are becoming much more conscious of petrol prices," Yvo de Boer said. "High oil prices also improve the competitiveness of renewable sources of energy and make it more interesting to focus on energy efficiency."

Slow shift towards renewables now- no impact on oil consumption
The Associated Press, Business News “Renewable energy use to grow rapidly”. December 5, 2006. l/n Energy markets will shift further toward alternative sources in the coming years, driven primarily by higher prices for traditional fossil fuels and recently enacted public policy, according to a Department of Energy report released Tuesday. But despite rapid growth projections for renewable sources, as well as expectations for a nuclear renaissance, the department's Energy Information Administration (EIA) predicted in its annual energy outlook that oil, coal and natural gas will still account for the same 86 percent share of the U.S. energy market in 2030 that they did in 2005. Total energy demand is anticipated to grow 1.1 percent annually between now and 2030.

Only long term high prices can cuase a renewable shift
Deutsche Presse-Agentur, 4/20, 2002 Oil prices have steadily risen since the start of this year, at one point even going beyond 28 dollars per barrel, and while this is worrisome to most people, one sector of German industry is expectantly rubbing its hands: the renewable energy companies. "An increased use of regenerative energies and a change in consumer behaviour...will first set in when the 30 dollar (per barrel) mark is exceeded," says Norbert Allnoch, director of the International Economic Forum for Regenerative Energy (IWR). Only when the expectation sets in that "over the long term will there be higher oil prices" can a change in consumers' habits be expected, adds Allnoch of the Muenster-based think tank. Regenerative energy is a grab-bag term to cover a wide range of alternatives to fossil or nuclear fuels, including solar cells, hydroelectricity, wind power and bio-gas.

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Oil Economics page 31 of 38

Oil prices high
Oil prices are high now
Webster 08 (Camilla Webster, Reporter, “Stocks tumble on oil surge”, Forbes, 6/11/08, http://www.forbes.com/markets/2008/06/11/energy-alcoa-staples-markets-cx_cw_0611vid3.html) Oil prices jumped and investors shied away from stocks while awaiting the latest outlook from the U.S. Federal Reserve Wednesday. The energy complex had a stark reaction to the weekly inventory report, which showed a 4.6 million barrel draw on crude oil stocks. Crude oil spiked above $136 a barrel on a knee-jerk reaction before quickly retreating to earlier levels, up $4.09 at $135.40. Meanwhile, the U.S. Department of Energy said it sees gasoline prices remaining above $4 a gallon and oil staying much higher than $100 a barrel through 2009. Market watchers are looking ahead to the 2 p.m. release of the Fed's Beige Book for its June 24-25 monetary policy meeting. Fed funds futures trading indicates expectations that the central bank will hold rates steady at the June meeting but that a rate hike is possible when the monetary policy committee meets again in September. Still, a Wednesday speech from Fed Vice Chairman Donald Kohn reinforced the central bank's inflation concerns. Kohn said it can not be assumed that inflation expectations are anchored, a dangerous situation even if real inflation indicators moderate. He also said even correct monetary policy allows for temporary increases in unemployment and inflation after price shocks like oil's record run.

Oil prices are at all time highs
Agence-France-Presse 08 (“Oil prices top 147 US dollars per barrel”, 7/12/08, The Age, http://news.theage.com.au/world/oil-pricestop-147-us-dollars-per-barrel-20080712-3dvb.html) Oil prices rocketed to records above 147 US dollars on Friday as traders seized on the weak US currency, simmering tensions over crude producers Iran and Nigeria and news of a looming strike in Brazil. New York's main oil contract, light sweet crude for August, hit a historic peak of 147.27 US dollars a barrel before closing at 145.08 US dollars a gain for the day of 3.43 US dollars. London's Brent North Sea oil for August delivery jumped as high as 147.50 US dollars to beat the previous record of 146.69 US dollars set on July 3. The contract settled up 2.46 US dollars at 144.49 US dollars. With markets already in a frenzy over tensions with Iran and problems in Nigeria, news of a strike in Brazil added to speculative fervor, Workers for Brazil's state-run oil giant Petrobras are to start a five-day strike on Monday. The main union covering Petrobras workers in the key Campos off-shore area in southeastern Brazil confirmed to AFP Friday that the near-total stoppage would occur. "There will be minimal production if Petrobras accepts that the production is controlled by the workers but if the company tries to use its own teams, we will disconnect the equipment," union spokesman Marcos Brida said. The Campos area accounts for 80 percent of Petrobras's daily production of 1.8 million barrels of oil. Oil also swept back into record territory after the European single currency briefly leapt above 1.59 US dollars. The weak dollar boosts demand for dollar-priced oil which becomes cheaper for buyers using stronger currencies. "As ever, the market remains very sensitive to any potential supply disruptions and geopolitical tensions," said Sucden analyst Andrey Kryuchenkov. Oil rallied by almost six US dollars on Thursday on the back of simmering geopolitical tensions over key producer Iran and worries over stretched global crude supplies, traders said. Prices had dived below 140 US dollars on Monday as a result of a then strengthening US currency, underlining the extreme volatility that the market is currently experiencing. On Friday, traders continued to track Iran, which is OPEC's second-biggest crude oil producer with output of about four million barrels per day. The White House played down the risk of war between Iran and the United States, despite Iranian missile tests and some tough talk by US Secretary of State Condoleezza Rice. Rice warned Iran that Washington had beefed up its security presence in the Gulf and would not hesitate to defend its ally Israel. Iran insists its nuclear drive is aimed solely at generating energy but some Western nations fear it could be aimed at making an atomic bomb and have called for a freeze of uranium enrichment.

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Oil Economics page 32 of 38

Oil Prices will Stay high
Oil prices will remain high in the future
Glassman 07 (James K., AEI Senior Fellow, Kiplinger’s Peronal Finance Magazine, “The place to be is Energy”) Occidental makes most of its money in oil exploration and production, or E&P. In energy jargon, it is mainly an upstream business. A company such as ExxonMobil, by contrast, has substantial upstream and downstream operations. As an integrated firm, Exxon extracts oil, distributes it through tankers and pipelines, refines it, and sells it to businesses and the public. As a result, Exxon, BP, Shell and other integrated companies benefit less than E&P firms when oil prices soar. The upstream side of the business does well, but downstream, high oil prices raise costs for wholesalers and dampen demand by consumers. Ultimately, stock prices reflect this. Since 1998, Exxon shares have little more than doubled. BP stock has gone from $45 to $74. Of course, if you own shares in an integrated oil company, you get a relatively smooth ride. According to Value Line Investment Survey, Exxon, BP, Chevron and most other integrated firms are less volatile than the market as a whole. Such stocks also pay nice dividends. Since 1991, Chevron's dividend has gone from 81 cents to $2.32 a share, rising every year. So if you're looking for stability, buy big integrated oil. But if you believe energy prices will stay high, then the place to be is exploration and production. As E&P stocks go, Oxy is pretty tame. Parallel Petroleum (PLLL) has risen 15-fold since the depths of the late 1990s. Chesapeake Energy (CHK) has soared from less than a dollar at the end of 1998 to more than $35 in mid 2007. But investors care about the future, not the past. E&P shares have risen with the prices of oil and natural gas (I'll get to that later), as well as with increased efficiency and greater unit sales. But will prices remain at their current levels, or perhaps even increase? Yes, says Wayne Andrews, a managing director at Raymond James & Associates, who has a sparkling record as an analyst. In a report issued in early July, he and his colleagues say they are "thoroughly bullish on both oil and gas long term."

Oil Prices will remain high because of ethanol
Johnson 08 (Keith Johnson, Reported, Wall Street Journal, “High Oil Prices, Blame Ethanol, OPEC says”, 7/16/08,

http://blogs.wsj.com/environmentalcapital/2008/07/16/high-oil-prices-blame-ethanol-opec-says/)
OPEC president Chakib Khelil has a new culprit for the rising cost of oil–ethanol. Mr. Khelil says about 40% of the recent rise in oil prices can be chalked up to ethanol, which accounts for about 1% of the world’s transportation fuel. The other 60%, apparently, is due to a weak dollar and “geopolitical worries.” The problem: OPEC’s boss doesn’t lay out the logic explaining why ethanol blended into gasoline is to blame for high oil prices. Why ethanol falls afoul of big oil producers and oil companies is easier to explain. Oil companies don’t want to be forced to shell out for a whole new infrastructure for ethanol, from pipelines to special gas pumps. And ethanol blends in gasoline do make gas supplies go further–not good news for producers at a time when high prices are already starting to dent demand for gasoline, in the U.S. at least. Big Ethanol is striking back. The world’s four largest ethanol lobbies, The U.S. Renewable Fuels Association, the Canadian Renewable Fuels Association, the European Bioethanol Association, and Brazil’s Sugarcane Industry Association joined forces in a full page open letter to Mr. Khelil published in the Financial Times on Wednesday. The foursome call OPEC greedy, and say the cartel wants to kill U.S. ethanol mandates in particular in order to sell more oil, and make bigger profits when new oil discoveries are scarce. “New sources of energy are beginning to weaken OPEC’s grip on the world and threaten to reduce the $1.2 trillion OPEC nations will rake in this year from the exorbitant price of oil,” the letter said. Suddenly, ethanol producers are getting hit from all sides–food and fuel. Ethanol lobbies made their pitch to G-8 leaders earlier this month, pleading with under-fire world leaders not to scrap ethanol programs in light of rising alarm that ethanol and biofuels are to blame for high food prices. Ethanol producers got no favors Wednesday with a new report by the Organization for Economic Cooperation and Development, the Paris-based rich-country club, which said biofuels do contribute to rising food prices. The OECD urged governments to pour subsidies into energy efficiency, instead. Those outside attacks are helping paper over internal differences between the big ethanol lobbies, most notably Brazil’s longtime desire to knock down U.S. tariffs on imports of Brazilian ethanol. Brazil (and some congressmen) figure more Brazilian ethanol means cheaper gas. U.S. ethanol producers like the $0.54 per gallon tariff just fine. At least ethanol got one good piece of news in an otherwise bleak year. The OECD said that ethanol reduces greenhouse-gas emissions compared with regular fossil fuels: by 50% in the case of American corn ethanol, and 90% with Brazilian sugarcane ethanol.

Oil prices are here to stay Chang 07 (Joseph, “Get used to it!”, ICIS Chemical Business, November 2007, l/n)
BLACK GOLD is getting more precious. Having languished at under $10/bbl just eight years ago, crude oil recently spiked over $90/bbl. Tightening global supplies and accelerating demand from oil producing and emerging market countries could take oil well past the $100/bbl mark. One leading economist sees crude oil prices hitting $100/bbl by the end of 2008 and staying at or above that level for some time to come. "This is not a spike. Triple-digit prices will be here to stay for the foreseeable future," says Jeff Rubin, chief economist and chief strategist at CIBC World Markets. "Despite a doubling of the oil price in the past few years, demandis accelerating." While global demand is growing at a modest 2%/year, growth from developing countries is rising at 4%/year, according to CIBC. "Within

Zarefsky Juniors Oil Economics MG, KN, SS page 33 of 38 a decade, developing-world demand will exceed OECD demand - a startling change," says Rubin. That would bring oil demand from these countries to over 50m bbl/day from the current 35m bbl/day. Demand is surging from OPEC and emerging market countries, where their economies are more dependent on oil for growth. For every percentage point of GDP growth, China uses almost twice as much oil as the US. "China has become the factory of the world and is much more oil-intensive," notes Rubin. And OPEC economies are 15-20% more oil-intensive than China. Demand for oil in these countries is surging. From 2001-2006, consumption in Iran, Saudi Arabia and Kuwait rose by an annual rate of 4.5%, 5% and 7%, respectively. In contrast, world consumption rose by 1.5%/year and OECD demand edged up just 0.5%/year. SUBSIDIES CREATE UNCHECKED DEMAND GROWTH Why the huge gap? The key reason is that gasoline is highly subsidized in many oil producing countries, such as Iran and Venezuela, creating runaway demand undeterred by rising crude oil prices. "Caracas is living on $10/bbl oil and the retail price of gasoline at 25 cents/gal reflects that," Rubin points out. "People in those countries feel they have a God-given right to consume as much as they wish, and the governments that interfere do so at their peril." Last summer in Iran, where gasoline is imported despite the country's huge production of crude oil, the government rationed supplies. Widespread riots ensued, but the government kept the policy. But in Nigeria, the government backed down from its attempt to drop fuel subsidies after oil workers threatened to strike and shut down production. The oil economies of the OPEC countries, Russia and Mexico consume around 12.3m bbl/day - 250,000 bbl/day more than Western Europe, and well over China's 7.1m bbl/day, according to CIBC. The US is the world's largest consumer at 20m bbl/day.

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Oil Economics page 34 of 38

Price Crash Inevitable
An oil price crash is inevitable and delaying it only makes it worse- turns DA By Shawn Tully, editor at large for CNN’s magazine Fortune joined FORTUNE as a reporter in 1979, following a stint as a Contributing Editor to newly-founded New Jersey Monthly. He was promoted to Associate Editor in 1982, and the following year established FORTUNE's first editorial office in Paris . During his eight years in Europe, Tully wrote the first article in a major magazine about the EEC's 1992 initiative, profiled business legends Francois Dalle of L'Oreal, Helmut Maucher of Nestle, and Jan Carlzon of SAS, and contributed three investigative pieces about fugitive commodities trader Marc Rich, including the 1983 cover story, "Secrets of Marc Rich." He also chronicled virtually every major trend in then-resurgent European economy, including the boom in cross-border TV and M&A, the rise of the Soviet Union as a major trading partner, the rush to embrace "green" products, and the European practice of paying their CEOs a pittance compared to the gargantuan packages in the U.S. From 1987 to 1989, Tully served as European Editor, supervising all of Fortune's coverage in Europe Returning to the U.S. at the start of 1990, Tully contributed features on a wide range of topics, including " America 's Painful Doctor Shortage," "The Super CFOs," and "Donald Trump, An Ex-Loser Is Back in the Money." He also wrote the first piece on financial tool EVA, a cover story entitled "The Real Key to Creating Wealth," and described the plight of executives strapped on six-figure salaries in another cover, "Are You Paid Enough?" Investigative pieces included "The Marriage from Hell," the tale of the troubled union between Northwest Airlines and KLM, "A Deal Too Far" about the disastrous merger of Conseco and Green Tree Financial, and "A House Divided," a behind-the-scenes look at epic battle for the legendary auction house. Along the way, Tully predicted the collapse of the tech bubble in early 2000 in "Has the Market Gone Mad?" More recently, he's covered the Napster saga ("Big Man Against Big Music"), the stent wars between J&J and Boston Scientific ("Blood Feud") and the troubles at the New York Stock Exchange ("Bringing Down the Temple"). He began predicting a real estate bubble three years ago in a story depicting a house teetering on the edge of a cliff ("Is This House Worth $1.2 Million?") and he's sure that house will someday tumble. He's also developed a specialty in banking, following Jamie Dimon's comeback at Bank One and JP Morgan, and endorsing Bank of America's coast-to-coast retail strategy when most journalists yawned. His most recent pieces were cover stories profiling JP Morgan CEO Jamie Dimon and warning that the real estate bubble is finally deflating. In the housing story, his theme was simple: It's a great time to sell! Tully left Fortune in 1996 for a stint as on on-air TV reporter for CNBC, but returned to the magazine in early 1998. He's a frequent guest on such shows as "The O'Reilly Factor" on Fox and CNN's "In the Money," and represents Fortune as a speaker at industry events. He's the co-author of the Sports Illustrated book "Tennis." Tully holds a BA from Princeton University , an MBA from the University of Chicago , and a Masters in Applied Economics from the University of Louvain in Belgium. Last Updated: July 15, 2008: 1:50 PM EDT “Why oil prices will tank Arguments that $4-a-gallon gas (or even higher) is here to stay are dead wrong. Housing's boom-and-bust cycle tells you why.”, http://money.cnn.com/2008/06/06/news/economy/tully_oil_bust.fortune/ NEW YORK (Fortune) -- High-flying tech stocks crashed. The roaring housing market crumbled. And oil, rest assured, will follow the same path down. Not everyone agrees. In an echo of our most recent market frenzies, some experts pronounce that the "world has changed," and that the demand spikes, supply disruptions, and government bungling we face now will saddle us with a future of $4, $5 or even $10 a gallon gasoline. But if you stick to basic economics, it's clear that the only question is when - not if - prices will succumb. The oil bulls are correct in their explanations of why prices have jumped, to a record $138.54 a barrel on Friday. It's indisputable that worldwide demand has surged, chiefly driven by strong growth in China, India and the Middle East. It's also true that most of the world's reserves are controlled by governments in places like Russia and Venezuela that mismanage production, thus curtailing supply growth. But rather than forming a permanent new plateau for prices - as the bulls contend - those forces are causing a classically unstable market that's destined for a steep fall. In a normal oil market, the cost of producing the last, most expensive barrel of oil needed to satisfy worldwide demand sets the price for every barrel the world over. Other auction commodity markets work much the same way. So even if Saudi Arabia produces at $4 a barrel, if the final, multi-millionth barrel required to heat houses and run cars costs $50, and is produced, for argument's sake, at a flagging field in West Texas, the world price is $50. That's what economists call the equilibrium price: It's where the price that customers are willing to pay meets the production cost, including a cushion, naturally, for profit or "the cost of capital." But today, the sudden surge in demand and the production bottlenecks have thrown the market radically out of balance. Almost exactly the same thing happened in the housing market. And both housing and oil supply react to a surge in demand with a long lag. In housing, the lag is caused by restrictive zoning and development laws, especially in coastal markets like California and Florida. So when the economy roared back in 2002 and 2003, builders couldn't turn out homes fast enough for buyers armed with those cheap mortgages. As a result, prices spiked. They no longer bore any relation to the actual cost of buying and improving land, or constructing and marketing a new house (at some reasonable profit margin). Instead, frenzied buyers were setting the price. Because builders were reaping huge windfall profits, they rushed to buy and develop land. And sure enough, those new houses were ready just as buyers were retreating to the sidelines because they could no longer afford to buy a home. That vast overhang of unsold homes is what's driving down prices today. The story is much the same with oil, with a twist.

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Oil Economics page 35 of 38

Price Crash inevitable
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A big swath of the market isn't really paying that $125 a barrel number you hear about seemingly every hour. In China, India and the Middle East, governments are heavily subsidizing oil for their consumers and corporations, leading to rampant over-consumption - and driving up prices even more. But sooner or later the world won't keep paying those prices: Eventually, the price must fall back to the cost of that last barrel to clear the market. So what does that barrel cost today? According to Stephen Brown, an economist at the Dallas Federal Reserve, that final barrel costs just $50 to produce. And when the price is $125, the incentive to pour out more oil, like homebuilders' incentive to build more two years ago, is irresistible. It takes a while to develop new supplies of oil, but the signs of a surge are already in place. Shale oil costing around $70 a barrel is now being produced in the Dakotas. Tar sands are attracting investment in Canada, also at around $70. New technology could soon minimize the pollution caused by producing oil from our super-plentiful supplies of coal. "History suggests that when there's this much money to be made, new supplies do get developed," says Brown. That's just the supply side of the equation. Demand should start to decline as well, albeit gradually. "Historically, the oil market has under-anticipated the amount of conservation brought on by high prices," says Brown. Sales of big cars are collapsing; Americans are cutting down on driving. The airlines are scaling back flights. We've learned another important lesson from the housing market: The longer prices stay stratospheric, the worse the eventual crash - simply because the higher the prices and bigger the profit margins, the bigger the incentive to over-produce. It's even possible that, a few years hence, we could see a sustained period of plentiful oil supplies and low prices, meaning $50 or below. A similar scenario occurred following the price explosion in the 1970s and early 1980s. The price spike caused the world to cut back sharply on oil consumption. By the mid-80s, oil prices had fallen from almost $40 to around $15. They remained extremely low for two decades. It's impossible to predict how the adjustment this time will take shape, just as it was in housing. There the surge in supply came in places the experts swore there was "no supply," and wouldn't be any. Builders found a way to extend vast tracts of homes into California's Inland Empire and Central Valley, and even build "in-fill" projects near the densely-populated coasts. An earlier bubble is also instructive. In the early 1980s silver prices jumped from $10 to $50 on the theory that the world was facing a permanent shortage of silver. Suddenly ads appeared asking homeowners to bring their tea sets and jewelry to Holiday Inns for a big price. Silver supplies poured from seemingly nowhere, out of America's cupboards, of all places. And so it will be with oil. We don't know where the new abundance will come from, from shale, or tar sands or coal or an OPEC desperate to regain market share. We just know that it will appear. With prices like these, it always does.

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Oil Economics page 36 of 38

Demand Collapse Now
Link non0unique, demand collapsing
The Financial Times Business group 08 file, FTBUS, is useful for high added value news and comment on the financial services industry (banking, insurance, accountancy, etc.), on commodities and export market. The specialist nature of this news and comment means that it is unlikely to appear elsewhere in this depth. The FTBUS file supplies a wide range of information for users in finance, banking, accountancy, tax, insurance, investment, manufacturing, government, the law, financial regulations and business opportunities.,Investment Adviser, July 7, , “Is this the tipping point for oil demand?” http://www.ftadviser.com/InvestmentAdviser/Investments/Region/US/Features/article/20080707/97c59652-41e4-11dd-a2360015171400aa/Is-this-the-tipping-point-for-oil-demand.jsp Whether or not justified by underlying fundamentals, the fact remains that oil is hitting an all-time high as this is written, nearing $140 intraday. Some analysts are predicting oil prices of $150-200 later this year. Could it happen? It is certainly possible, but the sense is that prices at current levels are starting to bite. Anecdotal evidence is that the long-awaited demand response may have begun. Airlinesachoking on $4 per gallon jet fuel pricesaare slashing capacity. Sales of gas-guzzling SUVs and light trucks are collapsing in the US, while small cars and hybrids are flying off the lot. Public transportation use is increasing. Not just in the US but throughout the OECD, oil demand is starting to drop off. Demand responses take time, but we may have reached a tipping point.
What's pushing oil prices higher? 7 reasons why crude has soared to record levels COMMENTARY URL: http://www.msnbc.msn.com/id/13862677/ By John W.

Schoen, 2008

Senior Producer MSNBC Oil prices also are being stoked by investors in the futures market who have no intention of ever taking delivery of a barrel of crude. The rapid run-up in prices over the past two years has drawn billions of dollars worth of bets that prices will move higher. If the other forces driving prices higher persist, expect investors to continue bidding up futures contracts. The flip side is that with all this extra capital sloshing around the oil markets, a pullback in prices could be amplified as speculators bail out.

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Oil Economics page 37 of 38

Price Fixing causes spikes, not supply/demand
Prices aren’t naturally high – they’re fixed. Supply/demand’s an oil-funded myth
Raines 8 Howell Raines was the executive editor of The New York Times from 2001 to 2003. Under his stewardship, the paper won an unprecedented seven Pulitzers in a single year. Prior to becoming executive editor, Raines served in a variety of roles at The Times, including editorial page editor, White House correspondent, deputy Washington editor, London bureau chief, Washington bureau chief, and Atlanta bureau chief.In 1992, he was awarded the Pulitzer Prize for Feature Writing for his article "Grady's Gift," an account of his childhood friendship with his family's black housekeeper and the lasting lessons of their relationship. Raines has published several books including The One That Got Away, My Soul Is Rested, Whiskey Man, and Fly Fishing Through the Midlife Crisis. Mr. Raines holds a B.A. from Birmingham-Southern College and an M.A. in English from the University of Alabama. http://www.portfolio.com/views/columns/media/2008/07/16/Criticism-of-Medias-Energy-Coverage?rss=true, Crude Reporting Jul 16 2008 For my money, a sounder answer as to whom to believe is Don Barlett and Jim Steele, the investigative reporting team that has won two Pulitzers and two National Magazine Awards for exposing government theft and corporate greed. Their 2003 series for Time magazine on oil economics remains required reading for anyone who wants a better understanding of how gas at $4 to $5 a gallon represents a carefully arranged screwing of consumers. “The bottom line for the oil people is, How much can I make while spending the least I can get by with on refineries, synthetic fuels, and for exploration and drilling on the vast, unused acreage in existing oil leases?” Barlett says. He notes that Canada has become the United States’ No. 1 oil supplier by funding joint government-industry exploration of the tar-sand fields of Alberta. “The most chilling statistic is Exxon Mobil’s. It spent twice as much last year to buy back stock as it did on exploration.” As for shallow journalism that helps Big Oil, Steele makes the point that the newsrooms that were once staffed by the redistributionist children of the New Deal and the A.F.L.-C.I.O. are now populated with the children of Reaganomics: “Younger reporters come out of a mind-set that the market rules, taxes are evil, and government ought to let these people in the oil industry go about their business.”As journalism has passed from a hungry to an elite profession, there’s no shock value in the fact that Exxon Mobil paid only $5 billion in U.S. income taxes last year while it paid $25 billion to foreign governments. Even with Exxon Mobil making $76,000 a minute, the last thing that occurs to many assignment editors and reporters is to investigate whether a windfall-profits tax would drive Exxon Mobil, BP, and other oil companies to invest in the alternative-energy strategies they boast about in their television commercials. Then there’s the problem of letting general-assignment reporters, rather than energy specialists, cover gasoline prices mainly as a story of consumer suffering. About 40 percent of U.S. oil is produced domestically, and Washington has declined to regulate auto fuel as an essential commodity. That’s where the vertical integration of a giant like Exxon Mobil creates market leverage. It owns oil fields, processing plants, and retail outlets, creating some monopoly-like advantages in controlling supply and fixing prices in the U.S. market. Then there is the remarkable job that the oil companies have done in persuading network-TV anchors and correspondents to depict them as they want to be seen: powerless victims of a supply-and-demand cycle that is as immutable as gravity and as random as lightning. Congress, responding to demands for tougher laws on oil speculation, would prefer to blame environmental regulations. Much of the context-free reporting about what the executives say, in Congress and on television, is marked by breathtaking gullibility. Speaking of television, no one of any age can doubt that the industry’s star performer in the public relations battle over gasoline prices is Rex Tillerson, chairman and C.E.O. of Exxon Mobil. His appearances on the Today show have become five-minute promos for price escalation, with Matt Lauer cast as the surrogate for a nation of consumers who don’t fully understand their role—helpless and sacrificial—while the company maximizes shareholder value, “our reason for being.” This is a “demand-driven price runup, no question about it,” Tillerson drawls, fingers intertwined and as fidget-free as Chance the Gardener. Lauer gamely zeroes in on Exxon Mobil’s dirty secret—that it spends only 5.3 percent of revenue on exploration at a time of record revenue. “If you’re making $400 billion a year, should consumers expect you to pay or spend even more on exploration?” Lauer asks. The unflappable Tillerson describes this modest expenditure as “very, very robust.” He adds, with apparent conviction, “We would do more if we could gain access to more areas.” In other words, give us ANWR, then we can talk price at the pump. In fact, no unbiased expert claims that exploiting the fields in the Alaskan wilderness would cause more than a bump in world supply or prices in the U.S.  By the way, Tillerson observes, the industry needs more refineries too. Lauer, charmingly outpointed at every turn, finally blurts, “Mr. Tillerson, you’re always nice with your time.” “My pleasure, Matt,” the oil king rumbles, not a hair out of place on his salt-and-pepper corporate coif. And it was, no doubt, a pleasure for him to slip out of Rockefeller Center, built with Standard Oil dollars accrued in an earlier era of rapacious pricing, without addressing the oil-company claims that are most easily disproved by that old-fashioned journalistic method called reporting. The plain truth is that the record profits cited by Lauer—$10.9 billion in the first quarter of this year for Exxon Mobil—reflect an industrywide decision to flow revenue directly to the bottom line rather than to capital expenditure.

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Oil Economics page 38 of 38

Price Fixing causes spikes, not supply/demand
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To buy Tillerson’s story, you’d have to believe that profit is an accident, when it is, irrefutably, the result of a company strategy tailored to this unique moment of opportunity. Oil executives generally believe in an updated version of the peak-oil theory, introduced in 1956 by geologist M. King Hubbert. It posits that because of oil-field depletion and the expense of production, American-oil-industry output will reach a maximum level and then start to decline. An updated version of Hubbert’s bell curve—which factors in the number of wells being drilled and refinery capacity—sets the year that the peak will be reached at 2020. If you’re getting a prime price for a product that will be harder to acquire in a few years and less valuable due to competition from other fuels, the smart play, obviously, is to divert every penny into profit while the Black Gold Casino is still open. To confuse the press and public, you set up several straw men to take the blame for the supply shortage that you’ve seen coming for a half-century: refinery capacity, environmental legislation, and the imaginary supply potential in undrilled portions of the continental shelf and ANWR. But let’s look at the Cheneyesque fantasy that drilling in ANWR is a major national-security priority that would make us less dependent on foreign oil. The fact is, the Trans-Alaska pipeline that is supposed to bring us that new ANWR oil probably couldn’t handle it right now because lack of maintenance has left it in bad shape. (Business Journalism 101: You can reinvest revenue in infrastructure or pull the money out as profit.) Plus, there’s not enough Alaskan oil to affect price. It would be gone in a few months if we could pump it at maximum capacity. From a national-security standpoint, the smart thing would be to leave it in the ground for use in case of some future civilization-threatening cataclysm. Oil-friendly members of Congress like to blame environmental regulation for the lack of refinery capacity. But the oil companies themselves choked supply by closing more than half of their 300 U.S. refineries in the past 25 years. (Business Journalism 201: You can reinvest in manufacturing capacity or ride the demand curve to higher profits.) Studies by Cambridge Energy Research Associates, a respected, oil-friendly consulting firm, indicate that even if all environmental regulations were removed from refinery construction, few would probably be built right away because of a 75 percent rise in construction costs since 2000, largely driven by the increased fuel cost of transporting building materials. I don’t mean to imply that when it comes to cutting through industry and congressional malarkey, Barlett and Steele are the only game in town. The Chicago Tribune, the Wall Street Journal, Texas Monthly, and other publications have all done credible oil series during the past few years. The problem is that headlines on today’s pump prices trump the revelations of yesterday’s in-depth reporting. The digital-news era is good at letting us know what happens now. But it’s lousy at reminding us of what’s happening again. Take the richly symbolic case of ANWR. Oil executives know that they haven’t explored 80 percent of their existing leases in the continental U.S., according to Barlett. But they also know that if they can crack the wildlife refuge, Congress will lack the political will to keep them away from the other government land and the ocean floor they covet. In that sense, ANWR fits a historical leitmotif. For more than a century, oil companies have been gaming the federal oil-leasing system to receive bargain prices on the raw materials under public ownership. Oil companies have always depended on the transfer of unpumped oil from public to private ownership. In the Teapot Dome scandal of the early 1920s, oilmen bribed officials at the Interior Department to gain ownership of an oil field owned by the U.S. Navy. With ANWR and the offshore leases, everything will look aboveboard if Congress and consumers can be whipped into a demand-driven frenzy. Oil companies will blame the Arabs and environmentalists for a supply shortage they’ve maintained as a matter of policy since the days when the Texas Railroad Commission set quotas on how much oil could be pumped out of the ground. Decade after decade, the oil companies claim that they would pump more if only they were allowed to. Barlett calls it playing the shortsupply card. “Every freaking reporter out there falls for it,” he says. “And if I’m the P.R. guy for an oil company, I’m going to play that sucker for all it’s worth.” Supply and demand? Sure, but as John Lee, a business journalist at the Wall Street Journal and the New York Times for many years, reminds me, supply and demand in oil are not just “two pie charts—where it comes from, where it goes, measured maybe five years ago.” There are more complex reasons for pain at the pump. “American gasoline prices have always reflected the latest spot price, namely what you have to pay to buy bulk gasoline on the open market. This is last-in pricing, rather than pricing based on inventory costs.” Now, let’s say you’re an oil company selling bulk gasoline, and suppose your inventory contains some gasoline made from $140-a-barrel oil and some that was purchased for $75 a barrel. That leaves a lot of room for price manipulation. But please, whatever you do, don’t think for a minute that’s what Tillerson and Exxon Mobil are up to. Just like you and me, they are powerless slaves in the fields of supply and demand. Now tote that barge, lift that barrel.