The End of Oil

Falling Oil Prices: Party like it's 1999?

Will oil prices even further? That’s what some speculators are betting. The New York Mercantile Exchange, or NYMEX, reports that traders are buying up large numbers of $25 “put options” for February oil futures contracts. A put option gives a trader the right to sell oil at a future date for a given price—generally the price the trader thinks oil will fall below. As analyst James Cordier told Bloomsbury this week, the large volume of $25 options represents “somebody making a bet that crude oil is going to crash in the next six weeks.”

            But is it a reasonable bet? Maybe. As bad economic news continues to mount, it’s more and more probable that economic growth—and thus, demand for oil—will stay stagnant or even fall for the next year. Merrill Lynch, for example, just cut its 2009 oil price forecast from $90 a barrel to just $50. If oil does indeed collapse to $25 (a price we haven't seen for 7 years or so), that could pull gasoline prices down to around $1.60 a gallon—and give recession weary consumers a much-needed break.

            But low energy prices aren’t welcomed by all. Thus summer, many New Englanders signed contracts to buy heating oil this winter for $4 a gallon. That made sense when high prices seemed the new norm (in August, Goldman Sachs predicted $145-a-barrel oil by November 15)—but now seems foolish, given that heating oil is selling for around $2.75.

            OPEC, too, doesn’t like bargain barrels. The cartel is considering cutting its production by as much as 1 million barrels a day to keep prices from falling below the level many cartel members need to balance their budgets.

            But don’t get too used to cheap gasoline. The main driver for lower prices is the recession. When the economy eventually recovers, energy-hungry developing countries like China and India, responsible for more than half of recent growth in oil demand, will resume their high consumption. And as demand returns, so will higher oil prices. The Paris-based International Energy Agency predicts oil prices will average $110 in current dollars by 2030.

            In fact, today’s low oil prices will likely bring back those higher prices even sooner. As oil gets cheaper and cheaper, oil companies can no longer afford as many new oil projects, especially in hard to reach fields, which means they won’t be bringing as much new oil to market over the next few years. Likewise, cheap oil removes the incentive to produce oil alternatives, like biofuels.

            All of this retrenchment means total fuel supplies and production capacities will be falling just as the recession begins to lift and demand returns—a recipe for yet another spike.

            So maybe you'd better take that Hummer back off the Christmas list.

How Low Can They Go?

Despite vows by OPEC cut oil production and prop up plummeting prices, the market isn’t persuaded that the cartel has much power. The 1.5 million barrel cut announced Friday would be one of largest in recent history—taking global output down by nearly two percent. But it’s far from clear OPEC can deliver those cuts—or that they will have much effect on prices. 
    The cuts themselves will be hard to engineer. Publicly, the cartel’s 11 members are unanimous that reductions are necessary: Iran and Venezuela especially are said to need oil prices at $95 a barrel simply to balance their bloated budgets. By cutting the number of barrels on the market, the cartel can shrink global supplies and push the price up from $60 range and back toward $100—in theory, at least. But in practice, OPEC hasn’t been very successful ensuring that all members cut their output at the same time. In times past, certain cartel members have cheated, pumping more than their assigned quota in the hopes of making up in volume what they are losing in price—despite the fact that such cheating only serves to drive the price down further. It was just such cheating by Venezuela in the 1990s that helped push oil prices into the single digits. Granted, Venezuela might not cheat this time around, given its desperate need for cash. But smaller members may try to add extra barrels to the market. 
    Further, if even OPEC does maintain the necessary discipline, the cartel will be working against an extraordinarily powerful trend: falling demand driven by recession. Already, US oil demand has fallen to its lowest level in nearly a decade, and market analysts expect the once-ravenous appetites of China and other Asian to falter as well. No surprise that Iran’s oil minister wants to cartel to cut an extra one million barrels in addition to the announced cuts. And yet, if OPEC is too aggresive in its cuts, it risks making the global recession even worse, and thus driving oil demand--and prices--even lower. Some experts see prices falling perhaps to $50--or barely a third of their record level this summer!
    Time, however, is on the cartel’s side. The current price slump hasn’t come about because the industry has discovered vast new supplies of oil, or because industrial nations have become dramatically more energy efficient—but because of an economic slowdown. Eventually, howefger, the credit crisis will ease, and economic growth will return, and with it, energy demand. China, after all, has no plans to stop growing into an industrial power.  Oil prices will creep back up, motorists will scream every time they fill up the tank—and OPEC will be struggling to find ways to pump more oil.

Do high oil prices speed or delay a cleaner future?

Got this very interesting question yesterday from J. Hsu:

"The word on the street is that high oil prices will push the need for renewable resources -- but at the same time, it makes the development of unconventional resources viable. What strategy will win out?"
 

J-- Excellent question. Higher prices will indeed encourage both more alternatives, but also more oil--thus raising the possibility of a kind of paralyzing equilibrium that simply maintains the status quo. But in fact, a high-price environment could give alternatives several small but crucial advantages over oil, unconventional or otherwise. First, whatever surge of new oil is brought to the market as a result of these higher prices will be temporary; sooner or later, demand for oil will once again move ahead of supply and prices will rise, making oil unattractive again. Second, and more fundamentally, "unconventional" oil is still plagued by lots of external costs, such as CO2/climate, and, in some cases (such as 'heavy' oil in Venezuela) political instability. To the extent that today's high oil prices encourage alternatives that have fewer environmental and political costs, alternatives will gradually pull ahead.

"OPEC Won't Let Crude Oil Fall Below $100"-- Ecuador

Anyone looking for a little price relief from oil markets shouldn't hold their breath: Acccording to Rafael Correa, president of Ecuador (which is OPEC’s smallest member), the oil cartel is prepared to reduce output and "protect" the price of oil if it falls below $100.
 
Correa's comments were made during a TV interview on the ETV Telerama network, and later posted on the presidential Website, according to Bloomberg news.

Ecuador, which recently rejoined the cartel after a 15-year absence, would clearly welcome the cuts. The country has struggled to maintain its daily output quota of half a million barrels—and thus would be hard-hit by any substantial price decline.

But a move by the cartel to protect the price is bad news to consumers generally, and especially in the United States, where a moderation in oil prices is widely seen as a precondition for economic recovery.

Where have I been all these months?

The short answer is: busy with another book (The End of Food). But as several readers have pointed out, the oil story hasn't gotten any less interesting or important, so....let's make this blog a little more interactive. Post your oil questions (or comments, or predictions) and let's see what kind of conversation we can get started.

Grain price surge "still only in its infancy” -- Financial Times

(Interesting piece on energy from the Financial Times)

Grains lifted to highs as oil surges

By Chris Flood in London

Published: January 3 2008 18:25 | Last updated: January 3 2008 18:25

Agricultural commodities rose to multi-year highs Thursday following crude oil’s surge to $100 a barrel as traders anticipated higher demand from the expanding global biofuels industry.

In Chicago, wheat jumped 16 cents to $9.31 a bushel, 59 cents below its all-time high, while soyabeans rose to $12.38, a fresh 34-year high, and corn traded within touching distance of its recent 11-year high.

In Paris, rapeseed prices rose to record levels, up 1.5 per cent to €444.75 a tonne, while Malaysian palm oil futures also hit a record $961 a tonne Thursday.

As grains and oil seeds are key feedstuffs for biofuels, the oil price rise has exerted a huge push on agricultural commodities, which enjoyed their best returns for almost 30 years in 2007. The S&P GSCI agricultural commodities index returned 31 per cent last year, its best performance since 1981.

Support is also coming from population growth and demand for animal feed.

“This combination of food, feed and fuel demand for crops has created an upward shift in the trend demand growth for agriculture products,” said Jeffrey Currie, head of commodities research at Goldman Sachs.

He said global biofuel demand could increase from 10bn gallons a year in 2005 to 25bn gallons annually by 2010, an annualised growth rate of 20 per cent.

Extreme weather events and drought have hit harvests and exporting countries, such as Russia and Ukraine, have imposed export tariffs to ensure their domestic supply base remains secure. Key consuming countries, such as India and Egypt, have been scrambling to secure supplies, ensuring that overseas demand for US wheat and corn is running at near-record levels.

As a result of supply disappointments and rising demand, stocks have fallen to historic lows in many agricultural markets, leaving prices very susceptible to upward price shocks.

Many analysts believe the rally for agricultural commodities is only just beginning.

“In inflation-adjusted terms, prices for agricultural commodities today are still significantly below their real highs, so their valuations remain very attractive,” said Michael Lewis, head of commodities research at Deutsche Bank. “We believe the rally for agricultural prices is still only in its infancy.”

[And this from the WSJ....]

$100 Oil Could Eat Away at Consumer Spending
January 2

Oil prices only briefly touched $100 a barrel today, but a prolonged stay at that level could threaten a U.S. economy already weakened by an ailing housing market and increasingly cautious lenders.

In the U.S., which remains the most oil-dependent industrialized nation, oil at $100 would threaten consumer spending, which accounts for more than two-thirds of U.S. economic activity and is already expected to soften as home values decline. Oil’s rise is sending up the price of gasoline — the most visible price in the U.S. economy — and that has major impact on consumer psychology. Readings of consumer confidence have been weakening recently.

“If oil stays at the price it’s at, you could see gasoline prices at $3.60 or $4 a gallon, which is absolutely frightening,” said Paul Ashworth, senior U.S. economist at Capital Economics, a London-based research firm. “It’s going to have a fairly devastating impact.”

Until recently Federal Reserve officials downplayed the inflationary impact of higher energy prices, noting inflation excluding food and energy had edged lower. And consumers’ and investors’ long-term expectations of inflation, as revealed by surveys and bond trading behavior, have remained relatively stable. But Fed officials recently have signaled a rising degree of discomfort with the inflationary implications of energy prices. The statement accompanying their last interest-rate move said that, along with higher prices for other commodities, energy prices “may put upward pressure on inflation.” Those concerns suggest the Fed feels little latitude to lower interest rates to cushion the shock of steeper fuel bills, since doing so could aggravate inflation.

Economic forecasting firm Global Insight says that, in the U.S., each additional $10 per barrel increase in oil prices raises gasoline prices by roughly 19 cents a gallon, cuts growth in consumer spending by a third of a percentage point, reduces employment by 100,000 and adds one-half percentage point to consumer price inflation. Those factors combined will subtract two-tenths of a percentage point from the already slow 1.1% pace of growth the firm expects for the first half of 2008, Global Insight says.

Growth in consumer spending slowed from an inflation-adjusted annual rate of 4% in the first quarter to about 1.4% in the second quarter as gasoline prices climbed in the spring and early summer, then rebounded to 3% in the third quarter. Economists now anticipate a slower fourth quarter, though not as slow as they feared earlier. Macroeconomic Advisers, a St. Louis forecaster, estimates that consumer spending increased in the fourth quarter at a 2.8% annual pace.

“If gasoline prices go up, that means less to spend on everything else,” said David Greenlaw, Morgan Stanley’s chief U.S. fixed-income economist. “Whatever you get on gas prices eats into other forms of consumer spending.” –Sudeep Reddy

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WSJ "The Road to $100 Oil – and Beyond"

(Had to share this interesting piece by R Gold, N. King , and A. Davis at The Wall Street Journal.)

January 2, 2008

Economists, Wall Street commodity traders and even seasoned energy executives were caught flatfooted by oil's dizzying rise. Looking back, several factors came together at the same time to help oil shoot up roughly tenfold in less than a decade and briefly touch $100 today. Those factors are likely to stick around, perhaps pushing prices up further.

Western oil companies, though flush with cash, are finding fewer places to explore and drill for oil. Demand in China and the developing world has surged far more than people anticipated a decade ago and is driving oil markets.

Adding more volatility, oil is increasingly traded as an investment by financial players with little interest in owning the barrels. After years of internal friction, the Organization of Petroleum Exporting Countries has been more disciplined about keeping global inventories lean and prices buoyant.

The world's ability to pump enough oil is being tested. "Demand has surged ahead and the industry has been playing an intense game of catch up," says Daniel Yergin, chairman of Cambridge Energy Research Associates.

The Trends Ahead

Will the trends endure? Already, demand growth has slowed or stalled in some industrialized countries, including the U.S. If the U.S. falls into a recession this year, as some economists predict, that would tend to depress oil prices.

Nations such as China that have used subsidies to soften the blow for oil users are beginning to buckle and pass along price increases. That could also sap demand.

THE ROAD TO $100

• What Sky-High Oil Prices Mean for the Economy
• Interactive Graphic: Oil's Steady ClimbSays Didier Houssin, director of oil markets and emergency preparedness at the International Energy Agency in Paris: "The big question is, when will the demand reaction happen? We know it is coming, but what we don't know is what price level will spark it. That is the ultimate crystal-ball question."

On the supply side, high prices are encouraging companies to take more risks and pour money into finding oil in hard-to-reach places, such as deeper waters. In November, Brazilian oil company Petroleo Brasileiro SA announced the discovery of a giant new oil field estimated to contain five to eight billion barrels of oil. If that estimate is correct, it would be one of the largest finds in recent years.

But these finds take years to go from discovery to production. In the short term, financial investors who helped drive up oil prices are likely to continue swaying markets -- and that can push the market in either direction, depending on traders' short-term views.

Unlikely March

The march to $100 seemed unlikely 10 years ago. A glut of oil began to form in the first few weeks of 1998. Prices began to plunge as Western oil companies and OPEC members Saudi Arabia and Venezuela battled for market share. The Asian financial crisis weakened Asia's crude demand. Meanwhile, that winter was one of the warmest on record in the Northern Hemisphere, lowering demand for heating oil. OPEC nations attempted to turn prices around by cutting production, but members cheated by pumping more than their allotment.

On Dec. 10, 1998, crude oil futures settled at a low point of $10.72 on the New York Mercantile Exchange.

The situation began to turn in early 1999. Hugo Chávez became president of Venezuela, one of the bigger cheaters, and promised better cooperation. In March 1999, OPEC ministers agreed to cut production again. Similar OPEC agreements had foundered in the past, as member nations greedily sent extra tankers sailing off in search of petrodollars. This time, the cartel stayed in sync. Prices began to climb and closed the year above $25.

Another emerging issue was the end of easy oil. The industry had found most of its giant fields in the decades after World War II. What was left was often in remote places with high extraction costs. Burned by price crashes in 1986 and 1998, the industry was wary of investing too heavily in new production. Wall Street penalized companies that were seen as overly aggressive. Big Western oil companies responded by being disciplined with their cash.

The thirst for oil was growing steadily. Demand in the U.S., by far the world's largest consumer, grew by 2% to 3% a year in the late 1990s. Meanwhile, demand in developing nations took off and has remained strong despite rising prices. "The insensitivity of oil demand vis-a-vis prices has been startling," says longtime oil observer John Olson, co-manager of Houston Energy Partners, a hedge fund affiliated with Sanders Morris Harris Group Inc.

Big Subsidies

Mr. Houssin, of the International Energy Agency, attributes some of this to massive subsidies that countries such as China, Saudi Arabia, Venezuela and Iran provide to keep domestic energy prices low. Strong economies in most parts of the world have also muffled the impact on consumers.

Even the Sept. 11, 2001, terrorist attacks caused only a minor dip in global demand. By the time a U.S.-led coalition invaded Iraq in March 2003, the world was consuming over 79 million barrels a day, up from 73 million barrels a day five years earlier. The invasion caused a dip in supply from one of the world's biggest oil producers. By 2004, OPEC's spare capacity, or the amount of additional oil it could deliver quickly if needed, shrank to the lowest level in a generation.

It was also the year that China truly came onto the world energy scene. With China's economy surging, the demand for jet fuel nationwide jumped by nearly 50%, according to the China Aviation Oil Corp., then the country's monopoly supplier of jet fuel. Facing electricity shortages, Chinese steel mills and other factories began sucking up diesel to power backup generators. In 2004, global demand shot up by an unexpected 2.8 million barrels a day, to 82.3 million barrels a day. Almost one-third of that growth was due to China alone. "That was the truly amazing year, and it will stand out for decades," says Roger Diwan, an analyst at the Washington-based oil consulting firm PFC Energy.

At the same time, the oil-exporting Persian Gulf states were becoming substantial energy consumers themselves, as petrodollars turbocharged their economies.

The oil industry was unable to lift its output in lockstep. Some of the best oil fields are in places like the Middle East or Russia that don't necessarily welcome Western investment. Many new fields that are being developed are offshore and take years to drill and connect to the pipeline grid. Also, the oil industry is in fierce competition for cranes, steel and experienced construction crews.

Trading Changes

While finding oil in the ground has been getting harder, it became a lot easier to buy oil on paper. The New York Mercantile Exchange started round-the-clock electronic trading of its main crude benchmark in September 2006 and improved access to previously restricted energy trading markets. Financial institutions created new vehicles for making bets on the price of oil without having to manage futures holdings.

All of this has helped attract a flood of new money that has transformed oil trading. The oil markets were once dominated by physical traders—firms that needed to take delivery of the crude oil to run through refineries or trade with partners. Most of the new market entrants have no interest in ever taking delivery of a barrel of oil.

The new money came from hedge funds seeking profits in sharp oil-price moves, pension funds seeking diversification and a hedge against inflation, and Wall Street commodity desks helping financial investors make sophisticated bets and risking their own capital.

The number of oil-futures bets outstanding on Nymex has quintupled since 2001. Because oil has been rising at the same time, the dollars at stake in the main oil-futures benchmark, not including options, rose from roughly $7 billion in 2001 to more than $145 billion, calculates Ben Dell, energy analyst at Sanford C. Bernstein & Co.

As this surge of money chased a slowly growing number of barrels, prices sprinted upwards. And there is little to indicate that the conditions created by these financial commodity traders will push prices down anytime soon.

Write to Russell Gold at russell.gold@wsj.com, Neil King Jr. at neil.king@wsj.com and Ann Davis at ann.davis@wsj.com

The oil speculator premium

There is such a thing as a rational price for oil -- but world markets are far above it, because price bets have become self-fulfilling.

                                                                                          from The Los Angeles Times

For years, OPEC has argued that oil prices are being driven by external factors such as the weakening dollar and speculators -- and are thus out of the cartel's control. And for years, skeptics have dismissed such claims as cover for the cartel's greedy unwillingness to pump more oil. Recently, however, even the skeptics are acknowledging the price-pushing power of non-OPEC forces in the oil market -- forces that could be doing importers as much damage as anything the cartel ever tried.

The most obvious is the sagging dollar. Because oil is priced in dollars, and because the dollar's value has fallen nearly a third since 2002, Americans are spending more -- perhaps as much as $20 more -- for a barrel of oil.

And that pales against what speculators may be adding to the price. Although all commodities can be manipulated by speculation, oil is especially vulnerable. First, oil is prone to supply disruptions, whether from hurricanes or border wars. Second, oil is highly opaque. The global oil system has so many different pieces -- producers, refiners, shippers and distributors -- that no one knows precisely how much oil is in any given place at any given time. This means that estimates of how much excess inventory is in the system -- and thus, how big a buffer we have against a disruption -- can change rapidly. So when the U.S. Department of Energy, for example, announces a "surprising" decline in U.S. oil inventories -- and by implication a smaller buffer -- the oil market responds by driving up prices.

Oil is, in other words, an inherently volatile commodity, and thus highly attractive to traders, who profit by betting on the daily and even hourly fluctuations in price. And while there's nothing criminal about betting on price, it is a problem when the bets themselves influence the price. If enough traders gamble that oil prices will rise over, say, the next 30 days, then the price of 30-day oil futures contracts will rise, which will eventually pull up the current, or spot, price of oil -- the classic self-fulfilling prophecy. And because traders are always looking for anything that might warrant a price increase (and thus, the placing of a bet), the smallest events -- unrest in Nigeria, for example, or even upbeat economic news (which implies greater oil demand), become potential catalysts for a price rise.

Just how large this "speculative premium" is has become a matter of intense debate. Historically, says Fadel Gheit, a veteran oil analyst at Oppenheimer & Co. in New York, oil prices have run about three times what it costs to physically extract a barrel from the ground. Given that these extraction costs run between $15 to $19 a barrel worldwide, the "correct" price should be somewhere between $45 to $57. Indeed, as recently as 2005, OPEC itself claimed that $45 was a reasonable price. If that's true, we're paying a speculative premium of up to $45 for each barrel, or about $1 for each gallon of gasoline.

If nearly half the price of oil isn't justified by fundamentals like supply and demand, then sooner or later the price must fall. In theory, that ought to mean that a trader willing to bet against the market, by buying an oil futures contract for a lower price, should make a fortune. But in recent years, says Gheit, "anyone who has bet against the market has had their head handed to them" because the price keeps rising.

Why? The answer is complex. First, even with a speculative premium, the oil market is still out of balance. Demand for oil, especially in booming China and India, is rising faster than supply. And tight markets are prone to perturbations -- be they caused by political events, hurricanes or, more recently, speculators' bets.

What, if anything, can be done about the speculator premium? Various commentators have called on Washington to regulate commodity speculation or release some of the nation's Strategic Petroleum Reserve and thus flood oil markets.

But motorists shouldn't hold their breath waiting for policy action from Washington. When it comes to oil, our lawmakers have an abiding faith that the markets will sort themselves out; that when gas prices get high enough, demand will fall, and so will price.

Meanwhile, Washington's free-marketeers should bear in mind that the cost of the speculator premium goes beyond angry motorists. Every dollar increase in oil prices represents a huge bonus for oil exporters, not all of whom can be trusted to use it wisely. Iran, for example, is now raking in roughly $5.5 billion extra a month because of the speculator's premium -- cash that could be used to fund any number of nasty ventures, and that could offset whatever economic sanctions Washington manages to deploy against Tehran.

In the ultimate oil irony, even the merest mention by President Bush of sanctions against Iran is enough to push up oil prices -- and thus to send even more dollars to Tehran.

(Op-Ed Published in Los Angeles Times December 10, 2007)

OPEC: Greed or Going Out of Business?

Despite last week's promise by OPEC to pump more crude, oil prices crested $83 a barrel Friday, setting a new [nominal] record and raising new questions about the cartel’s willingness and ability to keep the world supplied with the oil we’ve yet to find a real alternative for.

There was, first of all, the question of the size of the "increase" itself. The promised extra oil—500,000 barrels per day (bpd)—is a pittance, barely half a percent of the 85.4 million barrels used globally every 24 hours, and not even enough to cover the oil production lost recently in Mexico due to hurricanes. Add in the fact that OPEC member Abu Dhabi must soon cut output by 800,000 bpd for long-overdue oil field maintenance and it’s obvious why oil markets effectively ignored OPEC’s generosity and pushed prices up, up, up.

  Less obvious, however, is why OPEC would offer such a measly boost to begin with—especially when U.S. government figures show the cartel with some 2.5 million bpd in “spare” production capacity.
Conventional explanations focus on internal rifts in OPEC, particularly between Saudi Arabia and Iran. Where the American-loving Saudis want to pump more oil, the fanatics in Tehran are said to enjoy causing the Great Satan economic pain. 

We’re also told that OPEC is wracked by fear of an oil glut: oil markets are tight today, but if America’s sub-prime mortgage mess leads to recession, OPEC worries, American oil demand will fall—just as an increase in output is hitting the market, leading to oversupply and crashing prices. This was the lesson from 1997, when OPEC raised its output just as the “Asian flu” killed oil demand, with the result that oil prices tumbled to single digits—a disaster OPEC doesn’t want to repeat.

  But this ten-year-old lesson doesn’t explain OPEC’s current reluctance to pump. In the first place, the risk of a major price collapse today is tiny—as OPEC well knows. American demand may be uncertain, due to our housing crisis. But there is no sign of slowing oil demand in Asia or other emerging markets, which are sucking up every barrel exporters can send them.

Second, even if America does slip into recession, analysts say that at worst, U.S. oil demand would fall by 100,000 barrels a day—less than the margin of error for Saudi daily oil production, and hardly enough to offset thirsty Asia.

Further, after years of high prices, OPEC is swimming in petro-dollars: cartel members could easily survive if prices slid back to $60 or even $55 a barrel. “There is very little risk for OPEC,” says one veteran industry analyst who is watching the oil cartel’s recalcitrance with growing exasperation. OPEC member’s combined foreign cash reserves, he says, “are bigger than all of China’s—and this for a regional economy smaller in size than the Netherlands. What can they possibly fear will happen to them if prices were to fall to a moderate level?”

So if the risk of a price collapse is so low, why won't OPEC raise production, ease prices, and behave like the “reliable” energy party it steadily claims to be? The most plausible theory may also be the simplest: greed. Wth prices high and demand still soaring, cartel members no longer feel the need to take any price risk at all. Because the big importers like the United States, Japan, Europe, and now China have no alternative suppliers, OPEC needn't assume even a tiny risk of declining prices: instead, the cartel knows it can leave markets tight, and prices high, with zero fear of losing customers. In a sense, $80 oil is a measure of OPEC’s supreme confidence that price risk is now all on the shoulders of buyers. As my analyst friend puts it, OPEC is “playing a conservative game in the most selfish way known to mankind.”

That OPEC has become greedy and complacent isn’t hard to believe: power corrupts and OPEC seems very much to be in the driver’s seat. But there is an even bleaker, and simpler, theory for OPEC’s stingy behavior: the cartel doesn’t have the extra oil to pump. U.S. government figures may show OPEC members with a combined “spare production capacity” of about 2.5 million barrels a day. But depletion experts like Matt Simmons, a sometimes-energy advisor to the Bush administration, have long claimed these figures are inflated. By Simmons' account, countries such as Saudi Arabia have already tapped most of their big oil fields and are struggling to maintain even current production levels—much less raise output.

At best, a significant increase in oil volume would take months and perhaps years to bring to the market. At worst—that is, if world oil production truly has “peaked,” as many oil pessimists now claim—even OPEC won’t be able to raise output meaningfully—bad news for a global economy that depends almost exclusively on petroleum products to move people and freight, and has made precious little progress in developing alternatives.

Oil conservatives have never accepted peak-oil theory: current pumping problems stem more from lack of investment in new fields than from any geological limits. Yet with so much money flowing to oil producers today, it's hard to see why producers wouldn't be putting some of that capital back into the ground, so to speak, if there were sufficient oil opportunities to invest in.

Peak-oil theorists argue that if OPEC still hasn't raised oil production this winter, after the first cold snap drives up demand for heating oil, it will be hard indeed to argue that OPEC is “choosing” to keep oil prices high. And even some conservative analysts, who don’t subscribe to the “peak oil” theory, nonetheless expect that oil prices will not only stay high, but could top $100 by year’s end.

  Whatever the explanation—greed or depletion—today’s high prices should be a clear signal to importers like the United States that OPEC is an even less reliable “energy partner” than before—and that our timeframe for getting beyond oil—with alternative fuels or efficiency or both—just became much shorter indeed.

Iraq's Growing (Yawn) Oil Riches

Nothing captures the myopic view of the oil world better than the market's recent dismissal of the big "new" oil in Iraq. On April 19, a Houston-based oil analyst, IHS, released a study showing Iraq's oil reserves to be around 220 billion barrels--or nearly twice as big as previously thought. Such reserves, IHS argued, meant Iraq's potential daily output could eventually top 9 million barrels, exceeding that of the current leader, Saudi Arabia.

In the oil markets, reaction to the news was....almost non-existent. In fact, the price for the benchmark West Texas Intermediate jumped above $65 for the first time in months, and other grades rose sharply. One reason is that oil markets are far more interested in factors that can affect price immediately--in this case, increasing tensions over Iran's nuclear program, as well as declining stocks of gasoline in the United States.

But another reason is that oil markets have long been skeptical about any forecasts about Iraq's glorious petro future. Predictions that Iraqi output would soar after liberation proved disastrously wrong: production has fallen from a pre-war level of more than 3 million barrels (mbd) a day to less than 2mbd--largely because the nation remains too unstable to repair existing infrastructure, much less expand it.

Which, of course, is precisely why oil markets treat the revised reserve estimates as a non-event. As IHS pointed out, activated Iraq's untapped fields would require at least $25 billion in outside investment. Yet few companies are willing to make that kind of commitment until the fighting (much of it driven by conflicts over oil revenues) is settled.

"Obviously the security situation is very bad," Ron Mobed, IHS' president, told the Khaleej Times of Dubai. "But when you look at the sub-surface opportunity, there isn't anywhere else like this. Geologically, it's right up there, a gold star opportunity."

But if market reaction is any indication, it's a gold star opportunity that won't pay for some time.