Monday, July 25, 2011

Hidden beneath the Rockies lies a big oil field! 2 trillion barrels

Hidden beneath the Rockies lies a big oil field! 2 trillion barrels
More oil than the whole Middle East
Let us say it is true. How come everyone is not running to exploit it, like they exploit any other economic and financial benefit?
The other aspect is how much energy, and at what cost, is it going to take to heat the oil shale up and extract the oil.
I suggest conserving resources; we should use renewable energy, such as Solar and Wind energy etc. to heat up the shale.
Another issue is they are waiting for oil to reach $200 per barrel so the government can reduce the deficit and outstanding loans.
I hope that is the truth and that there are no hidden agendas.

Technological hurdles to extract oil from shale
"Despite all the attempts to develop a shale oil industry in the United States over the past 100 years, the fact remains that no proven method exists for efficiently moving the oil from the rock. There are a number of candidate processes possible, but none has demonstrated a practical capability to produce oil."
Experts with field experience who are bullish on the prospects for America's oil shale. But they recognize that, here and now, we are still not there yet technologically.
There are a number of problems yet to be solved before US oil shale can be recovered on any type of meaningful scale, let alone a mass scale. And getting the extraction technology right is only one monkey wrench in the works with US oil shale. There are others.
For example, there are questions of air quality regarding domestic oil shale operations. How badly would these operations pollute the air? Would the levels be acceptable? The Oil Companies are not sure.
There are questions of water availability. During the extraction process, how much water would be required?
Experts are not sure. An early "guess" is two to three barrels of water per barrel of shale. This could be a conservative estimate. Either way, will the massive amounts of water necessary for heavy-duty shale extraction even be available in the first place, given that the Colorado River Basin is already running low?
You also need to account for the environmental and ecological damage and restoration to pre-drilling condition.
Could you imagine we could have the largest oil reserve in the world – if we find an economical way to extract the oil, we will be energy independent, we will have a huge economic boom, increase employment with funds staying in our country, we can inform the countries that are currently supplying us with oil that we do not need them and that they cannot blackmail us anymore or threaten us with economic doom.
American technology and knowhow will find the answer – all you have to do is wave the dollar bill in front of corporate America and they will find the answer “by hook and by crook”. Then the executives, the shareholders and the politicians will laugh all the way to the bank.
YJ Draiman

The U.S. Govt’s Secret Colorado Oil Discovery

The U.S. Govt’s Secret Colorado Oil Discovery
Hidden 1,000 feet beneath the surface of the Rocky Mountains lies the largest untapped oil reserve in the world — more than 2 TRILLION barrels. On August 8, 2005 President Bush mandated its extraction. Three companies have been chosen to lead the way. Test drilling has already begun…

Dear International Living Reader,

Five months ago, the U.S. Energy Department announced the results of a land survey…

It was conducted to determine the official amount of oil a thousand feet deep in the Rocky Mountains…

They reported this stunning news:

We have more oil inside our borders, than all the other proven reserves on earth.

Here are the official estimates:

8-times as much oil as Saudi Arabia
18-times as much oil as Iraq
21-times as much oil as Kuwait
22-times as much oil as Iran
500-times as much oil as Yemen
…And it’s all right here in the Western United States.

James Bartis, lead researcher with the study says, “We’ve got more oil in this very compact area than the entire Middle East.”

More than 2 TRILLION barrels. Untapped.

“That’s more than all the proven oil reserves of crude oil in the world today,” reports The Denver Post.

When asked about America’s least-publicized oil supply, Utah Senator Orrin Hatch said:

“The amounts of oil are staggering. Who would have guessed that in just Colorado and Utah, there is more recoverable oil than in the Middle East?”

Here’s the kicker…

The U.S. government already owns the land. It’s been right there under our noses the whole time.

In fact, the government’s appointed a small group of companies to begin the drilling.

Test drilling has already begun.

And the profit forecasts are ridiculous. According to the RAND Corporation (a public-policy think tank for the government), this small region can produce:

Three million barrels of oil per day… That translates into more than $20 BILLION a year.

These are the conservative estimates. The U.S. Energy Dept. estimates an eventual output of 10 million barrels of oil per day. At that rate, the money flow would be even greater.

I’ve written this letter to tell you everything I’ve learned about this rarely publicized oil reserve… who’s drilling it… and how to get a piece of the world’s biggest, untapped oil supply — before it’s too late.

Here’s the full story…

The Next American Oil Boom

There’s a new source of oil in the American West.

Today, it sits idle — untapped — inside more than 16,000 square miles of rock and sand.

Geologists call what lies in this region, oil shale.

What is oil shale?


At first glance, oil shale looks like an ordinary black rock.

It feels grainy to the touch and… greasy. You see, what’s inside oil shale has huge governments, Big Oil, venture capitalists, and even everyday investors scrambling to stake a claim.

Oil shale — when heated — oozes bubbling crude.

This precious resource is rare — found only in a few select countries. Places like China, Brazil, Estonia, Morocco, and Australia.


But the real story is how much untapped oil shale lies beneath U.S. soil. As the chart to the right indicates, there’s 4-times more oil shale in the U.S. than in all other countries combined.

Over the past 125 years, oil shale has been the secret oil source for a handful of nations. Specifically, those fortunate enough to have it…

China’s been using oil shale since 1929. Today, China is the largest producer of oil from oil shale. It plans to double the daily rate of production soon.
Estonia is an oil shale dependent economy. Over 90% of the country’s electricity is fueled by shale oil. In fact, electricity run on oil shale is a chief export.
In 1991, Brazil built the world’s largest oil shale facility. They’ve already produced more than 1.5 MILLION tons of oil to make high quality transportation fuels.


Jordan, Morocco, and Australia have recently announced plans to utilize their oil shale resources. All 3 governments are currently working to build oil shale facilities.


But all these countries’ oil shale resources pale in comparison to the U.S. supply. As you can see from the table to the right, the United States dominates the oil shale market — with over 72% of the world’s oil shale resources.

Our gargantuan supply of oil lies beneath an area called the Green River Formation — a barren stretch of land covering portions of Colorado, Utah, and Wyoming.

World-renowned geologist Walter Youngquist calls the oil beneath the Green River Formation, “a national treasure.”

Congress calls this area simply, “the next Saudi Arabia.”

It’s easy to see why…

This region holds the largest known oil reserve on the planet…

Colorado’s Oil Lands — Restricted for 76 Years, Now Open for Drilling

There are over 16,000 square miles of oil shale in the Green River formation...

Each acre holds 2 million barrels of oil — it’s the most concentrated energy source on earth, according to the Energy Department.

The federal government owns 80% of this oil-rich land.

In fact, the government placed protective legislation on this land in 1930, forbidding anyone to touch it.


You see, the government always knew this land was saturated with oil — but getting it out has always been expensive.

Buying oil from foreign countries was always the cheaper bet. It has been for the past 80 years.

Wisely, the government kept the land around for a “rainy day”, protecting it with 1930s legislation.

I’m sure you’re aware of today’s situation at the gas pump. Buying oil from foreign countries has gotten out of hand. The price of oil is sky-high. It’s way too expensive to keep buying foreign oil. In other words, the “rainy day” has finally arrived.

The timing couldn’t be more perfect. Oil shale technologies have begun to advance – drastically.

Companies are coming up with ways to extract oil from the Green River Formation very cheaply.

For example, one Utah-based company says it can extract the oil for as little as $10 a barrel. In fact dozens of companies have stepped forward with similar claims. With oil prices approaching $70 a barrel – these are pretty significant breakthroughs.

That’s all the government needed to hear.

Monday, July 18, 2011

The US Government's Secret


The US Government's Secret StansberryOnline.com
5-2-6

 


 Hidden 1,000 feet beneath the surface of the Rocky Mountains lies the largest untapped oil reserve in the world - more than 2 TRILLION barrels. On August 8, 2005 President Bush mandated its extraction. Three companies have been chosen to lead the way. Test drilling has already begun
Dear Reader,
Five months ago, the U.S. Energy Department announced the results of a land survey
It was conducted to determine the official amount of oil a thousand feet deep in the Rocky Mountains
They reported this stunning news:
We have more oil inside our borders, than all the other proven reserves on earth.
Here are the official estimates:
    * 8-times as much oil as Saudi Arabia
    * 18-times as much oil as Iraq
    * 21-times as much oil as Kuwait
    * 22-times as much oil as Iran
    * 500-times as much oil as Yemen
And it's all right here in the Western United States.
James Bartis, lead researcher with the study says, "We've got more oil in this very compact area than the entire Middle East."
More than 2 TRILLION barrels. Untapped.
"That's more than all the proven oil reserves of crude oil in the world today," reports The Denver Post.
When asked about America's least-publicized oil supply, Utah Senator Orrin Hatch said:
"The amounts of oil are staggering. Who would have guessed that in just Colorado and Utah, there is more recoverable oil than in the Middle East?"
Here's the kicker
The U.S. government already owns the land. It's been right there under our noses the whole time.
In fact, the government's appointed a small group of companies to begin the drilling.
Test drilling has already begun.
And the profit forecasts are ridiculous. According to the RAND Corporation (a public-policy think tank for the government), this small region can produce:
    Three million barrels of oil per day That translates into more than $20 BILLION a year.
These are the conservative estimates. The U.S. Energy Dept. estimates an eventual output of 10 million barrels of oil per day. At that rate, the money flow would be even greater.
I've written this letter to tell you everything I've learned about this rarely publicized oil reserve who's drilling it and how to get a piece of the world's biggest, untapped oil supply - before it's too late.
Here's the full story
The Next American Oil Boom
There's a new source of oil in the American West.
Today, it sits idle - untapped - inside more than 16,000 square miles of rock and sand.
Geologists call what lies in this region, oil shale.
What is oil shale?
At first glance, oil shale looks like an ordinary black rock.
It feels grainy to the touch and greasy. You see, what's inside oil shale has huge governments, Big Oil, venture capitalists, and even everyday investors scrambling to stake a claim.
Oil shale - when heated - oozes bubbling crude.
This precious resource is rare - found only in a few select countries. Places like China, Brazil, Estonia, Morocco, and Australia.
But the real story is how much untapped oil shale lies beneath U.S. soil. As the chart to the right indicates, there's 4-times more oil shale in the U.S. than in all other countries combined.
Over the past 125 years, oil shale has been the secret oil source for a handful of nations. Specifically, those fortunate enough to have it
    * China's been using oil shale since 1929. Today, China is the largest producer of oil from oil shale. It plans to double the daily rate of production soon.
    * Estonia is an oil shale dependent economy. Over 90% of the country's electricity is fueled by shale oil. In fact, electricity run on oil shale is a chief export.
    * In 1991, Brazil built the world's largest oil shale facility. They've already produced more than 1.5 MILLION tons of oil to make high quality transportation fuels.
    * Jordan, Morocco, and Australia have recently announced plans to utilize their oil shale resources. All 3 governments are currently working to build oil shale facilities.
But all these countries' oil shale resources pale in comparison to the U.S. supply. As you can see from the table to the right, the United States dominates the oil shale market - with over 72% of the world's oil shale resources.
Our gargantuan supply of oil lies beneath an area called the Green River Formation - a barren stretch of land covering portions of Colorado, Utah, and Wyoming.
World-renowned geologist Walter Youngquist calls the oil beneath the Green River Formation, "a national treasure."
Congress calls this area simply, "the next Saudi Arabia."
It's easy to see why
This region holds the largest known oil reserve on the planet
Colorado's Oil Lands - Restricted for 76 Years, Now Open for Drilling
There are over 16,000 square miles of oil shale in the Green River formation...
Each acre holds 2 million barrels of oil - it's the most concentrated energy source on earth, according to the Energy Department.
The federal government owns 80% of this oil-rich land.
In fact, the government placed protective legislation on this land in 1930, forbidding anyone to touch it.
You see, the government always knew this land was saturated with oil - but getting it out has always been expensive.
Buying oil from foreign countries was always the cheaper bet. It has been for the past 80 years.
Wisely, the government kept the land around for a "rainy day", protecting it with 1930s legislation.
I'm sure you're aware of today's situation at the gas pump. Buying oil from foreign countries has gotten out of hand. The price of oil is sky-high. It's way too expensive to keep buying foreign oil. In other words, the "rainy day" has finally arrived.
The timing couldn't be more perfect. Oil shale technologies have begun to advance ­ drastically.
Companies are coming up with ways to extract oil from the Green River Formation very cheaply.
For example, one Utah-based company says it can extract the oil for as little as $10 a barrel. In fact dozens of companies have stepped forward with similar claims. With oil prices approaching $70 a barrel ­ these are pretty significant breakthroughs.
That's all the government needed to hear.
On August 8, 2005, President Bush signed into law, a mandate lifting the protective legislation on the Green River Formation.
This mandate is called The Energy Policy Act of 2005. It calls for the opening phases of oil extraction in the Green River Formation ­ the world's most concentrated energy source.
We're finally ready to tap the largest oil reserve on the planet
http://www.stansberryonline.com/OIL/20060405-OIL
-COL.asp?pcode=EOILG422&alias=200604OIL

Hidden beneath the Rockies lies a big oil field! 2 trillion barrels

Hidden beneath the Rockies lies a big oil field! 2 trillion barrels

By yj draiman
Hidden beneath the Rockies lies a big oil field! 2 trillion barrels
Let us say it is true. How come everyone is not running to exploit it, like they exploit any other economic and financial benefit?
The other aspect is how much energy, and at what cost – financial and ecological, is it going to take to heat the oil shale up and extract the oil.
I suggest conserving resources; we should use renewable energy, such as Solar and Wind energy etc. to heat up the shale.
Another issue is they are waiting for oil to reach $200 per barrel so the government can reduce the deficit and outstanding loans.
I hope that is the truth and that there are no hidden agendas.
 Technological hurdles to extract oil from shale“Despite all the attempts to develop a shale oil industry in the United States over the past 100 years, the fact remains that no proven method exists for efficiently moving the oil from the rock. There are a number of candidate processes possible, but none has demonstrated a practical capability to produce oil.”Experts with field experience who are bullish on the prospects for America’s oil shale. But they recognize that, here and now, we are still not there yet technologically.There are a number of problems yet to be solved before US oil shale can be recovered on any type of meaningful scale, let alone a mass scale. And getting the extraction technology right is only one monkey wrench in the works with US oil shale. There are others.For example, there are questions of air quality regarding domestic oil shale operations. How badly would these operations pollute the air? Would the levels be acceptable? Shell isn’t sure.There are questions of water availability. During the extraction process, how much water would be required? Experts are not sure. An early “guess” is two to three barrels of water per barrel of shale. This could be a conservative estimate. Either way, will the massive amounts of water necessary for heavy-duty shale extraction even be available in the first place, given that the Colorado River Basin is already running low? You also need to account for the environmental and ecological damage and restoration to pre-drilling condition.
American technology and knowhow will find the answer – all you have to do is wave the dollar bill in front of corporate America and they will find the answer “by hook and by crook”. Then the executives, the shareholders and the politicians will laugh all the way to the bank.
YJ Draiman
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One Response to “Hidden beneath the Rockies lies a big oil field! 2 trillion barrels”

  1. miriamdraiman Says:
    The energy non-crises
    The following are small excerpts from chapters in Mr. Willims book ‘The Energy Non-Crisis’
    CHAPTER 1 – The Great Oil Deception … There is no true energy crisis. There never has been an energy crisis . . . except as it has been produced by the Federal government for the purpose of controlling the American people. …
    CHAPTER 3 – Shut Down That Pipeline … My friend answered, “Well, Brother Lindsey, that’s one of the major cross-country pipelines carrying crude oil from the West to the East.” “Ah,” I answered, “That’s rather interesting. I’ve heard there’s a possibility of an energy crisis. I’m sure glad those pumps are running full speed ahead.” … That was in 1972. You will remember that 1973 was the first time we were told there was really an energy crisis. The East Coast was used as a test for that energy crisis, and there were long lines of people waiting, burning fuel while they waited in line for gas they couldn’t get. … Well, the man finally recognized that I was getting a little bit indignant and he said, “well, mister, if you really want to know the truth, the truth is the Federal government has ordered us to close this pipeline down.” The old Westerner went on and told how he stood up to the boss man, “Why man, I can hardly believe that. After all, we’ve got an energy crisis.” The boss man answered him, “Sir, we’re closing it down because we’ve been ordered to.” …
    CHAPTER 4 – An Important Visit by Senator Hugh Chance … What followed included some of the most astonishing answers I have ever heard in my life.

How Wall Street Controls Oil

How Wall Street Controls Oil
And how OPEC will be the fall guy for $140 oil.

      Control over oil markets, once the province of the major integrated oil companies and then OPEC, may now be shifting into the hands of Wall Street’s ubiquitous investment banks. Oil industry experts noted this unwelcome transition at an early December 2006 OPEC-EU meeting in Vienna. Producers clearly were not happy to see their ability to influence prices undermined. EU representatives were equally unhappy because the changeover might increase price volatility. Wall Street types, meanwhile, denied responsibility.
      It has become clear in 2006 that one of Wall Street’s newest concepts—marketing commodities as an asset class—has altered world energy markets in a surprising fashion. In particular, the injection of cash into commodities by passive investors such as pension funds has created a rich financial incentive to accumulate inventories. Participants in physical energy markets (both oil and natural gas) have responded by putting away almost record amounts and building new storage facilities. The stocks amassed, in turn, have undermined the ability of oil exporters to control prices. OPEC ministers recognize that under certain circumstances the accruing stocks could precipitate a sudden, temporary drop in crude prices similar to the one observed in natural gas last spring.




          At the same time, the stock and price rise threatens to raise political hackles. Legislators will no doubt
respond this spring with a spate of hearings and perhaps laws directed at an industry incorrectly accused
of  hoarding.
           Here I describe the latest development in the energy market twists and turns of the last three
decades.  Its appearance has made the tools traditionally used to predict oil market fluctuations at least  
temporarily obsolete.
                                                                  A SURPRISING CHANGE

Those who watch oil markets closely were startled last June as oil prices and inventories simultaneously rose to unprecedented highs. The price rise itself was not a surprise. Nor was the stock climb to levels not observed since the 1998 shock. However, the two events occurring simultaneously caught the attention of many and for good reason: historically, high prices have been associated with low inventories and vice versa.
          The surprising parallel increase in stocks and oil prices can be observed in Figure 1. There I compare
U.S. commercial crude stock levels from January 1986 through December 2006 with the spot price of WTI
[West Texas Intermediate, an oil pricing benchmark], which trades on the New York Mercantile Exchange.
For presentation purposes, stocks are graphed against the left vertical axis and prices against the right.

Control over oil markets may now be shifting into the hands of Wall Street’s
ubiquitous investment banks.

One the left vertical axis and prices against the right. One can note an unusual surge in stocks beginning in
January 2005 that matches the crude price rise from $45 to $74 per barrel.
      The concurrent upsurge in prices and stocks was unusual by historical standards. In the past, inventories
of oil and other commodities moved counter cyclically with prices. Commercial users of commodities have
always been notoriously parsimonious. Indeed, few managers will risk tying up working capital to accum
mulate additional stocks, and oil companies have previously been very aggressive in minimizing inventories.

Crude for delivery in 2010 will pass $140 per barrel.

Moreover, no publicly traded company has reported holding speculative stocks.
      On this occasion, however, the stock boost was driven by a profit motive rather than a speculative one.
Commercial firms were given the chance to gain by keeping stocks, and they responded by increasing their
holdings.
      Wall Street provided the opportunity to benefit from adding stocks. For the last fifteen years, investment bankers have touted commodities as an asset class.
In the last two years, the idea gained recognition. Commodities were sold as an alternative to traditional bond and stock investments. Building on academic research at Yale and Wharton, analysts from Goldman Sachs, Deutsche Bank, Barclays, PIMCO, and other institutions have circulated papers that demonstrate how investors achieve useful diversification by allocating a small portion of their portfolios to ommodities. The diversification occurs because returns from commodities are negatively correlated with returns on equities or bonds.

Oil Storage Problem

      Oil can no longer be held in open pits as it was in the 1930s. It must be kept in tanks or on
ships, and both have a fixed supply. As storage fills, the prices facility owners charge for it increase. The boost in storage costs drives down cash prices. Such an impact occurred in summer 2006 when cash prices in U.S. natural gas markets dropped by more than 60 percent to $4.50 per million Btu. In an even more extreme case, in September natural gas sellers briefly paid buyers in Great Britain to take gas. (The statement is correct. British firms paid buyers to take gas because storage was full.) Thus Wall Street’s commodity asset class innovation has the potential to destabilize energy markets thoroughly.

Control over oil markets may now beshifting into the hands of Wall Street’s
ubiquitous investment banks.

--------------------------------------------------------------------------------



      Many pension fund managers have been convinced. Between 2004 and 2006, as much as $100 billion may have been invested in commodities. Figure 2, taken from a Goldman Sachs presentation, shows a rough estimate of the cash input from passive investors. One can see from the graph that financial          institutions had marketed the idea as early as 1991. However, one can also note the idea only took hold in 2004.
      Those investing in commodities are not typical of other commodity market participants. They are not speculators. They do not trade frequently, and they do not sell short. Investors buy a diversified portfolio of commodities and hold on to it. Energy commodities, particularly oil, make up a large portion of the indexes because energy accounts for a large share of the economy.
      Proponents of commodity investing recommend full collateralization of contracts. Although commodity futures are by definition margined transactions, commodity investors set aside the contract’s full value when they buy. Thus the purchaser of 1,000 barrels of crude will reserve $60,000 if oil sells at $60 per barrel. The money not used for margin is invested in a highly liquid instrument such as a Treasury bill.
      The most widely quoted academic proponents of commodity investment (Gary Gorton and Geert Rouwenhorst) do not promise investors returns from price appreciation. Rather they demonstrate how a return can be earned as a result of markets normally being in “backwardation,” a condition that occurs when cash prices exceed futures prices. As they explain,
           Keynes and Hicks postulated the theory of normal backwardation, which states
that the risk premium will, on average, accrue to the buyers. They envisioned a world in which
producers of commodities seek to hedge the price risk of their output. For example, a producer
of grain sells grain futures to lock in the future price of the crops and obtain insurance
against the price risk of grain at harvest time.
          Speculators provide this insurance and buy futures, but they demand a futures price that is
below the spot price expected to prevail at the maturity of the futures contract. By “backward
dating” the futures price relative to the expected future spot price, speculators receive a risk
premium from producers for assuming the risk of future price fluctuations.



      For illustration, I show in Figure 3 the forward price curve of oil on January 1, 2003. At that time, the first future settled for $31.68 per barrel and the second future at $30.50. If spot prices remained at $31.68 per barrel, the investor could count on making $1.18 per barrel in 30 days. Investors could earn an annual return of almost 60 percent if they repeated the exercise each month by “rolling” their investment into the next contract.
          Gorton and Rouwenhorst examine data for a thirty-year period and show that a portfolio of commodities structured as described above would earn returns that match those from bonds and equities. They also show the returns are negatively correlated, implying that commodity investments help diversify
portfolios.

INTRODUCING “NORMAL CONTANGO”
The movement of passive investors into commodities shifted markets from backwardation to contango, the condition that occurs when futures prices exceed cash prices. Quite simply, energy markets today are too
small to accommodate the increased activity of investors seeking to buy commodities and still stay in backwardation. Producers who might sell futures to hedge the risk of a price decline generally do not do so, having been counseled by other representatives of the same investment banks that buyers of their equities did not want them to hedge. The consequence of this impasse was predictable. Futures prices rose relative to cash prices. As can be seen from Figure 4, the market shifted from backwardation on January 1, 2003, to contango by July 2006. (In Figure 4, the 2003 curve is graphed against the left vertical axis and the 2006
curve against the right because the price level in 2006 is roughly double that of 2003.) The change in the curve’s shape is remarkable.
Usually, markets become more backwardated as cash prices rise.
Inventory accumulation began once markets shifted into contango because it became profitable for commercial firms to add to stocks. In a contango market, a company acquiring stocks avoids the risk of a
price decline by hedging. Thus in July an oil company could acquire incremental oil for $76 per barrel and simultaneously hedge the volume by selling futures for $80 per barrel. This transaction— referred to historically as a “cash and carry”—nets the company a $4-per-barrel profit whether oil rises to $100 or
falls to $10. Not surprisingly, firms jumped at the opportunity. As noted above, both prices and inventories rose.
In theory, companies could acquire oil indefinitely.  Prices could rise and stocks follow. However, at least one real impediment to this scenario exists: storage. Oil can no longer be held in open pits as it was in the



1930s. It must be kept in tanks or on ships, and both have a fixed supply.
As storage fills, the prices facility owners charge for it increase. The boost in storage costs drives down cash prices. Such an impact occurred in summer 2006 when cash prices in U.S. natural gas markets dropped by more than 60 percent to $4.50 per million Btu. In an even more extreme case, in September natural gas sellers briefly paid buyers in Great Britain to take gas. (The statement is correct. British firms paid buyers to take gas because storage was full.) Thus Wall Street’s commodity asset class innovation has the potential to destabilize energy markets thoroughly.

POLICY DILEMMAS
The emergence of high inventories and high prices and the possibility of a price collapse create dilemmas for OPEC and policymakers in consuming countries. For OPEC, the risk is obvious. Lawmakers in consuming nations seeking to reduce greenhouse gas emissions are also troubled by the prospect of low prices. Yet, there may be little they can do to ameliorate the situation.
OPEC’s problem concerns the price level. OPEC can and has cut oil production to squeeze stocks and raise
prices. In March 1999, Saudi Arabia led the organization in a program to reduce consumer inventories across the globe. Between mid-1998 and early 2001, global stocks shrunk by almost 700 million barrels. When they implemented this policy, OPEC officials predicted that prices would rise as stocks declined. Many doubted this, but by early 2001 prices had tripled from $10 to $30 per barrel.
In early December 2006, Saudi Arabia’s oil minister Ali Al-Naimi commented that global inventories were rising again. He fretted that prices might come under pressure.
Other OPEC members stated more explicitly that production cuts were needed to reduce world stocks by 100 million barrels. There is a problem with this thinking, however. OPEC cannot make inventories decline by cutting output. A reduced oil supply might induce those holding stocks to sell and take profits. Alternatively, they might decide not to sell, in which case consumption would have to decrease. In this second scenario, crude oil prices would need to increase between 10 and 20 percent to balance the market. This would bring crude back to the summer peaks of nearly $80 per barrel. Of course, a crude price hike is just what those marketing commodities as assets seek. More investors and more money would pour into commodity indexes, much of it into oil. The incentive to hold stocks would strengthen and inventories might build despite OPEC’s production cut.
The process will end when storage fills. Then OPEC will need to reduce output further or risk prices falling
precipitously. We could very well observe a price decline and OPEC attempts to arrest it. During 2007, I suspect we will see an oil price surge followed by a rush of cash into commodities. Forward prices will be bid higher.
Crude for delivery in 2010 will pass $140 per barrel. Stocks will rise further while Congress and the press accuse oil companies of hoarding. Then buyers will realize at some point that they have no place to put the oil and prices will tumble. The history of commodity market cycles suggests the decline could be spectacular. Single digit prices are possible, although probably only for a day or two.
As an EU official said privately, “The market has been destabilized.”


Quite simply, energy markets today are too small to accommodate the
increased activity of investors seeking to buy commodities and still stay in
backwardation.
In an even more extreme case, in September natural gas sellers briefly
paid buyers in Great Britain to take gas.