June 2008 Archives

Yesterday I provided some thoughts with regard to Saudi Oil Conference. Robert F. Worth and Jad Mouawad wrote an excellent article At Oil Conference, Saudis Offer Slight Rise in Production (free registration is required) for The New York Times. I will just offer a teaser quote and encourage you to read the article in full.

Some analysts and oil traders had expected a much larger production increase from Saudi Arabia, the world’s top oil exporter.

But King Abdullah and the British prime minister, Gordon Brown, who walked into the high-ceilinged hall together as a military band played, soon offered totally different perspectives on the problem and how to approach it.

The king spoke of the “selfish interests” of speculators as a main reason oil prices have risen 40 percent this year, urging the gathered ministers to “rule out biased rumors and to reach the real causes for the increase in price.”

But Mr. Brown squarely pointed to fundamental economics and “oil demand rising faster than supply.” The U.S. Energy secretary, Samuel W. Bodman, put it more bluntly in a meeting with reporters, saying “there is no evidence we can find that speculators are driving futures prices.”

I am firmly in the camp of not blaming the speculators and instead blaming fundamentals. The demand is outstripping supply. Until either we reduce our consumption or we find more oil, prices will continue to remain high.

For those considering investing in oil companies, you might wish to consider investing in oil futures or an ETF such as USO). Often companies will have other challenges such as increased royalty and taxes as oil prices rise. Companies will often face increased costs and have difficulty replenishing their reserves. But with futures or an ETF that mimics oil prices, you can focus solely on oil prices and not have to worry about company specific issues.

My photograph of the View From Icefields Parkway is hosted at Flickr. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.

The article Oil Summit to Take on Speculators (subscription required) in today's Wall Street Journal mentions that high powered officials are looking at the role of speculators.

Officials from around the world, including U.K. Prime Minister Gordon Brown and U.S. Energy Secretary Samuel Bodman, along with the chief executives of major oil companies, will meet Sunday to discuss oil prices, investment, and the role of speculators.

"From a global perspective, we definitely think it's time that financial markets and their regulators take a tough look at how transparent is this market and what needs to be done to improve it," a contributor to the working paper said Saturday, "and if there is a need for regulation, how that regulation should tackle the issues."

Seeking diversification and a hedge against inflation, institutional investors such as pension funds and endowments have invested some of their billions into financial contracts passively following indexes composed of a basket of commodity futures.

...

Governments must help stabilize the oil market, by taking action against speculators, Saudi Arabia's deputy oil minister Prince Abdel Aziz bin Salman was reported as saying, according to remarks re-published from Asharq Al-Awsat newspaper by the state-run Kuwaiti news agency Saturday.

The reality is that speculators are not to blame. Typically, when speculators push the price of a good beyond a reasonable level, producers begin producing to capture excess profits. However, in this instance, producers are not producing. Moreover, producers are not showing their cards as to what they can or cannot produce. That is, Saudi Arabia does not allow independent assessments of its oil fields. Thus, investors and speculators can only guess.

If OPEC had the ability to open the spigots, I believe it would. It would do so to unsettle the backers and supporters of large scale mega projects, such as Alberta oil sands mega projects. If prices were to plummet dramatically for a year or two, investors would think long and hard before spending billions to develop these massive and capital intensive energy projects.

The oil summit on 22 June 2008 could prove counterproductive. After the jawboning by Saudi Arabia earlier to increase its production by a measly two hundred thousand barrels per day, and after many Asian countries have reduced their fuel subsidies, fuel prices remain stubbornly high. Should the summit produce some important pronouncements with no noticeable effects, then it will be that much more difficult to convince speculators and others that oil remains in plentiful supply and that speculators are to blame for the current mess.

Blaming speculators is easy. Fixing the root cause of high oil prices is not.

There were two articles in the Wall Street Journal this past weekend that caught my attention. First was A Hostage to Fame: After Six Years of Captivity in Colombia, Ingrid Betancourt Is a Global Celebrity -- and Too Valuable for Rebels to Release (subscription required), a front page article concerning Ingrid Betancourt who is a courageous and strong woman being held captive by communist Revolutionary Armed Forces of Colombia, or the FARC. I have written about Ingrid before here and here.

Ms. Betancourt, a minor presidential candidate when she was abducted in 2002, is one of about 700 hostages held by the FARC, Latin America's oldest and largest insurgency. The FARC, estimated to number about 9,000 fighters, funds itself largely through drug trafficking and kidnapping. All but about 40 of its hostages are held for ransom. The rest include Ms. Betancourt, three U.S. defense contractors abducted in 2001, and Colombian policemen, soldiers and politicians whom the rebels consider prizes of war to be deployed to strategic advantage.

Ms. Betancourt, who holds dual Colombian and French citizenship, has become the face of Colombia's captives and their heart-breaking suffering. In Europe, she is a cause célèbre, so famous that she is simply known as "Ingrid." Her portrait hangs on the facade of the Paris city hall and in Milan's main piazza. France stages marches to demand her release, and Italy holds midnight vigils. Across the world, more than 1,000 cities and towns have declared her an honorary citizen.

But in becoming so famous, the 46-year-old Ms. Betancourt has also become more valuable to the FARC, which has suffered a string of major setbacks in the past few months. Only days after he complained about Ms. Betancourt in the email, Mr. Reyes, the rebels' second-in-command, was killed in an airstrike by the Colombian military on his camp in neighboring Ecuador. Weeks later, the group lost its legendary leader Manuel Marulanda, who apparently died of a heart attack.

The article goes on to discuss Venezuela's president Hugo Chavez's possible role in assisting FARC to destabilize Colombia.

The second article Venezuela's Chávez Urges End to Colombia Insurgency: In Sharp Reversal, Guerrillas Are Asked To Release Hostages (subscription required) shows Chavez changing course.

In a surprising turnaround, Venezuelan President Hugo Chávez urged Colombian guerrillas to free hundreds of hostages, put down their weapons and end their almost 50-year campaign to overthrow Colombia's government and install a communist regime.

Speaking on his weekly television program, Mr. Chávez, who has been a public ally of the 9,000-strong Revolutionary Armed Forces of Colombia, or FARC, said the group's efforts to overthrow Colombia's democratically elected government were unjustified. "The guerrilla war is history," Mr. Chávez said.

The president has been lobbying friendly governments to grant de facto democratic diplomatic recognition to the FARC. "At this moment in Latin America, an armed guerrilla movement is out of place."

I am always drawn to people of principle who struggle against seemingly insurmountable challenges. And thus, I admire Ingrid and hope that she and her fellow captives are released soon. She has suffered far too much.

With regard to Hugo Chavez, while I appreciate any effort to help free the FARC hostages, I have strong concerns about his role in assisting FARC and helping to destabilize the region. Unfortunately, the high price of oil is helping to stabilize his regime and allow him to continue to wreak havoc. That is truly unfortunate.

I have long held a strong interest in South America and am drawn to people with strong principles and convictions. Thus, Ingrid Betancourt's story has captured my interest and attention.

My photograph of the downtown Calgary is hosted at Flickr. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.