Oil And Gas Supplies And Prices

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We can be certain that financial markets have already "integrated" the approach of peak oil through 2003-06 by an "exuberant round" of massive price rises for primary products right across the board, from metals and minerals to soft commodities. These now receive the biofuels boost or price "premium" where they could or might be utilized in producing biodiesel or bioethanol. The driver for this is oil prices and energy prices. Oil prices are now both high and extremely volatile, while gas prices are low and extremely volatile. This is a trader's delight but useless for planning and achieving energy transition in an orderly framework.

Simply because market traders and operators considered oil prices "too high" and "unsustainable" after the summer peak of world oil demand in August 2006, oil prices were clipped by about 25 percent in a few weeks, only to increase again with the onset of cold weather in big consumer markets. On the supply side, world oil production and supply is now rigid, stagnant, and inflexible. It is unlinked and disconnected from the demand side. On that side "robust growth" is the reality, albeit denied or countered with misleading data that present world oil demand growth as at "very low rates". In addition, because oil prices were considered "too high" but not amenable to speculative downsizing in summer 2006, this tack shifted to world traded gas, resulting in absurdly low gas prices equivalent in energy terms to oil at about US$17 per barrel.

Apart from blurring public and political understanding of peak oil and peak gas reality and generating huge trading gains for successful market players, this incoherent market-based response to long-term decline in oil and gas supplies, and the urgent need to reduce energy intensity and develop renewables, is totally ineffective and unrelated to real needs. It is even counterproductive in the sense that it gives the impression that "if it's traded it has to exist." This again, however, is a distraction because at any one time the paper contract volumes of traded oil exchanged on world oil markets can be tens or hundreds of times actual world daily oil demand, about 86.5 million barrels/ day on average in 2006, using an "all liquids" base. The oil exists on paper, but not in the production sites, pipelines, and storage tanks. The same applies to a lesser extent but with increasing frequency to world traded natural gas.

The solution is simple and radical: removal of oil and gas from the trading arena. This would require the creation of an international agency, modeled on the International Energy Agency, but including all consumers and major oil and gas producers. It could be called the International Oil & Gas Agency (IOGA), and be charged with deciding and allocating oil and gas supply volumes and prices on a 90-day forward basis. Progressive price increases for internationally supplied (cross-border) oil and gas would be applied by the IOGA which would issue regular notes and information concerning mid-term and long-term oil and gas reserves and production trends.

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