Wednesday, May 14, 2008

Crude Oil price and UFO - a conspiracy theory

UFO? Oh, now I got your attention. No it’s not the UFO you think – Unidentified Flying Object.
It’s Unidentified Financial Organization.

Well, all is saying Oil price has been rising because the emerging market (namely India and China)’s rising demand caused it. Well, the thing is neither India nor China is “new” emerging market, both of them have been “emerging”. Saying in the past 6 years, the whole world gradually realized India and China were emerging is an insult on human kind’s intelligence – at least.

And while US energy consumption is dropping, the Oil price continues to set new record highs. And US is still the biggest consumer of Oil, so the link between demand and supply seems not so convincing here.

One more piece of evidence is OPEC actually claims some of their member is struggling to find buyers of their Oil.

OMG! If the theory of supply and demand relationship determines price holds true, should the price come down, so that people who want to sell, can make a deal?

Common wisdom seems not so wise here J

OK, here is my theory.
With Oil price rising for the past 6 years, it became common knowledge that to swing Oil price up, you adjust supply. You don’t need to stop Oil production altogether, you only need to reduce the output marginally, so that supply is lower than demand.

So when supply and demand are relatively balanced, you only need a small amount of supply reduction, to cause some buyer to pay more to avoid being the one who can’t fill their demand, and given the essential status of Oil, it’s likely that lots of buyers are willing to pay more rather than be left out.

It’s not only a theory, it’s reality too. We know that OPEC actually only output less than 50% (in average about 40%) of world’s Oil production, and adjustment of their output by less than a million dollar barrel a day which is less than 2% of total output of crude oil in the world, they can swing Oil price heavily.

However, this time around, it might not be OPEC who is flirting with record Oil price. There were various studies suggesting Oil over 50$ - 60$ USD means lots of alternative energy sources will economically sound. And my maintaining Oil price around 60$, OPEC can maximize their money inflow, while still keep “alternative” energies at the bay – as soon as those alternatives go into mass production, the cost of those are likely to drop and people may opt for the alternative rather than 60$ Oil.

That means Oil price so high (as the writing it’s over 126USD), it’s actually against OPEC’s long term interest.
OPEC’s complain about some member cannot find buyers of their Oil production is an early indication of the troubles ahead.

Indeed, China – one of the “emerging” country that sighted repeatedly by market participants is the most advance market in terms of Alternative energies like solar power.

Is it possible that OPEC countries cannot resist the temptation of 200$ Oil? Maybe, however you got to realize that lots of the OPEC countries are monarchy or semi-monarchy, and they do care more about their descents than most of the “democratic” countries. Besides, their big money hired economists would have definitely done the calculation for them.

And finally their complain about members can’t find buyers for their Oil, shed a light on why they are not eager to increase production – it’s no use, if at current production level, there are excess supply, increase supply will simply make it worse for all OPEC members, because while price is high, there will be more Oil sitting and waiting for buyer.

So what’s going on here? You may ask. The buyers don’t like it, the sellers’ are hurt from it, and why the price still sits there?

Well, here is where UFO comes in.
There are Unidentified Financial Organizations, who noticed a small supply adjustment can swing the price of Oil significantly – they noticed how Saudi Arabia did that in the past.
They also noticed the demand and supply of Oil is GRADUALLY getting balanced as the steady rise of demand in emerging market is nothing unpredictable.
They figured out, if Saudi can swing the price by adding or reducing a fraction of supply, what can’t WE do that?

Yes UFO does not produce Oil, however, everyone can buy Oil.

UFO with trillions of dollar in their pocket, can stock up Oil by purchasing it. And function as “dummy” demand, drives up Oil price, during the course, they can rolling sell and buy Oil to make money. And because they now function like a counter-Saudi Arabia, they know where the Oil price is going, so they can make lots of money out of it.

Why there are OPEC countries can’t find buyer for their Oil? Because UFO works in future market more than real market, when they gouge the price, they may need to purchase excess future that they don’t really need or can’t sell, they will simply void those excess future they bought and the real Oil producer will stumble to sell the real product cause they cannot simply void the physical barrel of Oil when UFO voids their future contract.

So, who are those UFO? I don’t know. I know they are very wealth, very strong and with lots of money.

It does not look like a government’s deed, because the effects of these actions are beyond borders. And the effects are relatively hard to predict compare to other means governments can exercise.

What sees to be true is they have infiltrated many governments, media and investment houses. There are numberless reports citing “emerging” markets, “resilient” US markets, etc which are all true but were also true when Oil was 26$/bbl.

All in all I don’t think it’s a bad thing fro Oil consumers and hopefully the earth. As Oil price so high, many many alternative energy businesses are lucrative. And much cleaner cars are been adopted in US and Europe at unforeseen pace.

Things like nuclear power are back on to agenda. While we still think nuclear is unsafe, Oil burning pollution and green-house-gas, are killing us anyways, how much worse can nuclear be? At least it does not emit Green-house-gas and only kills us in accidents, rather than gradually kill up non-stop like Oil consumption.

“Dear UFO,
If you happen to see this article, please forgive me. I have no intention to portrait you as a dark force; I actually think you are doing a good thing for all of us.
And no one will believe me anyways so I don’t think this will stop your money making machine.
So please don’t send in your commando to kill me.

Worship you.”