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Perhaps I don't understand you, but isn't this simple hedging? Southwest Airlines, a huge consumer of petroleum products, used gasoline futures markets in order to take the volatility out of its costs. Anyone who is smart enough, and who desires to remove such volatility, can hedge their exposure to rising gasolinie prices. I think that's why the petroleum futures markets developed in the first place, isn't it?

You suggested that the futures contracts should be made between oil extractors and the ultimate consumers of refined petroleum products. Why should that be? Do you believe that an intermediary such as the New York Mercantile Exchange makes such hedging much more efficient? Such an exchange makes it possible for thousands of oil producers, hundreds of oil refiners, and millions of refined petroleum products consumers to all efficiently reduce their risk.

Is it possible, Per, that for many consumers gasoline costs have not been large enough to justify the transaction costs – especially the analysis time – of engaging in fuel hedges? I suspect that will change for some consumers, but most will simply opt for more efficient consumption of energy.

In other words, with gas over $4.00 per gallon, the dollar has lost 60 or 70% of its value.

Maybe I can pay for a loaf of bread soon with a quart of oil!

How should one interpret price "information" when one cannot rely on the value of the accounting unit, the dollar? Is oil going up or is the dollar going down? Are both going up, or both down, but at different rates? I'd look at other commodities., e.g. copper, for the answer.

Absolutely preventable! Where were the consumers willing to commit to a floor in the oil prices in order to have their prices capped and so help to support the oil investments that were needed?

Per, here’s why you should hire me:

1) Wrong. There was zero way to prevent this runup in oil. China has doubled it’s oil consumption every decade since 1990 (exponential). It will surpass us next decade, because China contains 1/6th of the planetary population. China has zero domestic oil supply.

2) Floor: impossible: there is no way to induce private investment unless return is amenable. Oil sucked for 30 years (see below).

3) The oil investments “that were needed” were made: return on investment for the oil industry was the highest of the past 20 years: Oil sucked for 30 years; now its back (and half-government-induced).

Per, there is no way whatsoever that you (or anybody else) could have "prevented" the current situation.

The questions therefore become who 1) understands the current situation (you do not), and 2) which presidential candidate will cause the least harm?

1) Prices incorporate information,

2) This information includes futures, plus spot prices.

Sorry, Name is correct here; the stock mkt predicts (rather innacurately) roughly 6 months out, futures are as published (esp front-month contracts).

Our expectations of oil prices have increased somewhat dramatically. Historical VWAP of spot crude would probably be smooth, and meaningless.

EIA published demand numbers (see above) are far more relevant here….

A question I have not been able to find an answer to is "if you take into account the volume of crude oil that is actually produced and sold (not futures contracts) along with the prices that it is transacted at (including all the contracted prices which may be well below current spot prices), what is the current weighted average price of crude and what would a time series of that weighted average price look like?"

name: "I believe a mechanism like this has existed for some time. It's called the stock market."

And more appropriately the futures market. These markets existed and oil consumers and producers used them. Yet the futures market did not predict the run up we have seen. Of course if it had the spot price would have risen sooner and development of alternative energy sources would be further along. Let's be happy the "speculators" (who take blame from many quarters for the price increase) are making development of alternative energy sources economic. I much prefer that speculators (and the consumers and producers) be "setting" prices than the government. Did the consumers and producers miss the "predictable" trend 5 years ago? Yes, was it preventable if the government had done something? Well maybe but if the government had gotten it right then (and if Per or Mesa were making the call they would have) it would have been random luck. The government will usually not do better than the market – they just don't have the same skin in the game. Sure, you can point to examples where the government outguessed the market but can you point to a government-centered economy that has consistently out performed a market-centered economy?

I believe a mechanism like this has existed for some time. It's called the stock market. You want to make it easier for big oil to invest, buy their stock. Capital ratio strengthens, easier to fund new investment.

If you are arguing that not enough exploration/R&D was done by oil companies, I think that fails the smell test. What could have been done to expand supply is lift Congressional restrictions on drilling.

The costs of these projects are built into the price of oil; artificially inflating this price in hopes of expanding future supply would not prevent what we are currently seeing here. As the price of oil goes up, other substitutes (oil sands, solar, wind, etc.) become more economically attractive.

Unfortunately, I have to step away, but this post could easily be 6 – 7 pages long.

This is not about price controls…indeed they never work. This is about consumers and oil extractors entering into some voluntary long term contracts at prices that make sense for both sides and that permit easier investments taking out part of the volatility in the market.

Um, what?

Why (and how) do you “cap” (or put a floor under) oil prices?

You seem not to understand market economics, Per. You could put floors and ceilings on prices all day long, and somewhere, that price intervention will be absorbed/reflected.

Price controls do not work. They never have.

Absolutely preventable! Where were the consumers willing to commit to a floor in the oil prices in order to have their prices capped and so help to support the oil investments that were needed?

But why should consumers worry about a cap when what was discussed was the lack of a floor?

Great points. Let's remember that this train left the tracks when the party that opposes nuclear, natural gas, coal, oil, and hydro took power in 2006.

Democrats have opposed every single source of abundant energy available to the United States for at least thirty years. When solar power becomes economically viable as a primary source of energy, bet the farm that environmentalists/Democrats will 'discover' a reason why it's a danger to the planet.

I don't recall posting on shale here, but maybe I did. Congress took shale off the table recently, no development at all. I haven't followed shale that closely, but when I did in the 70s in situ retorting was the technology that held the most promise, which didn't use much water. The point to be made is congress has taken it off the table totally no matter what technology is used. The feds grant water permits on federal lands, they allow water to be used in Wyoming coal extraction. They withheld them when a coal slurry pipeline was being proposed. They can and do use judgement. But elimating all research and low level development no matter what is short sighted.

It's not just shale, it's that everything is off limits now, whether it's Cape Wind, a lease that was sold in the 70's that the government renegged on, all outer continental shelf areas except Texas and Lousiana and grandfathered areas of california. It was proposed that 80 miles offshore of Florida's gulf coast be opened. It would be serviced out of Lousiana.

35 years ago the oil companies were accused of capping wells to raise the price, now it's congrss doing the same thing.

We get what we deserve, very high oil prices. There are consequences. Air travel will be unaffordable shortly. Most of the legacy carriers will be out of business. No business model for them tolerates sustained $135 oil. They can't use ethanol. They can't use hydrogen. Only spec Jet A or B.

I am surprised the airline unions aren't pushing those in Congress who are killing their jobs. Perhaps they are. They should.

Time to be reasonable.

There is a simple reason the Saudis have their production levels set where they are: They make the most money at this level.

Right on. The Saudis are masters of that! Petroleum accounts for something like 98% of the country's GDP. The oil ministry hires only the very best, brightest and most educated to maximize revenue by controlling supply (we can debate how effective they are, but that's not the point). This is in their best interest. What makes people think they would suddenly break with the natural human behaviour of acting in one's own self interest? Crazy.

If you don't mind my butting in….

It's true that shale is neither permiable nor porous and that makes the hydrocarbons much more expensive to lift. It requires fracturing the rock and flushing it out with water and maybe other techniques (on which I'm no expert).

When I was an oil analyst in the mid-90's, shale oil required $40/bbl market price to be economic. Albatross, a frequent poster here and much closer to the business of late than I am, informs me that that price has dropped due to advances in technology.

While it's true that water, etc. is required to lift that oil, that's all factored into to the price of recovery. Given this, why wouldn't you lift for $37/bbl and sell for $135/bbl?

Thanks for the numbers, Corky. So, this means that ANWR reserves are calculated on a price which is less than 1/3 the current price. There could very well be much more oil there now (assuming that not all the oil was recoverable at the 1998 price).

Technology needs energy to function. Without energy, there is no technology.

Mesa Econoguy – I think we see things very similarly but would argue a technicality on your above quote. Oil prices have risen because of two factors – supply and demand. The other factors you mention (and the speculation and greed that Thinktwice mentions) are determinants of supply and demand. It is really very simple – and predictable and not preventable. And thanks for pointing out that there is both a buyer and a seller for every "speculative" contract.