Modern Energy Plans and Solutions

1. Modern Energy Plansand Solutions Lecture 7 (continued)

2. Oil Speculation • Almost immediately, the energy markets were flooded with trades that had little to do with the actual demand of energy, but increasingly with futures trading based on global geo-politics, socio-economic inter-dependencies, and large hedge fund manipulations trading between the traditional stock market and the newly created energy markets.

3. Oil Speculation • The net result is an artificial market that increasingly has little to do with the demand for energy, but rather the opportunities short term energy contracts offer the investor in a politically and economically challenged global market place – i.e. “a hedge” against stock/bond market fluctuations • The resulting model has caused great instability in the domestic energy markets – WHY?

4. Oil Speculation • Investors now can use the oil market and the equity market as an investment vehicle. • In so doing, they can manipulate futures with an excessive influx of capital that is never intended to “buy” and take “delivery” of products, but rather to drive the price up/down within a given range so that profits can be realized in the selling of those contracts to the “end user” buyers (i.e. the oil companies) • Example: A tanker full of oil could leave a port in the middle east and the contents of that oil would be traded numerous times while in transit depending on geo-political, economic, or speculative factors. If conditions are not right for the speculator, the tanker will sit idle for weeks, months, without unloading to a final buyer. • Example: Crude oil, or bulk refined products are “hoarded” and stored on tankers, tank farms, railroad cars, across the world until market conditions are favorable for speculative moves to finally sell these commodities to an end user for a profit. • Both these scenarios can/could cause artificial shortages and over-speculation in a strategic international market

5. Oil Speculation • Contrary to popular belief, oil companies do not control the price of oil. They develop the oil fields, but then sell the oil through the international spot oil market. • Quite often oil companies develop and also refine oil. In such instances, they are still using the international spot oil market to handle their internal company transactions • It’s the market that sets the price of oil. • Example: If a Chinese refiner is willing to pay a higher price than a US refiner for US WTI crude oil, the spot oil price will increase based on market demand. • Historically, refiners have used the international market to buy/sell their products to wholesalers and retailers • The new “investment” and “hedging” oriented speculators have introduced much volatility in this traditional market by causing artificial price fluctuations, surpluses/shortages, and demand inconsistencies.

6. Oil Speculation • Given this increase of outside speculation in the oil/gas markets, fundamental economic commodity pricing indicators and practices are now much more susceptible to political and social turmoil than before. • Why!!

7. Oil Speculation • “short selling” - Short selling is the selling of a security or commodity that the seller doesn't own. It’s effectively borrowed from a broker (hence the name – “short”) • The shares are sold and the proceeds credited to the seller’s account. At some point those shares need to be replaced to the broker. • If, when replacing the shares (covering) the price is lower than the original borrowed price, the seller makes a profit. If not, it’s a loss to the seller NOTE: • Conversely – “long selling” is the opposite of “going short”

8. Oil Speculation • Shorts/Longs from many new capital sources have significantly increased the money flow into these markets. As a result we see increased volatility in the commodities markets across the board. • All this new “froth” (new money and new investors) in the commodities market makes traditional investors very “skittish”. • Hence, prices tend to fluctuate wildly, and that translates directly to retail prices at the pump and the grocery store.

9. Oil Speculation • As a transportation planner and/or logistician, your future job description and duties will most likely include a working knowledge and understanding of the commodities markets (and the oil futures market in general). • Be prepared! Do your homework, and follow the daily news and the markets as a matter of course.

10. Hydraulic Fracturing • “Fracking” has been understood since the late 40’s, but it wasn’t until the late 90’s that the technique was refined to make extraction economical • Fracking made oil/gas fields that had been tapped out of free flowing oil/gas viable and economical again – VERY ECONOMICAL!! • Fracking made it possible to develop oil/gas resources in terrain and geology that was previously thought to be impossible to extract at a profit • In 10 short years, the technique has made the US a leader in the global energy market.

11. The Future • Recent reports suggest that by using oil/gas Fracking technology, clean coal, alternative energy, and nuclear sources, the US could be energy independent by 2020 • IS THIS A REALISTIC VIEW? • Maybe yes, buy the US will need to change the legacy “Rockefeller” and “Getty” oil business model.

12. The Future! • Gas is significantly cheaper in the mid-and southwest than the east coast. – Why? *Hint: It’s not a tax issue – the problem lies much deeper and is rooted in the old Rockefeller model.

13. The Future! • Our current pipeline infrastructure is based on the old Rockefeller, WWII, and early post WWII designs that serviced the oil industries of the day. • This infrastructure has not been updated since the 1970’s (environmental concerns, political agendas, and cost are among the factors)

14. The Future! • As a result, east coast refiners don’t have the capacity, and are not connected to a large enough pipeline system to meet the growing needs of these growing east coast population centers • Hence east coast refiners and distributors are forced to purchase higher cost Brent Crude from Europe and a large amount of Gasoline blend stocks from Europe and South America • This model is not viable for US energy independence!

15. The Future! • The oil/gas pipeline infrastructure needs to be expanded to new areas of supply (i.e. North/South Dakota, Minnesota, and Canada) • Refineries need to be built closer to these new areas of supply • Yet political and environmental lobbies are against these expansions

16. The Future! • Assume that the US can produce enough oil/gas volume to effectively meet its total energy needs • In a global market, what is the effect on this energy production? Will prices drop?

17. The Future! • Some experts believe that it’s better to leave US energy resources in the ground until such time that a comprehensive US energy policy can ensure that US based production will stay in the US and that the pricing of those resources reflects a domestic model that favors the American consumer versus a global spot market price.

18. Next week • Alternative energy models in domestic transportation • Production efficiencies in doemstic transportation • Infrastructure improvements