As usual Professor Cochrane is spot on. Let the markets work; inevitably government intervention makes adverse conditions worse. Still, count on it happening; modern western societies have no patience and no fortitude to withstand even minor disruptions even for a just cause
1. We were around 4 mm barrels a day oversupplied before the war
2. At least 12mm are shut in now
3. Oil production in the Strait after the war will not just resume like a ball game after a rain delay.
4. If certain GCC wells are plugged, it may damage fragile reservoirs, and take months of work before the flow of oil is restored. In the really bad case, wells are plugged and abandoned.
5. The permanent loss is a function of the duration of the shut in. After a couple of months, wells may be plugged and abandoned.
6. The market is indeed pricing in a short duration to the crisis, but skew and Kurtosis in I plied volatility in the 2-4 month Brent crude options market suggest more fear than the backwardated forward reveals
7. The US threat to hit Iranian infrastructure less selectively is an unquiet inducement to other countries to send ships to the area. The implied threat is “You need Brent oil more than we do! Participate in the solution!
8. The best case, insurance costs for shipping through the Strait will add $ 3 per barrel to the cost Brent crude, perhaps for a very long time. Nightmare case is much higher.
9. In bad outcomes, Brent could blow out to a $30 premium over WTI.
10. New production will come less from US shale (Chastened to capital discipline by history, running out of tier 1 inventory, subject to many lags before production) than say Brazil/ Guyana, Canada, Russia, deep offshore US Gulf. Maybe shale will add a few hundred thousand barrels a day for a few years.
Colleagues? They're a history guy and a military guy venturing ignorantly into economics. That's your field Cochrane. Stick to your guns! Your futures guns.
A forward curve is NEVER a forecast of future prices. It is just the price at you buy or sell Oil at a future delivery TODAY. I am surprised how good and prestigious economist keep getting this so wrongly. Equities have a forward as well, built with rates, repos and dividends, and NO ONE assumes it is a forecast of the share. Regards
The forward market is an expectation of what a commodity, equity or anything else is worth at a specific time in the future and traders bet that they are correct in that the price will be either above or below the current future price. Creating an equilibrium where it is a composite of all actors who have placed bets on what they think the price will be. In that sense it is very much a forecast for prices. It doesn’t mean that it’s correct.
Nice definition. But paraphrasing Wittgenstein about Futures "Don't look at the definition, look at the use". WHY can you TODAY arrange to get oil delivered on that future date at a specific location for nothing more than exchanging pieces of paper ? Therein lies a multitude of forecasts about current supply, future supply, future production, frictions, risk free rates, moronic politicians etc, all to then be translated into reality by people working with the physical world. And as Prof Cochrane has pointed out, currently very few producers seem to be sending their workers out to turn rusty valves to synthesize a long term future/spot commodity package for you to take the other side of. And as others have pointed out, a forecast is just an opinion, most are wrong
Bravos research presented an interesting argument. They said to look at the savings of Americans, arguing that in 2022 Americans had a lot more savings but now we are tapped out.
Nice definition. But paraphrasing Wittgenstein about Futures "Don't look at the definition, look at the use". WHY can you TODAY arrange to get oil delivered on that future date at a specific location for nothing more than exchanging pieces of paper ? Therein lies a multitude of forecasts about current supply, future supply, future production, frictions, risk free rates, moronic politicians etc, all to then be translated into reality by people working with the physical world. And as Prof Cochrane has pointed out, currently very few producers seem to be sending their workers out to turn rusty valves to synthesize a long term future/spot commodity package for you to take the other side of. And as others have pointed out, a forecast is just an opinion, most are wrong.
~25% of US energy comes from renewables. Somehow Prof. Cochrane "forget" about it. Renewable (sun) are faster to build to drilling. Wind was (almost) abolished by the president. Go green quicker and mitigate energy prices faster to any other supply side solution.
It is not instead of oil and oil will dictate the price. Now you have a shortage that you need to close. You reduced sun and wind far too brutally. Open the gate and get what it can give. Efficiency comes with flexibility. The situation changed (the world changed) - change your response
My response is to follow the price signals and use what makes sense. Up to now, in nearly all places and for nearly all applications, solar and wind have been adopted only due to political decisions - either subsidies to make them profitable, or mandates to require their adoption regardless of economics.
If you remove the subsidies and mandates, a regulator might plausibly conclude that renewables are worth some presence in the energy mix, but should do so only after explicitly acknowledging the cost and including them in energy prices, rather than hiding them.
I doubt there are many places where renewables would really merit significant investment.
You seem to believe that there's a link between oil prices and economics of renewable energy. Could you explain that? Renewables are essentially used only for electricity generation, while essentially no electricity is generated from oil.
When the consequences of the proper and correct action for the future of the U.S. and western civilization are relegated to the short term cost of oil, we have become a country of economically illiterate wimps. Allowing Iran to have ballistic missiles and the ability to use a nuclear warhead controlled by a radicle Islamist ideology with the future ability to close the Strait of Hormuz at will seems more of an appropriate discussion, but not a debate.
As usual Professor Cochrane is spot on. Let the markets work; inevitably government intervention makes adverse conditions worse. Still, count on it happening; modern western societies have no patience and no fortitude to withstand even minor disruptions even for a just cause
My understanding is:
1. We were around 4 mm barrels a day oversupplied before the war
2. At least 12mm are shut in now
3. Oil production in the Strait after the war will not just resume like a ball game after a rain delay.
4. If certain GCC wells are plugged, it may damage fragile reservoirs, and take months of work before the flow of oil is restored. In the really bad case, wells are plugged and abandoned.
5. The permanent loss is a function of the duration of the shut in. After a couple of months, wells may be plugged and abandoned.
6. The market is indeed pricing in a short duration to the crisis, but skew and Kurtosis in I plied volatility in the 2-4 month Brent crude options market suggest more fear than the backwardated forward reveals
7. The US threat to hit Iranian infrastructure less selectively is an unquiet inducement to other countries to send ships to the area. The implied threat is “You need Brent oil more than we do! Participate in the solution!
8. The best case, insurance costs for shipping through the Strait will add $ 3 per barrel to the cost Brent crude, perhaps for a very long time. Nightmare case is much higher.
9. In bad outcomes, Brent could blow out to a $30 premium over WTI.
10. New production will come less from US shale (Chastened to capital discipline by history, running out of tier 1 inventory, subject to many lags before production) than say Brazil/ Guyana, Canada, Russia, deep offshore US Gulf. Maybe shale will add a few hundred thousand barrels a day for a few years.
Apologies, meant this as reply to OP
> Prices still affect us, but we gain income.
The expenses on the war, the downstream increase in prices (e.g. Plastic we buy from China is now expensive) etc. are worth this income ?
Colleagues? They're a history guy and a military guy venturing ignorantly into economics. That's your field Cochrane. Stick to your guns! Your futures guns.
A forward curve is NEVER a forecast of future prices. It is just the price at you buy or sell Oil at a future delivery TODAY. I am surprised how good and prestigious economist keep getting this so wrongly. Equities have a forward as well, built with rates, repos and dividends, and NO ONE assumes it is a forecast of the share. Regards
The forward market is an expectation of what a commodity, equity or anything else is worth at a specific time in the future and traders bet that they are correct in that the price will be either above or below the current future price. Creating an equilibrium where it is a composite of all actors who have placed bets on what they think the price will be. In that sense it is very much a forecast for prices. It doesn’t mean that it’s correct.
Nice definition. But paraphrasing Wittgenstein about Futures "Don't look at the definition, look at the use". WHY can you TODAY arrange to get oil delivered on that future date at a specific location for nothing more than exchanging pieces of paper ? Therein lies a multitude of forecasts about current supply, future supply, future production, frictions, risk free rates, moronic politicians etc, all to then be translated into reality by people working with the physical world. And as Prof Cochrane has pointed out, currently very few producers seem to be sending their workers out to turn rusty valves to synthesize a long term future/spot commodity package for you to take the other side of. And as others have pointed out, a forecast is just an opinion, most are wrong
Bravos research presented an interesting argument. They said to look at the savings of Americans, arguing that in 2022 Americans had a lot more savings but now we are tapped out.
Nice definition. But paraphrasing Wittgenstein about Futures "Don't look at the definition, look at the use". WHY can you TODAY arrange to get oil delivered on that future date at a specific location for nothing more than exchanging pieces of paper ? Therein lies a multitude of forecasts about current supply, future supply, future production, frictions, risk free rates, moronic politicians etc, all to then be translated into reality by people working with the physical world. And as Prof Cochrane has pointed out, currently very few producers seem to be sending their workers out to turn rusty valves to synthesize a long term future/spot commodity package for you to take the other side of. And as others have pointed out, a forecast is just an opinion, most are wrong.
~25% of US energy comes from renewables. Somehow Prof. Cochrane "forget" about it. Renewable (sun) are faster to build to drilling. Wind was (almost) abolished by the president. Go green quicker and mitigate energy prices faster to any other supply side solution.
"Go green quicker and mitigate energy prices faster"
Yes, you don't have to worry about fossil fuel price fluctuations because you've locked in high prices.
It is not instead of oil and oil will dictate the price. Now you have a shortage that you need to close. You reduced sun and wind far too brutally. Open the gate and get what it can give. Efficiency comes with flexibility. The situation changed (the world changed) - change your response
My response is to follow the price signals and use what makes sense. Up to now, in nearly all places and for nearly all applications, solar and wind have been adopted only due to political decisions - either subsidies to make them profitable, or mandates to require their adoption regardless of economics.
If you remove the subsidies and mandates, a regulator might plausibly conclude that renewables are worth some presence in the energy mix, but should do so only after explicitly acknowledging the cost and including them in energy prices, rather than hiding them.
I doubt there are many places where renewables would really merit significant investment.
You seem to believe that there's a link between oil prices and economics of renewable energy. Could you explain that? Renewables are essentially used only for electricity generation, while essentially no electricity is generated from oil.
When the consequences of the proper and correct action for the future of the U.S. and western civilization are relegated to the short term cost of oil, we have become a country of economically illiterate wimps. Allowing Iran to have ballistic missiles and the ability to use a nuclear warhead controlled by a radicle Islamist ideology with the future ability to close the Strait of Hormuz at will seems more of an appropriate discussion, but not a debate.