Transition through Gas
- 1. Transition through Gas 21 st Century Resilient Energy Markets Chris Cook IIES Conference, 1 st November 2011
- 2. 21 st Century Problems cannot be solved with 20 th century solutions
- 3. End of an Era In October 2008 Western 20 th century financial markets died The 20 th century oil market is about to follow it A combination of greed and the direct connections of the Internet have killed it How did this happen? What comes next? … .and what does this mean for Iran?
- 4. In the Beginning 1992 - Goldman Sachs create the Goldman Sachs Commodity Index (GSCI) Fund GSCI makes a long term investment in several commodity markets, particularly crude oil GSCI was sold to risk averse investors as an 'inflation hedge' Investors offload the risk of owning dollars and take on the risk of owning oil
- 5. Direct Investment in Oil GSCI was the first of a new breed of funds making direct investment in commodities These funds do not speculate – taking risks in search of transaction profit They are risk averse – they wish to avoid loss and preserve wealth Their motivation in trading is not the same as other participants
- 6. 1995: a Marriage made in Heaven As an oil producer BP 'hedges' oil prices by selling oil forward, and exchanges oil risk for dollar risk GSCI fund has precisely the opposite position BP began lending oil to GSCI, in return for an interest-free loan in dollars from GSCI Part of BP's inventory is now – unknown to the market - 'owned' by GSCI This is Dark Inventory
- 7. Dark Inventory Knowledge of the existence of Dark Inventory is privileged 'asymmetric' information to traders Oil is owned by the investor, not the producer, who is merely the custodian Conventional traders and speculators mistake financial demand for real demand
- 8. 2008 – End of the Beginning Global oil demand by consumers was approaching available supply Financial demand by investors and met by producer leasing led to a price bubble This led to demand destruction, and after a spike to $147/bbl the price collapsed to $30/bbl Producers were damaged: to reinflate the price was urgently necessary
- 9. 2008/9 - Printing Oil 2008 Credit Crash – Federal Reserve Bank sets zero interest rates and prints dollars (QE) Investors rush out of dollars and into gold, commodity and oil funds.... anything but dollars Who is printing oil and creating Dark Inventory to satisfy this massive demand?
- 10. 2009 until March 2011 OPEC members 'comfortable' with price Oil and natural gas prices diverge from historic relationship – Gazprom is not comfortable Oil Price is effectively pegged between two levels – a cap and collar Through leasing oil to meet financial demand, producers may limit (cap) prices Through oil market purchases producers may support (collar) prices
- 11. Oil and natural gas prices part company
- 12. 2009 through 2010 – oil is 'pegged' in a range
- 13. Twin price shocks Libya - supply shock Fukushima – demand shock Speculators enter the market Price spikes to over $125/bbl and kills demand Speculators leave the market in June March 2011 - Beginning of the End
- 14. 2011 – Speculators come.....and go
- 15. Federal Reserve Bank completes its QE programme of printing money to buy debt The Dollar Pump is switched off New Dark Inventory ceases to be formed Lower financial demand for oil depresses the future price......a market Backwardation June 2011: the Dollar Pump Stops
- 16. In September 2011 $9bn of index fund money pulled out of the market An increasing glut of products eg fuel oil, naphtha The market has gone over a cliff, and no real demand is holding it up When it looks down.......... … .........an Oil-e-Coyote moment The End - an Oil E.Coyote moment?
- 17. Goodbye to the 20 th Century oil market
- 18. 21 st Century Investment – Energy Units Direct investment in flows of energy (Mega Watts MMBtu, litres of gasoline) through Energy Loans Direct investment in Energy Savings – Nega Watts and Nega MMBtu through Energy Loans Renewable energy & energy savings are free Value is received now in exchange for valuable Units which cost nothing to redeem Units are exchanged and redeemed within an Energy Clearing Union – a Framework of Trust
- 19. 21 st Century Investment - Nondominium Nondominium is the 21 st Century associative legal framework within which Units are issued Asset owned by custodian Payment made for the use of the asset Manager shares in the flow of use value Balance of flow is available to create Units Units are investments in the asset not the owner
- 20. Transition through Gas – a Low Carbon Transition Plan for Iran
- 21. Transition in Iran Step One - unitise Natural Gas
- 22. Step Two – increase domestic prices to Caspian global benchmark level
- 23. Step Three – an energy dividend of Units is made to Iranians
- 24. Step Four – massive energy loan investment in Iranian renewable energy
- 25. Step Five – a national programme of Energy Loan investment in Energy Savings
- 26. Energy Diplomacy – through the Caspian Golden Gate
- 27. Caspian Foundation (Custodian) Investors Payment Units Services Energy Managers Littoral States Step One – Caspian Nondominium Investment
- 28. Step Two – Caspian gas benchmark price
- 29. Step Three – Energy Clearing Union ECO -> Eurasia -> Global
- 30. Step Four- rather than pricing oil in dollars, and gas in oil.... price dollars and oil in gas