John Hofmeister, former president of Shell Oil USA, was opining on cable TV on Friday about the rebound of the oil industry and the need for prices to stabilize, saying “the volatility is killing the industry”. Like many, he notes that price volatility makes planning, investment and operations difficult. This is a common complaint, not just among petroleum companies but governments of both oil importers and exporters.
As far back as 1986 I found myself arguing that “volatility” had become a code word in the petroleum industry, with no one really interested in stability. Rather, consumers wanted low prices, even if volatile, and producers wanted high ones. (Shocking, I know.) That still holds true. No airline executive will complain if prices are volatile around $40, and no oil company CEO will lament volatility that is centered on $100.
The debate about volatility revived in 2000, after a price collapse in 1998 to $12 followed by a spike above $30, something negative for everyone. The insufficiency of global energy data was highlighted in 1998 by what David Knapp (an old friend, then at the International Energy Agency) coined “missing barrels”. (I call them Knapps.) This referred to the fact that there was more oil was thought produced than thought consumed on going into inventories. Organizations like the IEA refer to the discrepancy as “miscellaneous to balance” and it often accounts for more than 1 mb/d.Click here to continue reading this article.
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