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Transition through Gas


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A presentation made in Tehran on 2nd November at the 15th International Conference of the International Institute for Energy Studies.

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Transition through Gas

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