On Energy Source this week:
© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
UNG is confirming it will continue expanding its holdings via the over-the-counter market and even energy markets other than gas to expand its holdings after running out of shares by hitting the CFTC-imposed limit in June:
U.S. Natural Gas is most likely to increase its use of over-the-counter products, Mr. Hyland said. The fund already has about 5% of its assets in swaps, in which the fund enters an agreement with a counterparty that yields a return in line with natural gas prices. Read more
Ed Morse, managing director of LCM Commodities, is one of the few oil market pundits saying oil prices will not shoot up at any sign of demand.
Writing in the upcoming September/October issue of Foreign Affairs, he cites several reasons, according to Reuters:
One is demand suppression, as a result of those high prices last year:
“One extraordinary lesson of the last 60 years is that after every spike in oil prices, demand growth flattens considerably.”
And demand recovery will be slow:
As consumers scale back consumption, global oil demand will probably grow 1 to 1.3 percent a year, versus a growth rate of 1.5 to 1.8 percent last decade, wrote Morse, a former U.S. State Department energy official.
Oil prices rose on Friday but base metals were mixed and sugar prices staged a modest correction as commodity markets paused for breath after strong gains in the previous session.
In energy markets, Nymex September West Texas Intermediate rose 28 cents to $70.80 a barrel while ICE September Brent gained 47 cents at $73.95 a barrel. Read more
Is avoiding climate change just too expensive?
Answering this question depends very on how much you think climate change itself will cost, and how much you think avoiding climate change will cost - along with difficult moral and philosophical matters such as concern for future humanity.
One of the best known attempts to quantify this is the Stern Review, which estimated that climate change could end up costing 5 – 20 per cent of global GDP per year, but would only cost 1 per cent of GDP to avoid (Lord Stern later revised these numbers, saying 2 per cent of GDP is needed to avoid climate change, and without this, the effects could be even worse than he previously thought).
Enter Bjorn Lomborg. Best known as a climate change sceptic, he now says an agreement on climate change at Copenhagen in December is crucial. But he’s not entirely going with the mainstream just yet: he believes the dominant approaches to climate change are too expensive, so the latest project of his Copenhagen Consensus Center is to publish a series of papers on the best ways to spend $2,500bn over the next 10 years, and then ask five leading economists to choose the best option.
The latest of these papers is likely to be one of the most controversial. Richard Tol, an energy economist at Dublin’s Economic and Social Research Institute and a member of the Intergovernmental Panel on Climate Change, estimates that the costs of most climate-change mitigation programmes vastly outweigh the benefits the world would gain.
Tol came up with five scenarios for how to spend that money (some scenarios spent more or less):
Tol came up with five scenarios for spending $2,500bn over 10 years:
1. A $750/tonne carbon tax introduced only in the OECD, over 2010 – 2019. Cost per dollar of benefit: >$100. Carbon concentration: about 875ppm
2. A $250/tonne carbon tax inroduced worldwide, over 2010 – 2019. Cost per dollar: $100 Carbon concentration: about 750ppm
3. As for number 2, but continuing the carbon tax throughout the century (thereby spending far more than the $250bn). Cost per dollar: $50. CO2: 450ppm
4. A $12/tonne carbon tax, the proceeds of which are invested in a trust fund for 10 years, to finance a century-long programme of emission abatement. Cost per dollar: $4. CO2: 650ppm
5. A $2/tonne carbon tax, the proceeds of which are invested in a trust fund as above. This spends only $12.5bn. Cost per dollar: 66c. CO2: 850ppm.
One important note about the scenarios: apart from scenario 1, they all assume a uniform, worldwide tax on carbon across all sectors. There’s really almost no chance of this happening any time in the foreseeable future, let alone from next year – for anything like this to play out in reality, those costs would have to be concentrated in some countries. Read more
One of the main points Bjorn Lomborg makes in the current round of Copenhagen Consensus papers, particularly Richard Tol’s report, is that focusing on reducing carbon dioxide emissions (particularly in the developed world) is unnecessarily expensive.
They are far from alone in this argument, and three papers published alongside Tol’s are likely to find a more welcome response. The papers argue that climate change can be more cheaply avoided by pursuing forestry projects, tackling soot or “black carbon”, and reducing methane emissions. None of these approaches on their own would be enough to avoid dangerous levels of climate change, but all three fare far better on the savings per-dollar-spent approach used in Tol’s paper, than simply reducing carbon dioxide emissions through efficiency and renewable energy. Read more
US politicians first complained about the ‘London loophole’ in oil futures regulation last year, saying that because the London-based ICE Europe exchange was outside of the regulatory reach of US watchdogs it was potentially ripe for speculator abuse.
Now, data published by the CFTC suggests that positions held by “commercial” traders – who buy or sell oil for their own business purposes – are better represented amongst London-based ICE Europe Futures exchange than among New York-based Nymex. Read more