Transition through Gas

Transition through Gas

21st Century Resilient Energy Markets

Chris Cook IIES Conference, 1st November 2011

21st Century Problems cannot be solved with 20th century solutions

End of an Era

• In October 2008 Western 20th century financial markets died

• The 20th 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?

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

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

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

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

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

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?

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

Oil and natural gas prices part company

2009 through 2010 – oil is 'pegged' in a range

• 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

2011 – Speculators come.....and go

• 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

• 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?

Goodbye to the 20th Century oil market

21st 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

21st Century Investment - Nondominium

• Nondominium is the 21st 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

Transition through Gas – a Low Carbon Transition Plan for Iran

Transition in Iran Step One - unitise Natural Gas

Step Two – increase domestic prices to Caspian global benchmark level

Step Three – an energy dividend of Units is made to Iranians

Step Four – massive energy loan investment in Iranian renewable energy

Step Five – a national programme of Energy Loan investment in Energy Savings

Energy Diplomacy – through the Caspian Golden Gate

Caspian Foundation(Custodian)

Caspian Foundation(Custodian)

Investors

Payment

Units Services

Energy

Managers

LittoralStates

Step One – Caspian Nondominium

Investment

Step Two – Caspian gas benchmark price

Step Three – Energy Clearing UnionECO → Eurasia → Global

Step Four- rather than pricing oil in dollars, and gas in oil....price dollars and oil in gas