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Anatomy of a Market Collapse,

The Demise of Petroleum


by Steven J. Smith

Preface
Can you imagine a future where light sweet crude oil sells for $5.00 a
barrel, with natural gas priced equivalently? And neither are used as
fuel or heating, but used exclusively as chemical feed stocks. A future
where electricity costs a tenth of a penny per kilowatt hour. And there
are no transmission wires or massive storm related power outages,
because electrical energy is generated where its used. A future where
global warming and smog are only mentioned in the pages of history
books. A future with no American or British solders in the middle
east, because nobody cares what happens to middle east oil. Can you
imagine that future?

1.0
Introduction:
In late December 2006, the author was contacted by two business men (Peter & Jeff)
who wished to manufacture electrical generators, based on the Magneto-
Thermodynamic generation (MTG) principle (see companion paper entitled Magneto-
Thermodynamics, parts 1, 2, & 3). Unfortunately, the parties involved were unable to
reach a mutually acceptable agreement, however oil markets did react swiftly and
strongly to the potential competition. Starting on January 3rd, as the parties entered into
negotiations, during one of the coldest winters in recent history, the benchmark price for
light sweet crude oil suddenly dropped by nearly 16% in just 9 trading sessions, then
started rising when it became apparent the parties would be unable to reach an
agreement.

As the trading charts and supporting documentation (below) will illustrate, crude oil
market price movements were closely correlated with events surrounding the authors
unsuccessful negotiation. This tight correlation graphically demonstrates the level of
anxiety major oil market participants experience, at the prospect of competition from
MTG technology.

1.1
Market dynamics:
For those readers who are unfamiliar with commodity market trading, this section is
included as a short tutorial on market dynamics.

Most people understand that a market (such as crude oil) moves up or down in response
to changing realities in the physical environment. For instance political instability in a
major producing nation will cause the price to rise, and conversely, large inventories in
a consuming nation will cause the price to fall. Less understood or appreciated are the
actual timing and mechanisms of price fluctuation. One might assume that market price
reacts to events as they unfold, and if no prior information is available this is exactly
what happens. However, if information is available prior to the actual event, then
market price reacts based on that knowledge, even though the event has yet to take
place. This may seem counter intuitive, but consider the following example.

Suppose you own 100 shares of XYZ corporation, and the CEO of XYZ corporation
holds a press conference, during which he announces that sales of XYZ products are
expected to decline next year.

What are you going to do?

Will you wait until next year to sell your shares in XYZ corporation, or will you sell
them now? Of course you'll sell now, because you don't want to be the last person to
sell, and thereby take a loss on your investment. In other words, the price of XYZ
shares will start to drop the very moment the announcement is made (by the CEO), even
though the event (decline in sales) wont take place for many months. In economics, this
is known as the "Efficient Market Theory" and is stated as follows: "Prices fully reflect
all known information".

Next, markets are NOT homogenous. There are a few major participants, and many
thousands of minor participants. Generally, the major participants have a legitimate
business interest in the commodity being traded, rather than a purely speculative
interest. For instance, a breakfast cereal manufacture has a very real interest in corn and
wheat commodity market prices. Therefore a small number of major participants might
represent 80% of trading activity, while the thousands of minor participants may
account for only 20% of trading activity.

Suppose a few major participants have knowledge of an event that will significantly
impact market pricing at some future date. What will happen? Since these few major
participants are, by virtue of their size, capable of creating significant price movements,
market valuation will quickly change for little or no apparent cause. And all the smaller
participants will be caught off guard, wondering "what happened!!!".

To summarize:

• Current market price reflects all known current AND future factors, that will
impact valuation.
• Market price may change suddenly and significantly with no apparent cause,
based on information known only to a few major participants.

1.2.1
The direct evidence:
Chart 1 (below) shows trading activity on the March 2007 NYMEX crude oil contract
from October 2, 2006, through February 2, 2007.
Chart 1

As can be seen, for three consecutive months (until January 3, 2007), trading activity
was confined to a narrow price range, seldom trading above $65.00 or below $62.00 a
barrel. The next chart (below), is an expanded and annotated version of the last portion
of chart 1.
Chart 2

Chart 2 shows the rapid and unexpected decline in crude oil prices, as the parties
entered into negotiations starting on January 2, 2007. Followed by a slower rise,
starting January 17, 2007 as it became increasingly apparent the parties would not be
able to reach an agreement. These annotations clearly illustrate that fluctuations in
market pricing correlate rather precisely with key events during negotiations. And
while an agreement to commercialize MTG technology would not result in immediate
displacement of oil and gas as dominate energy sources. Such is the nature of market
dynamics (see section 1.1) and the potential of MTG, that major market participants
reacted swiftly and decisively.

The sequence of events shown in chart 2, raises several interesting ancillary questions.
For instance, how did these major market participants obtain what was supposed to be
confidential information, known only to the negotiating parties? It would seem
industrial espionage is alive and well in America, and has little regard for laws against
wire tapping, or email interception. The next question is more subtle. How did these
major market participants know that negotiations were in progress? Apparently
surveillance of the author is an ongoing endeavor. A review of website access logs will
substantiate that many of these major participants visit this website on a regular basis.

Click Here to view list of energy related visitors to this website (link opens in a new
browser window).
Click Here to view list of foreign government visitors to this website (link opens in a
new browser window).

One final question is deserving of contemplation. How can these major market
participants know that MTG technology will (when commercialized) have such a
dramatic impact on energy markets, or for that matter, will even work? Perhaps the best
way to answer this question, is to turn it inside out. In other words, why would these
major market participants react so swiftly and decisively, without compelling evidence
to support their actions? The petroleum industry is conservatively estimated at
$500,000,000,000 dollars per year (wholesale). The industry retains some of the best
scientists and engineers available at any price. One may safely conclude these scientists
and engineers have told their employers that MTG represents a very real threat to the
continuing dominance of petroleum as the worlds leading energy source.

1.2.2
The indirect evidence:
During the authors unsuccessful negotiations, certain indirect indications of concern on
the part of major market participants were also observed. In order to make sense of
these indirect indications, the reader must have an understanding of exactly where
America obtains its imported oil. Chart 3 (below) shows typical US oil imports by
country of origin.

Chart 3 - courtesy US Department of Energy (DoE)


As chart 3 illustrates, nearly 50% of American imports are derived from just three
producers: Canada, Mexico, and Saudi Arabia. These nations will suffer the largest
and most immediate impact, if MTG is commercialized. Along with these nations, we
can also expect the American government to show concern, since a large segment of its
revenue is derived from the (hidden) taxation of petroleum. The table (below) shows
selected website visitors, starting on January 3, 2007, and ending on January 27, 2007.
A 24 day period coinciding with the negotiation period shown in Chart 2 (above).

Selected Website Visitors - January 3, 2007 through January 27, 2007


IP Address Date Website Visitor
Wed Jan 03, 12:11:37 Pentagon HQDA (HQ Department of
141.116.10.13
PM the Army)
Thu Jan 04, 02:38:55
212.138.64.176 Saudi Arabian Government
AM
Fri Jan 05, 05:34:19 Canadian Customs and Revenue
198.103.184.76
AM Service
Fri Jan 05, 11:17:18
140.80.199.91 Bank of Canada
AM
Fri Jan 05, 01:50:12
140.80.199.91 Bank of Canada
PM
Mon Jan 08, 12:18:59
212.107.116.246 Saudi ISP
AM
Mon Jan 08, 07:31:20
140.80.199.91 Bank of Canada
AM
Mon Jan 08, 01:03:24
192.108.124.40 See Note 1 (below)
PM
Wed Jan 10, 07:18:50
140.80.199.91 Bank of Canada
AM
Wed Jan 10, 10:07:22
140.80.199.91 Bank of Canada
AM
Thu Jan 11, 11:52:41
12.2.142.7 Caterpillar Corp.
AM
Fri Jan 12, 10:15:09 Travelers Financial Services (Saudi
204.117.78.97
AM Owned)
Mon Jan 15, 07:20:01
192.249.47.8 United Technologies
AM
Wed Jan 17, 02:31:23 UK Military (Defence Evaluation &
146.80.9.65
AM Research Agency)
Wed Jan 17, 05:08:31
192.102.214.6 UK QinetiQ (Defence Contractor)
AM
Wed Jan 17, 10:45:18
140.80.199.91 Bank of Canada
AM
Thu Jan 18, 04:48:38
213.42.21.77 Arab Emirates - UAE
AM
Thu Jan 18, 08:57:10 Canadian Customs and Revenue
198.103.184.76
AM Service
Thu Jan 18, 12:10:12
12.2.142.7 Caterpillar Corp.
PM
Fri Jan 19, 06:25:31 Dominion Engineering, Inc. (Nuclear
66.95.35.98
AM Power)
Fri Jan 19, 10:55:07 US Army - Special Operations
209.22.224.49
AM Command
Fri Jan 26, 07:38:25
217.117.207.132 Deka Bank (Luxemburg)
AM
Fri Jan 26, 01:14:32
132.58.234.102 US Air Force (Nellis AFB Nevada)
PM
Fri Jan 26, 02:20:17 Pentagon HQDA (HQ Department of
141.116.98.164
PM the Army)
Sat Jan 27, 04:20:18
198.36.32.25 Saudi Arabian Oil Company (Aramco)
AM
Sat Jan 27, 12:08:40
86.57.245.39 Republican Association (Belarus)
PM

Notes: 1. US Army, Tobyhanna Depot, C4ISR (Command, Control, Communications,


Computers, Intelligence, Surveillance, and Reconnaissance).

Please note the six visits from Bank of Canada (Canadian central bank), with the last
visit on January 17. Compare this last date with Chart 2 (above). Also note the four
visits from Saudi Arabia and Saudi owned business interests. The heavy equipment
companies (Caterpillar and United Technologies) derive a significant portion of their
profits from manufacture of engines that use oil as their energy source. The US and UK
military visits also lend credence to an atmosphere of apprehension over the potential
demise of oil as a strategic energy source (vis-a-vis Iraq), and as a continuing source of
tax revenue. The visit from Belarus is a bit puzzling, until one remembers that Belarus
and Russia were having a serious disagreement over pipeline right-of-ways and energy
pricing during this time frame. No doubt there were other petroleum related visitors
during this period, however they had the foresight to use untraceable internet IP
addresses. Finally, there was one further visit from the Bank of Canada, on February
12, 2007. A day when the price of oil dropped by $2.00 a barrel from the previous days
closing price.

To put these visitations in perspective, the reader should remember this is NOT a high
profile website, and on average receives just 30 to 40 visitors per day. All the more
remarkable that it should attract so many prestigious visitors in such a short period of
time.

1.2.3
Coincidence or Consequence:
The argument can be made that what has been presented in sections 1.2.1 & 1.2.2
(above), amounts to nothing more than mere coincidence. And of course, that is a
possibility. Therefore we must ask, what is the probability that evidence presented
herein, is just a quirk of fate? In order to make that determination, it is necessary to
assign a probability to each of the major events, outlined in sections 1.2.1 & 1.2.2. The
key events are:

• Market falls sharply as negotiations are started.


• Market rises slowly as negotiations fail.
• Bank of Canada starts visiting website when market starts falling.
• Bank of Canada stops visiting website when market starts rising.
• One final visit from Bank of Canada on February 12, 2007 when market falls by
$2.00 in a single day.

For the sake of discussion, lets assign a probability of ten to one (10:1) for each of these
events. In other words, there is a one in ten chance the NYMEX oil futures market will
start falling when author enters into negotiations, and another one in ten chance the
market will start rising as negotiations fail, and so on for each of the events listed above.
These are fairly conservative odds, and the reader is encouraged to make his/her own
estimates as to the probability for each of these events. Next, the mathematics of
probability state the chance that any two events will happen, is the product term
(multiplication) of their individual probabilities. In other words, the probability for two
events that each have a 10:1 probability is 100:1 (one chance in one hundred).
Therefore, if the probability of each event listed above is 10:1, the combined
probability for all five events happening is:

10 x 10 x 10 x 10 x 10 = 100,000:1 (one chance in one hundred thousand).

If you assume one chance in fifty (50:1) for each of these five events, the probability
rises to 312,500,000:1 (approximately one chance in three hundred million).

While coincidence can not be ruled out, the probability of simple happenstance is, to
say the least, remote.

1.3.1
Summary:
That Magneto-Thermodynamic generation (MTG) technology will, if commercialized,
quickly displace petroleum as the dominate energy source, is no longer subject to much
debate or even reasonable doubt. The major industry participants have through their
actions, revealed the future they foresee. And the consiquences of that vision are
documented herein, for all to see. The only remaining question is how that
displacement will transpire...

Can you imagine the future?

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