The Vega FactorOil Volatility and the Next Global Crisis
How oil volatility is affecting the global political scene, and where the oil market is heading The world is rapidly moving towards an oil environment defined by volatility. The Vega Factor: Oil Volatility and the Next Global Crisis takes an in-depth look at the most important topics in the industry, including strategic risk, why traditional pricing mechanisms will no longer govern the market, and how the current government approaches have only worsened an already bad situation. Details the industry's players, including companies, traders, and governments Describes the priorities that will need to be revised, and the policies needed to achieve stability Explains how today's oil market is fundamentally different from the pre-crisis market Oil prices affect everyone. The Vega Factor explains the new international oil environment of increasing consolidation and decreasing competition, and reveals how consumers and investors can navigate price volatility and new government policies.
Preface ix Chapter 1 The Meaning of Oil Vega 1 Chapter 2 How Oil Volatility Relates to Strategic Risk 15 Chapter 3 Determining Oil Prices 37 Chapter 4 Dollars, Credit, Financial Crises, . . . and the Oil Connection 57 Chapter 5 Oil Companies and the Upstream/ Downstream Tradeoff 101 Chapter 6 How Government Action Increases Volatility 141 Chapter 7 Is There a Response? 179 Appendix A World Proved Oil Reserves (Billion Barrels) 197 Appendix B Exxon CARM per Gallon (January 3, 2000 to December 31, 2007) 209 Appendix C Exxon ARM per Gallon (January 3, 2000 to December 31, 2007) 221 Appendix D Shell CARM per Gallon (January 3, 2000 to December 31, 2007) 241 Appendix E Shell ARM per Gallon (January 3, 2000 to December 31, 2007) 253 Appendix F BP CARM per Gallon (January 3, 2000 to December 31, 2007) 273 Appendix G BP ARM per Gallon (January 3, 2000 to December 31, 2007) 285 Notes 305 About the Author 421 Index 423
KENT MOORS is Professor in the Department of Political Science and the Graduate Center for Social and Public Policy at Duquesne University, where he also directs the Energy Policy Research Group. An internationally recognized expert in oil and gas policy/finance and risk assessment, Kent is also President of the oil and gas consulting firm ASIDA, Inc., advising companies, financial institutions, law firms, and governments worldwide. He authors the Oil and Energy Investor, a twice-weekly advisory, the monthly Energy Advantage, and the investment alert service The Energy Inner Circle, and is a frequent contributor to Money Morning and contributing editor to the two leading post-Soviet oil and gas publications—Russian Petroleum Investor and Caspian Investor. Through an agreement with DeMatteo Monness, he provides specialized advisories to a broad range of Wall Street analysts, as well as investment, hedge fund, and capital and asset managers.
There is a sleeping dragon at the heart of the financial system. Soon the beast will awake and rear its terrible head, and we will look back on the days of the subprime disaster with nostalgia. In this riveting book by oil industry expert Kent Moors, you will meet the dragon he refers to as oil vega, and you'll discover why it poses such a grave threat to world economic and political stability. Those familiar with the options and currency markets will recognize vega as the term traders use to denote the rate of price volatility. Expanding upon that traditional usage, Moors coined the expression oil vega to describe the dramatic increase of price volatility seen in the oil markets over the past several years. In The Vega Factor, he describes how, contrary to popular belief, the current environment of runaway volatility in the markets is not the work of diminishing reserves, manipulation by oil producing nations, or increased competition among nations. Rather, it is a result of a structural flaw in the trading system itself. Oil futures contracts, Moors explains, while once a valuable source of liquidity and price stability, have exceeded their historic mandate, leading to an upending of the traditional relationship between "wet barrels" and "paper barrels." With oil now as much a financial asset as a commodity, and an oil derivatives market currently worth thousands of times more than the world's combined oil reserves, a perverse dynamic has evolved in which the price of crude chases the price of paper barrels in a race it can never win. In some of the most gripping passages of the book, Moors considers the global mayhem and destruction that will likely result from an ongoing failure by policymakers and industry to peg the value of oil—literally the fuel that drives industrialized economies—to anything more tangible than the greed, fear, and superstition of financial speculators. In the closing chapters of The Vega Factor, Moors explores ways in which oil companies, governments, and traders must revise their priorities vis-à-vis oil, as well as the radically new strategic understanding of energy that will be required if we are to meet market realities in an age of oil vega. He also suggests steps consumers and investors can take to protect themselves against the depredations of oil price volatility. We live in a world where the quality of everyone's life and the economic stability of every nation are directly tied to the price of oil. Read The Vega Factor and get to know the face of the dragon that even now is beginning to stir at the heart of global financial systems.
Praise for THE VEGA FACTOR "Dr. Kent Moors has done it again—smashed the long–held truths about oil pricing and revealed the number–one factor that will either save or destroy our economy and way of life. The crisis is upon us. That's exactly why it's more important than ever to read The Vega Factor. Every page, every idea is a gem." —Mike Ward, Publisher, Money Map Press "The Vega Factor highlights the serious flaws in global energy markets that threaten the world with its next shockwave. Let's hope energy practitioners and policymakers read it and come up with a solution before it's too late." —Ian Walker, Executive Director, Windsor Energy Group, London "This is the book Kent Moors was born to write. A lifetime of academic and real–life experience has given him a genuine insight into the energy world that few can master. Moors gives the reader a dose of reality with the facts and research to support his theory of oil vega. Be prepared to change your view of the way the future will unfold as Moors gives us the benefit of decades of research and hands–on experience. It is a glimpse behind the curtain of how the real world of 'energy politics' works in the twenty-first century." —Ron Klink, Senior Policy Advisor, Nelson Mullins Riley & Scarborough LLP "Moors does a precise and thorough job of dissecting an often less contemplated piece of the rapidly evolving energy landscape. Enlightening for policymakers, analysts, and novices alike." —Sean Levine, Senior Research Director–Policy, DeMatteo Monness LLC The true causes of runaway volatility in the price of oil and its dire economic and geopolitical implications Oil is the lubricant that keeps the modern world spinning on its axis. From the food we eat and the clothes we wear, to our means of transportation, and even the medications that keep us alive, every facet of our lives is dependent upon a steady supply of affordable crude. In The Vega Factor, oil industry expert and political scientist Kent Moors reveals how a deep structural flaw at the heart of the global financial system currently threatens to end the flow of affordable oil. He describes the grave economic and geopolitical implications of out-of-control price volatility in the oil markets—what he refers to as oil vega—and he offers his prescriptions for what governments, industry, and the financial sector can do to address the mounting threat of oil vega, before it's too late.
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