LONDON, Nov 3 (Reuters) – Global energy markets stand at a crossroads. The big themes that dominated the opening years of the century (prosperity, markets, peak oil, global warming and clean technology) are giving way to a different set of concerns centred on inequality, affordability, regulation and techniques for extracting oil and gas from tight rock formations and ever-deeper below the surface.

Some changes have come from outside the energy industry. The financial crisis has diminished confidence in free markets. Falling real incomes and rising unemployment in the advanced economies have pushed climate concerns into the background in favour of a focus on jobs and cutting household bills.

Other changes have come from within the energy markets. A decade of soaring real oil prices is at last beginning to transform the long-neglected supply side of the industry, encouraging widespread employment of technologies such as ultra-deepwater drilling and hydraulic fracturing to extend conventional oil and gas reserves.

High prices have begun to concentrate consumers’ minds on cutting consumption. But they are also sapping support for expensive policies to remake the electricity industry by switching from burning coal and natural gas to alternatives such as solar and wind.

In the emerging world, rising oil and gas prices have brought an enormous influx of wealth for producing countries, though in many cases the inequitable distribution of income is contributing to political unrest. For consuming countries, however, the mounting financial burden, mostly aimed at the middle class, is straining government budgets and may prove unsustainable in the long run.

POLITICS NOT ECONOMICS

At the root of all these issues are political rather than economic questions. There will be no shortage of oil, gas or power in the next two decades. But policymakers and voters are being forced to confront uncomfortable questions about what sort of energy industry we want in future.

LONDON, Nov 1 (Reuters) – If North Dakota’s oil industry is helping transform North American and global energy markets, then oil is having just as big an impact on the state itself.

But the extent of the state’s success poses awkward questions for political leaders in Washington and the rest of the country.

North Dakota has seen the fastest income growth of any state over the past five years, and almost all the gains are due to the boom sparked by drilling into the Bakken shale. Only the District of Columbia — dominated by government, contracting and lobbying jobs — has seen incomes rise more dramatically, according to the U.S. Census Bureau.

North Dakota’s median real income has risen over $4,250 per household (9 percent) since 2005, according to Census data, compared with a decline of almost $2,300 (4 percent) for the country as whole.

While income stagnates or falls across much of the United States, North Dakota’s is being propelled higher by royalties and fees from oil and gas leases, well-paid jobs in exploration and production, and all the services needed to cater for an influx of drillers from out of state (everything from food and lodging to entertainment).

In 2010, the state ranked 19th nationwide in terms of median income, up from 40th in 2000 and 38th in 1990. No other state has seen such a dramatic improvement (or fall) in its ranking over the last 10 or 20 years .

The state also benefits from the farming boom triggered by the ethanol mandate and increases in world food consumption. But the surge in median incomes between 2007 and 2010 leaves little doubt that the massive increase in oil drilling has been primarily responsible for its dramatic prosperity.

LONDON, Nov 1 (Reuters) – Jobs related to oil and gas drilling account for more than one in eight of all net new nonfarm jobs in the United States since 2003, and almost one in five in the private sector, according to an analysis of data from the Bureau of Labor Statistics (BLS).

Oil and gas drilling is one of the fastest growing sectors of employment, as near-record prices spur a massive expansion in activity and employment.

The number of jobs related to oil and gas drilling has risen by almost 200,000 (80 percent) since 2003, and the sector now employs about 430,000 workers, according to BLS (Chart 1).

Over the same period, total nonfarm employment rose just 1.49 million as a result of the recession.

Oil and gas employment bounced back quickly from a short sharp drop in the immediate aftermath of the financial crisis, when U.S. crude prices dropped to less than $50 per barrel, and now stands at the highest level for more than two decades.

BLS does not break out jobs in oil and gas drilling separately. But in the earlier part of the decade, most of the extra employment was in the gas sector, before switching to oilfield work in recent years, as gas prices have fallen and rig crews and support services have been redirected to focus on liquid-rich plays (Chart 2).

Job creation correlates well with increased oil and gas output, with U.S. crude production rising for the first time since the mid-1980s, and gas output leaping to confound earlier predictions of a peak (Chart 3).

LONDON, Oct 31 (Reuters) – Soaring oil prices have spurred a worldwide drilling boom that should result in much-faster growth in oil production over the next 2-3 years, helping meet strong growth in consumption, and tempering upward pressure on prices.

The number of rotary rigs drilling for oil and gas stands at the highest level for over two decades, according to oilfield services company Baker Hughes.

In the United States, 1,080 rigs were drilling for oil at the end of October, up from 696 at the same point last year, and easily surpassing the previous peak of 740 set back in 1987 (Chart 1). Canada has seen a similar upsurge.

Outside North America, 903 rigs were drilling for oil, beating the previous peak of 832 in 2008, and the highest number since the late 1980s according to Baker Hughes data (Charts 2-3).

Intensive activity is needed just to offset natural output declines from older fields. Nonetheless the upsurge signifies a large increase in exploration and production (E&P) operations that should filter through into greater output and more spare capacity in the short to medium term.

TIME CHANGES EVERYTHING

While it is safe to assume supply and demand trends are relatively fixed over short periods of up to 2-3 years, beyond that horizon most elements of both production and consumption become increasingly flexible and respond strongly to price signals.

LONDON, Oct 28 (Reuters) – For all the bullish talk about tight supplies next year if the global economy skirts renewed recession, and occasional sharp short-covering rallies, benchmark oil prices are softening.

In the past six months, each of a series of sharp short-covering rallies has pushed the front-month Brent futures contract to peak at a lower level than the previous one: $127 on April 11, $126 on April 28, $121 on June 15, $120 on Aug. 1, $116 on Sept. 8, $114 on Oct. 14 and now $112 on Oct. 27.

Gradual subsidence in prices is not confined to nearby futures contracts. The same pattern of successively falling peaks is evident in the price of contracts for deferred delivery in Dec 2012 and Dec 2013 .

It stands in marked contrast to the continuous uptrend in prices through 2009 and 2010, which culminated in April 2011, in which each temporary peak was higher than the last (with one limited exception in the late spring of 2010).

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Sustained downtrends have been rare since the great upsurge in oil prices started in 2003 ().

Prices have eased despite several potentially bullish factors: (1) reported tightness in the cash market evidenced by premiums for quality crude and steep backwardation in the Brent forward curve; (2) the Fed’s commitment to keep interest rates lower for longer and attempt to pull down long-term rates; (3) rallying equities; (4) continued demand growth in Asia; and (5) warnings from prominent forecasters at major commodity banks about continued upside price risks from a tightening supply-demand balance in 2012.

LONDON, Oct 25 (Reuters) – U.S. consumers have given up hopes of a recovery, according to the gloomy findings of the Conference Board’s regular survey, in a sign recessionary forces are still gathering momentum and the economy is set to slow further in the next few months.

Consumers who expect their total household income to shrink in the next six months (19.2 percent) outnumber those who expect it to rise (10.3 percent) by almost two-to-one. The negative balance (-8.9 percentage points) is the worst since February-April 2009, when the economy was contracting. Households are far more pessimistic than in the aftermath of earlier recessions ().

Confidence in future income growth peaked in February and then began to slide consistently as households were battered by a combination of rising prices, an upsurge in financial volatility and a stalling economy.

Like business surveys, consumer confidence surveys must be interpreted with care. Responses are strongly shaped by what consumers have read about the health of the economy in the media, creating the risk of a circularity in which media reporting and survey responses feed off one another.

So specific questions such as expectations about household incomes are more useful than general ones about the state of the economy or the overall outlook. Pessimism about family incomes is therefore particularly worrisome, since it suggests households believe their own situation will worsen rather than improve in the short term.

That pessimism appears rational and realistic. The fallout from losing a job is now worse than in previous recessions given low rates of rehiring and the increased risk of becoming long-term unemployed or forced to accept significant wage reductions. Even for families that remain fully employed, nominal wage growth is minimal, and rising prices for food and fuel are cutting into the real inflation-adjusted value of incomes, leaving them worse off.

Fears the financial situation will worsen help explain why a significant number of consumers are trying to eliminate old debts as quickly as possible and why a culture of thrift has taken root as shoppers seek to stretch their stagnant incomes further by trading down.

LONDON, Oct 21 (Reuters) – Britain’s inflation performance is much worse than that of the other advanced economies and rapid price rises are more widespread than officials are comfortable admitting in public.

A surging inflation rate is recognised as a problem everywhere but at the Bank of England — where officials stubbornly insist the phenomenon is a “one shot spike”, that is “very temporary”.

Inflation was running above the Bank’s 2.0 percent target in all but one of the 12 main components of the consumer price index (CPI) in the 12 months to September, according to the Office of National Statistics (ONS) (Chart 1).

The only category in which inflation was below target was recreation and culture (where prices fell 0.6 percent in the year to September). In the case of clothing and footwear, price rises were close to target (2.1 percent). What distinguishes both categories is their highly discretionary nature.

In every other category from food (6.4 percent) to health (3.6 percent), education (4.6 percent), transport (8.9 percent) and communication (5.9 percent), prices were rising much more quickly than the Bank is supposed to permit.

Faster inflation has not been restricted to food, fuel and imported items (so-called first round effects) but has filtered through into a wide range of secondary manufactured items and services (second-round effects).

Britain’s problem is worse than in the United States, where faster inflation is mostly restricted to food, fuel and clothing. Prices are rising faster than the Fed’s informal 2 percent target in half the main categories (4) but more slowly in the other half (4) (Chart 2).

LONDON, Oct 12 (Reuters) – Hydraulic fracturing and horizontal drilling revolutionised the natural gas market, unlocking huge quantities of previous unrecoverable reserves trapped in tight rock formations.

The question is whether they are about to do the same for oil — unlocking billions of barrels of crude trapped in similar rock forms, and thereby upending forecasts about increasing oil scarcity and steeply rising prices.

WHY MALTHUS WAS WRONG

In the short term, prices for commodities are determined by the usual forces of supply and demand. In the medium and long term, however, technology is the main determinant of price and availability.

Fracking and horizontal wells are classic examples of transformational or disruptive technologies which completely alter their industries by upsetting long-held assumptions about the feasibility and cost of production.

New technology has proved a blind spot for market analysts and forecasters. In many instances, forecasts implicitly assume technology remains unchanged or evolves only incrementally, even over years or decades.

Yet past experience suggests disruptive and transformational technologies are more common than this static framework assumes. Given sufficient incentives in the form of high prices or threatened shortages technology has proved extraordinarily resourceful, wringing extra raw materials from the planet.

LONDON, Oct 4 (Reuters) – Oil markets have swung from irrational exuberance in the first half of the year to increasingly irrational pessimism in recent weeks.

Participants risk exaggerating the risk of a deep and prolonged recession hitting demand in both the advanced economies and emerging markets.

Blind swings from hope to fear usually lead to temporary mispricing, creating opportunities for those willing to take the other side. Estimating the recession risk is perhaps the most important trade in the oil markets right now.

If the market is exaggerating downside risks, some hedge funds and option market makers will sense an opportunity to sell overpriced put options to oil companies and investors willing to pay too much to protect themselves against further declines.

DEFORMED VOLATILITY SURFACE

Implied volatility surfaces for both Brent and U.S. crude (WTI) show the market charging a hefty premium for deep out of the money put options (Charts 1-4).

Downside protection has become expensive even though prices have already fallen more than $25 (20 percent) from their April highs, using Brent futures for December 2011 delivery as a basis.

LONDON (Reuters) – The most important fundamental in commodity markets is not supply, demand, inventories or spare capacity but the passage of time itself.

Successful traders learn time is the most important influence on their profits. Not just in the simple sense of picking peaks and troughs but on the cost of holding positions and time’s impact on all the other variables affecting prices (investment in new capacity, demand destruction and stock building).

Time enters explicitly into formulas used to price options as one of the “Greeks” (theta). It features in all elements of futures pricing (the cost of financing, cost of storage and convenience yield).

But discussions about time’s impact are almost entirely absent from commentary on commodity markets and few institutional investors seem to appreciate it fully.

In too many instances, investors are expressing a very long-term view on supply and demand trends (for example peak oil), often using short or medium-dated instruments, ignoring the roll costs of maintaining the position, and the extent to which both supply and demand become highly variable over periods of more than about 2 or 3 years ahead.

Failure to comprehend the full effect may explain why returns for many investors have proved consistently disappointing.

In commodities, at least, it answers Fred Schwed’s famous question “Where are the customers’ yachts?” They have disappeared because investors forgot to account properly for time’s passage.