Presentation in London at Global Futures Forum event on Human and Natural Resource Scarcity: systemic lessons to learn from the global crisis.

1. Market 3.0
Transition through Gas
Chris Cook
15 May 2012

2. Market 3.0
Market 1.0 – decentralised but disconnected; physical
market presence; Money 1.0 was a physical object
Market 2.0 – centralised but connected; market
presence by middlemen; Money 2.0 is a credit object
Market 3.0 - decentralised but connected; network
market presence; Money 3.0 will be a relationship

3. October 2008 - R.I.P. Market 2.0
Peak Credit
Collapse of Lehman Brothers
QE necessary to prevent debt deflation
Systemic and persistent solvency problem
Credit intermediary banks systemically short of capital

4. Adjacent Possible
Exchange Traded Funds and Index Funds
Quasi-equity ownership claim not debt claim
Passive 'inflation hedger' risk averse investors aim to
avoid loss rather than make transaction profit
Market risk is dis-intermediated – 'capital lite'
Intermediaries retain credit risk
Profit from service provision eg HFT, asymmetric info

5. Financialisation
QE and 0% $ interest rates – 'buy anything but dollars'
Correlated bubbles caused by 'inflation hedgers'
Price curves cease to reflect market price expectations
and reflect $ price expectations ie $ yield curve
Commodity prices lose touch with production,
consumption & inventories
Equity prices lose touch with underlying flows of
dividends and retained profits
Market 'cardiac arrest'

6. Correlated Commodity Bubbles

7. Market Cardiac Arrest

8. Oil Markets

9. Macro Oil Market Manipulation
If producers can support prices they will eg tin, copper
Such 'Macro' manipulation can persist for many years
Enron-style 'Prepay' contracts eg Chesapeake Energy
Producers lend oil to passive investors
Passive Investors lend $ to producers
Investment Banks intermediate producers & investors
A two tier – false - physical market and Dark Inventory
Asymmetric information re inventory is profitable for
privileged banks and traders

10. Bubble 1.0

11. 2005 to July 2008 – Bubble 1.0
BP and Goldman Sachs joined at the head from 1995
GS creates Goldman Sachs Commodity Index fund
GS invents 'inflation hedging' meme
Prepay - GSCI lends $ to BP via GS
BP lends oil to GSCI via GS
Bubble 'spiked' in July 2008

12. July/December 2008 - Collapse
Price falls from $147/bbl to $35/bbl
Saudis cut production by 1.5m bpd
Combination of price fall and production cut = Pain
October 2008 - $ billions of passive fund money flows
into funds in response to ZIRP and QE
Saudis receive an offer they cannot refuse - Prepay

13. Saudi Oil Production
Pain
Prepa
y

14. Bubble 2.0

15. Jan 2009 to March 2011 – Bubble 2.0
In or before January 2009 prepay programme begins
Market goes into 'super contango' and is re-inflated
Market price pegged for 18 months between $70 & $90
Unstable equilibrium
March 2011 - Libya supply shock & Japan demand shock

16. Saudi Oil Production
Unstable
Equilibrium
Pain
Shocks
Prepa
y

17. End Game

18. March 2011 to Date – End Game
May 2011 - Libya/Japan shock subsides
September 2011 - passive investors pulling out
November 2011 - Iran risk premium commences
March 2012 and May 2012 Saudis deliver 20m bbl to the
US – who are awash in oil (inventories @ 20 year high)
Prepays result in massive Saudi deliveries to US buyers
Market 1.5m to 3m bpd over-supplied
Iran risk premium subsiding
May 23rd Meeting in Baghdad

19. Muppets, Speculators & Shocks
Libya Shock
What Shock?
Iran Shock
03/04/10 19

20. Managed decline or Meltdown?
The market is going down as we speak
The risk is a market discontinuity
In 1985 the tin price collapsed from $8,000/tonne to
$4,000/tonne overnight
WTI risk maybe $50/bbl drop
Brent risk maybe $60/bbl drop
This would wipe out speculators, some clearers and
disrupt private 'too big to fail' clearing houses

21. What is the next Adjacent Possible?
ETF redeemable in gold recently launched
Fund units redeemable in payment for underlying asset
reduce liquidity risk and credit risk
Stock – undated IOU returnable in payment for value
Pre-dates modern banking (from 1694)
Back to the Future

22. Next Adjacent Possible
'Peer to Asset' investment
Intermediaries become 'capital lite' service providers
Networked and resilient market with risk distributed to
sellers and buyers collectively
Flight to Simplicity

23. Energy Doctrine
Stability – dis-intermediation reduces volatility and
enables long term investment
Equity – fair balance between producers, consumers,
service providers
High Carbon price – investment in renewables and
energy savings funded out of shared surplus
Energy Standard – energy unit of account (not currency)
Energy Economics – investment decisions made on the
basis of least energy cost rather than least dollar cost

24. Transition through Gas
Generic Gas Transaction Registration - GasClear
Gas Market Framework Agreement/ Clearing Union
Gas Market Instrument
Gas Market Domain eg Dot Gas
Global Energy Institute – networked public/private
institution for joined up R & D and energy policy
Now: oil is priced against $ and gas is priced against oil
Future: price dollars and oil in gas