Wall Street and Big Oil Profit from Global Turmoil




W

ith gas prices breaking the $3 barrier the
notion of “peak oil”—that geological constraints
will force a permanent decline in crude oil production—is the
apocalyptic flavor of the moment. Any number of websites, books,
organizations, and discussion groups warn that the post-carbon age
is nearly upon us, with everything from industrial agriculture to
plastics to pharmaceuticals to the car industry in danger of vanishing. 


While peak oil is a sexy theory, it’s simply not valid in the
near term. An extensive analysis last year by Cambridge Energy Research
Associates of existing oil reserves and future projects concluded
oil production will increase for the next 15 years if not longer.
The energy-forecasting group predicted that an increasing amount
of oil would be derived from unconventional sources, such as heavy
oil, tar sands, and natural gas condensates and that by 2010 daily
output could increase by as much as 16 million barrels over 2004
levels. Most peak oil proponents ignore this evidence and in doing
so they create a dangerous distraction, shifting the discussion
away from the political and economic actors that bear the most responsibility
for rising oil and gas prices—big oil, Wall Street, and the
White House. 


One of the main factors receiving little attention in the current
“crises” stems from how markets work, specifically how
speculation affects prices. While speculation is often passed off
as an economic law, there is plenty of evidence of direct manipulation.
Last year Goldman Sachs predicted a “super spike” that
could send oil up to $105 a barrel. Numerous financial analysts
were skeptical of the call, noting that it would take a dramatic
event—such as disruption of oil from Saudi Arabia—to cause
such a leap in prices. One analyst even indicated to AFX (the business
news service of Agence-France Presse) that Goldman Sachs was trying
to manipulate the energy market because of its own speculative interests. 


On March 31 AFX reported, “Analyst Kevin Kerr of Kerr Trading
International said the Goldman call was irresponsible and ‘clearly
an attempt to talk up the market on nothing more than hot air. Goldman
has huge speculative energy positions and they have no interest
in watching it go down right now’.” 








At
that point, the price of a barrel of oil was around $55. Now it’s
hovering around $75, almost 40 percent higher. The standard explanation
for rising oil prices is the law of supply and demand. However,
while the global supply has tightened overall, there’s plenty
of oil right now in U.S. stocks. In fact government data from this
April shows crude oil stocks are 6 percent above the levels from
a year ago, revealing that spiraling prices aren’t really related
to supply and demand. 


Kavaljit Singh, editor of the

Asia-Europe Dialogue Project

,
wrote on ZNet in December 2004 that, “The current upsurge in
oil prices has more to do with rampant speculation in oil futures
markets, than demand or supply factors.” Singh argued that
poor investment opportunities in equity, bond, and currency markets
led institutional investors and financiers to move into “energy
markets, particularly oil, in search of higher returns…. In
the words of Fadel Gheit, senior vice president of oil and gas research
at Oppenheimer & Company (New York), ‘oil has become the
only game in town’. ” 


Just three months earlier, the

Sunday Times

of London reported
that some of the largest investment banks in the world were moving
into the oil supply business. A

Times

report from September
12, 2004 by Robert Winnett noted that as “several secretive
hedge funds are now wagering hundreds of millions of dollars every
day in the oil market and reaping the dividends,” others were
moving into the physical market. “Morgan Stanley recently won
the contract to supply fuel to United Airlines and Goldman Sachs
recently bought 10m barrels of oil.” 


According to the

Times

, “A secret analysis of the market
carried out by a big European oil company” found that speculation
was adding “between 15 and 20 percent” to the price of
oil. This would amount to $10 to $15 a barrel at current prices. 


James Burkhard, director of oil market analysis at Cambridge Energy
Research Associates, explained how speculation worked to the

New
York Times

in August 2004: “Speculators don’t set
the price, but they intensify a price movement in either direction,
beyond or below what the fundamentals warrant.” 


The

Times

recounted one speculative frenzy in May 2004, “When
low inventories and news of violent attacks on oil executives and
facilities in Saudi Arabia drove oil futures up, speculators piled
on, according to market analysts. Their buying forced crude prices
up even higher, attracting yet more investors betting on a continued
rise, and so on in a classic spiral.” 


The White House and Congress could clamp down on the speculation—and
rising oil prices—by taxing oil futures trading, similar to
the Tobin Tax proposal to tax currency speculation. While oil is
traded internationally, New York’s Mercantile Exchange “accounts
for 65 percent of global turnover in crude oil futures” and
London’s Petroleum Exchange handles another 30 percent, according
to Bank for International Settlement data quoted by Singh. 



A

nother major factor in recent
years is the “terror premium.” Most recently, this refers
to White House saber rattling against Iran. Oil markets fear that
a U.S. attack would result in the loss of Iran’s four million
barrels of daily production or a retaliatory attack that could block
the critical oil route through the Straits of Hormuz. Industry analysts
estimate that the terror premium has added about $15$20 to the price
of a barrel—but this is also wrapped up in the speculation
so it’s hard to separate out as another factor entirely. 


Iran is the third major oil producer threatened by the Bush administration.
In the case of Iraq, the war and occupation have reduced its oil
exports by 700,000 barrels a day. Venezuela lost up to 900,000 barrels
a day in productive capacity after the U.S. backed an oil sector
strike in 2002-2003. (While the Venezuelan government was able to
gain control over the state-run oil industry from the anti-government
engineers and managers who were trying to bring down Hugo Chavez,
these technicians were swept out, taking with them experience in
keeping the vast infrastructure running at peak capacity.) Separately,
political unrest in Nigeria has caused 500,000 barrels a day to
go off-line. That’s about two million barrels a day lost. 








Bush
would rather blame China and India, however, claiming that prices
at the “gasoline pumps reflects the global economy in which
we live. See, when demand for oil goes up in China or India, two
fast-growing economies, it affects the price of oil…worldwide.” 


But energy traders know that the White House’s Iran policy
is a major factor. “Iran and Nigeria and their war of words
has sent oil buyers scurrying back to the buy side,” Phil Flynn,
a senior analyst at Alaron Trading, told the financial website MarketWatch
on May 1. 


Chavez blames the high oil prices on “bellicose statements
and the American president’s threats against Iran.” On
April 2 Qatar’s oil minister, Abdullah bin Hamad al-Attiyah,
observed, “We are doing all we can to meet demand, but prices
are rising because of Iran, Nigeria, and Iraq.” 


Increasing demand from the United States is also pushing up prices.
The U.S. consumes about 21 million barrels a day, while China is
a far second at 6.5 million barrels. Increasing U.S. demand stems
from ever-more massive vehicles. Increasing fuel standards and encouraging
conservation would reduce demand and oil company profits, which
is why Bush prefers to talk of a future “hydrogen economy.” 


Oil companies also play their part in high prices. After oil crashed
to $10 a barrel in 1998, following the East Asia currency crisis,
many oil fields ceased producing and numerous exploration firms
went bankrupt. It takes up to 10 years for the biggest oil production
projects to come on line. So supply constraints now are partly due
to the lack of drilling and exploration from before. But some oil
traders say outright that big oil deliberately cut exploration so
as to reduce supplies and drive up profits. It’s just like
farming. If you’re producing bumper crops of corn or wheat
and prices have plummeted, the simplest solution is to take the
land out of production. 


Exploration and infrastructure have been neglected all around. The

Times

of London states that, “According to Goldman Sachs,
the capacity of oil tankers and oil refineries has been dropping
since the early 1980s because of a lack of investment…. Since
1983, real spending on exploration and production of energy has
fallen by 49.5 percent.” 


But don’t cry for big oil, which has raked in astronomical
profits in recent years, led by ExxonMobil with $36.1 billion in
2005. Supplies are undoubtedly tight. Oil producers are pumping
85 million barrels a day, with all but 1 million barrels a day being
consumed. This compares to an excess of about 6 million barrels
a day in 2002. 


This is the background for the Bush administration’s plans
to remake the Middle East. With some two-thirds of the world’s
proven reserves (Canada, Venezuela, and Russia have the most reserves
outside the region), the Middle East is key to controlling the global
economy in the 21st century. Central to the neocon dreams of invading
and occupying Iraq and Iran were plans to privatize their oil industries. 


Thus supply constraints are a function of politics and economics,
not geology. Most oil reserves around the world are in the control
of governments. Big oil and the right wing want the reserves in
private hands, preferably Western ones. With very little fanfare,
for example, the Norwegian oil company DNO recently struck a deal
directly with the Kurdish regional government to develop oil reserves
in northern Iraq. 


But for the most part the U.S. military is bogged down in Iraq,
constraining its ability to cause mischief elsewhere; Venezuela
has been strengthened by taking control of its oil industry and
nationalizing some reserves of late; Iran can warn about the impact
of an attack on oil, without actually threatening supplies, and
watch the price go up and increase its revenues. 


Bolivia got into the nationalization game on May 1 by placing oil
and gas reserves under government control, thereby unsettling oil
markets. The decision revealed again the political nature of oil
exploration. The

New York Times

reported that for companies
with extensive operations in Bolivia, “It is sure to lower
their profits and to put any plans for future investment there in
limbo, according to analysts. ‘New investments are likely off
the table,’ Bear Stearns said in a report” issued on May
2. 


Other countries and groups have learned from the Bush administration’s
energy wars. Russia has been using its vast gas reserves as a weapon,
by cutting off the Ukraine last year and striking deals that make
Germany dependent on Russian supplies. In Nigeria the Movement for
the Emancipation of the Niger Delta (MEND) has discovered that a
few timely threats against the nation’s oil industry garners
it more international attention than 100 attacks against government
soldiers. In fact, much of MEND’s military and political strategy
is based on attacking oil industry targets while demanding that
the Delta’s oil wealth be shared equitably with people living
in the producing regions. 


Meanwhile currency factors include the drop in the value of the
dollar, which has fallen by some 50 percent against the euro since
2001. Back then, OPEC’s target price for a barrel was around
the mid-20s. To make up for the declining dollar, the main currency
for trading in the oil markets, producers needed the price to rise
by $12 to $15 a barrel.








Qatar’s Al-Attiyah also noted that “more than one million
barrels a day are going into inventories,” further crimping
supplies. In response to growing consumer anger over high gas prices,
Bush suspended deposits of crude oil into the Strategic Petroleum
Reserve, which critics have been demanding for more than two years.
Yet this will do little to affect prices at the pump because crude
oil supplies are already high. The problem is with gasoline supplies,
which are lower than normal and this stems from how big oil has
manipulated the U.S. refinery market to ensure tight gasoline supplies. 


A study by the Consumer Federation from October 2003 noted that
in the last 15 years about 75 refineries have closed. In 1985 refinery
capacity was equal to the daily consumption of petroleum products,
whereas by 2000, “daily consumption exceeded refinery capacity
by almost 20 percent.” 


Gasoline stocks have also declined precipitously since the early
1980s, from ten days above minimum operating needs to just two days
by 2003. As of early April 2006, U.S. Energy Information Administration
data showed gasoline inventories at their lowest point since the
disruptions caused by Hurricane Katrina last fall. With the refinery
industry producing flat out, all it takes is one accident at a refinery
to send the price of gasoline shooting up even more. 


A

New York Times

article from June 15, 2001 quoted a November
1995 document from Chevron that spelled out the strategy: “If
the U.S. petroleum industry doesn’t reduce its refining capacity,
it will never see any substantial increase in refinery profits.”
The result, according to the Consumer Federation, is that operating
income in the refining and marketing sectors has gone from about
$1 billion in 1995 to $19 billion in 2003—profits have only
increased since then. For the first quarter of 2006, Chevron reported
$4 billion in profits, including an astounding 260 percent jump
in refining and sales profits. 


Unlike the oil crises of the 1970s, high prices haven’t sparked
a recession that curtailed demand. In general, Americans spend less
on gas as a percentage of their household budget than they used
to, particularly during the 1970s oil shocks, and energy is a far
smaller part of the economy. In addition, about 80 percent of purchases
at the pump are now by credit card so increased prices just become
another blip in the massive debt servicing most households carry
out. If a recession does happen, oil prices could easily be cut
in half or more. 


It’s the working poor who have been affected the most—especially
the Bush base of rural Red Staters who drive long distances in fuelgulping
pickup trucks and SUVs. Urban populations aren’t affected as
much because they have access to mass transit and hence lower rates
of car ownership. That’s why the Republicans have been desperately
throwing out proposals that range from more oil industry subsidies
to $100 rebate checks that only encourage people to use more gas.
But for oil companies and producing countries, it’s the best
of both worlds: high demand and high prices. 






A.K.
Gupta is currently an editor of the



Indypendent



in
New York.