More on the real reason behind
high oil prices / Part II
By F. William Engdahl, 21 May,
2008
As detailed in an earlier article, a conservative calculation is that at least
60% of today’s $128 per barrel price of crude oil comes from unregulated
futures speculation by hedge funds, banks and financial groups using the London
ICE Futures and New York NYMEX futures exchanges and uncontrolled inter-bank or
Over-The-Counter trading to avoid scrutiny. US margin rules of the government’s
Commodity Futures Trading Commission allow speculators to buy a crude oil
futures contract on the Nymex, by having to pay only 6% of the value of the
contract. At today's price of $128 per barrel, that means a futures trader only
has to put up about $8 for every barrel. He borrows the other $120. This
extreme “leverage” of 16 to 1 helps drive prices to wildly unrealistic levels
and offset bank losses in sub-prime and other disasters at the expense of the
overall population.
The hoax of Peak Oil—namely the
argument that the oil production has hit the point where more than half all
reserves have been used and the world is on the downslope of oil at cheap price
and abundant quantity—has enabled this costly fraud to continue since the
invasion of Iraq in 2003 with the help of key banks, oil traders and big oil
majors. Washington is trying to shift blame, as always, to Arab OPEC producers.
The problem is not a lack of crude oil supply. In fact the world is in
over-supply now. Yet the price climbs relentlessly higher. Why? The answer lies
in what are clearly deliberate US government policies that permit the unbridled
oil price manipulations.
World Oil Demand Flat, Prices
Boom…
The chief market strategist for
one of the world’s leading oil industry banks, David Kelly, of J.P. Morgan
Funds, recently admitted something telling to the Washington Post, “One of the
things I think is very important to realize is that the growth in the world oil
consumption is not that strong." One of the stories used to support the
oil futures speculators is the allegation that China’s oil import thirst is
exploding out of control, driving shortages in the supply-demand equilibrium.
The facts do not support the China demand thesis however.
The US Government’s Energy Information Administration (EIA) in its most recent
monthly Short Term Energy Outlook report, concluded that US oil demand is
expected to decline by 190,000 b/d in 2008. That is mainly owing to the
deepening economic recession. Chinese consumption, the EIA says, far from
exploding, is expected to rise this year by only 400,000 barrels a day. That is
hardly the "surging oil demand" blamed on China in the media. Last
year China imported 3.2 million barrels per day, and its estimated usage was
around 7 million b/d total. The US, by contrast, consumes around 20.7 million
b/d.
That means the key oil consuming
nation, the USA, is experiencing a significant drop in demand. China, which
consumes only a third of the oil the US does, will see a minor rise in import
demand compared with the total daily world oil output of some 84 million
barrels, less than half of a percent of the total demand.
The Organization of the Petroleum
Exporting Countries (OPEC) has its 2008 global oil demand growth forecast
unchanged at 1.2 mm bpd, as slowing economic growth in the industrialised world
is offset by slightly growing consumption in developing nations. OPEC predicts
global oil demand in 2008 will average 87 million bpd -- largely unchanged from
its previous estimate. Demand from China, the Middle East, India, and Latin
America -- is forecast to be stronger but the EU and North American demand will
be lower.
So the world’s largest oil
consumer faces a sharp decline in consumption, a decline that will worsen as
the housing and related economic effects of the US securitization crisis in
finance de-leverages. The price in normal open or transparent markets would presumably
be falling not rising. No supply crisis justifies the way the world's oil is
being priced today.
Big new oil fields coming online
Not only is there no supply crisis
to justify such a price bubble. There are several giant new oil fields due to
begin production over the course of 2008 to further add to supply.
The world’s single largest oil
producer, Saudi Arabia is finalizing plans to boost drilling activity by a
third and increase investments by 40 %. Saudi Aramco's plan, which runs from
2009 to 2013, is expected to be approved by the company's board and the Oil
Ministry this month. The Kingdom is in the midst of a $ 50 billion oil
production expansion plan to meet growing demand in Asia and other emerging
markets. The Kingdom is expected to boost its pumping capacity to a total of
12.5 mm bpd by next year, up about 11 % from current capacity of 11.3 mm bpd.
In April this year Saudi Arabia's
Khursaniyah oilfield began pumping and will soon add another 500,000 bpd to
world oil supply of high grade Arabian Light crude. As well, another Saudi
expansion project, the Khurais oilfield development, is the largest of Saudi
Aramco projects that will boost the production capacity of Saudi oilfields from
11.3 million bpd to 12.5 million bpd by 2009. Khurais is planned to add another
1.2 million bpd of high-quality Arabian light crude to Saudi Arabia's export
capacity.
Brazil’s Petrobras is in the early
phase of exploiting what it estimates are newly confirmed oil reserves offshore
in its Tupi field that could be as great or greater than the North Sea.
Petrobras, says the new ultra-deep Tupi field could hold as much as 8 billion
barrels of recoverable light crude. When online in a few years it is expected
to put Brazil among the world's "top 10" oil producers, between those
of Nigeria and those of Venezuela.
In the United States, aside from
rumors that the big oil companies have been deliberately sitting on vast new
reserves in Alaska for fear that the prices of recent years would plunge on
over-supply, the US Geological Survey (USGS) recently issued a report that
confirmed major new oil reserves in an area called the Bakken, which stretches
across North Dakota, Montana and south-eastern Saskatchewan. The USGS estimates
up to 3.65 billion barrels of oil in the Bakken.
These are just several
confirmations of large new oil reserves to be exploited. Iraq, where the
Anglo-American Big Four oil majors are salivating to get their hands on the
unexplored fields, is believed to hold oil reserves second only to Saudi
Arabia. Much of the world has yet to be explored for oil. At prices above $60 a
barrel huge new potentials become economic. The major problem faced by Big Oil
is not finding replacement oil but keeping the lid on world oil finds in order
to maintain present exorbitant prices. Here they have some help from Wall
Street banks and the two major oil trade exchanges—NYMEX and London-Atlanta’s
ICE and ICE Futures.
Then why do prices still rise?
There is growing evidence that the
recent speculative bubble in oil which has gone asymptotic since January is
about to pop.
Late last month in Dallas Texas,
according to one participant, the American Association of Petroleum Geologists
held its annual conference where all the major oil executives and geologists
were present. According to one participant, knowledgeable oil industry CEOs
reached the consensus that "oil prices will likely soon drop dramatically
and the long-term price increases will be in natural gas."
Just a few days earlier, Lehman
Brothers, a Wall Street investment bank had said that the current oil price
bubble was coming to an end. Michael Waldron, the bank's chief oil strategist,
was quoted in Britain's Daily Telegraph on Apr. 24 saying, "Oil supply is
outpacing demand growth. Inventories have been building since the beginning of
the year.”
In the US, stockpiles of oil
climbed by almost 12 million barrels in April according to the May 7 EIA
monthly report on inventory, up by nearly 33 million barrels since January. At
the same time, MasterCard's May 7 US gasoline report showed that gas demand has
fallen by 5.8%. And refiners are reducing their refining rates dramatically to
adjust to the falling gasoline demand. They are now running at 85% of capacity,
down from 89% a year ago, in a season when production is normally 95%. The
refiners today are clearly trying to draw down gasoline inventories to bid
gasoline prices up. ‘It’s the economy, stupid,’ to paraphrase Bill Clinton’s
infamous 1992 election quip to daddy Bush. It’s called economic recession.
The May 8 report from Oil
Movements, a British company that tracks oil shipments worldwide, shows that
oil in transit on the high seas is also quite strong. Almost every category of
shipment is running higher than it was a year ago. The report notes that,
"In the West, a big share of any oil stock building done this year has
happened offshore, out of sight." Some industry insiders say the global
oil industry from the activities and stocks of the Big Four to the true state
of tanker and storage and liftings, is the most secretive industry in the world
with the possible exception of the narcotics trade.
Goldman Sachs again in the middle
The oil price today, unlike twenty
years ago, is determined behind closed doors in the trading rooms of giant
financial institutions like Goldman Sachs, Morgan Stanley, JP Morgan Chase,
Citigroup, Deutsche Bank or UBS. The key exchange in the game is the London ICE
Futures Exchange (formerly the International Petroleum Exchange). ICE Futures
is a wholly-owned subsidiary of the Atlanta Georgia International Commodities
Exchange. ICE in Atlanta was founded in part by Goldman Sachs which also
happens to run the world’s most widely used commodity price index, the GSCI,
which is over-weighted to oil prices.
As I noted in my earlier article,
(‘Perhaps 60% of today’s oil price is pure speculation’), ICE was focus of a
recent congressional investigation. It was named both in the Senate's Permanent
Subcommittee on Investigations' June 27, 2006, Staff Report and in the House
Committee on Energy & Commerce's hearing in December 2007 which looked into
unregulated trading in energy futures. Both studies concluded that energy
prices' climb to $128 and perhaps beyond is driven by billions of dollars'
worth of oil and natural gas futures contracts being placed on the ICE. Through
a convenient regulation exception granted by the Bush Administration in January
2006, the ICE Futures trading of US energy futures is not regulated by the
Commodities Futures Trading Commission, even though the ICE Futures US oil
contracts are traded in ICE affiliates in the USA. And at Enron’s request, the
CFTC exempted the Over-the-Counter oil futures trades in 2000.
So it is no surprise to see in a
May 6 report from Reuters that Goldman Sachs announces oil could in fact be on
the verge of another "super spike," possibly taking oil as high as
$200 a barrel within the next six to 24 months. That headline, "$200 a
barrel!" became the major news story on oil for the next two days. How
many gullible lemmings followed behind with their money bets?
Arjun Murti, Goldman Sachs' energy
strategist, blamed what he called "blistering" (sic) demand from
China and the Middle East, combined with his assertion that the Middle East is
nearing its maximum ability to produce more oil. Peak Oil mythology again helps
Wall Street. The degree of unfounded hype reminds of the kind of self-serving
Wall Street hype in 1999-2000 around dot.com stocks or Enron.
In 2001 just before the dot.com
crash in the NASDAQ, some Wall Street firms were pushing sale to the gullible public
of stocks that their companies were quietly dumping. Or they were pushing
dubious stocks for companies where their affiliated banks had a financial
interest. In short as later came out in Congressional investigations, companies
with a vested interest in a certain financial outcome used the media to line
their pockets and that of their companies, leaving the public investor holding
the bag. It would be interesting for Congress to subpoena the records of the
futures positions of Goldman Sachs and a handful of other major energy futures
players to see if they are invested to gain from a further rise in oil to $200
or not.
Margin rules feed the frenzy
Another added turbo-charger to
present speculation in oil prices is the margin rule governing what percent of
cash a buyer of a futures contract in oil has to put up to bet on a rising oil
price (or falling for that matter). The current NYMEX regulation allows a
speculator to put up only 6% of the total value of his oil futures contract.
That means a risk-taking hedge fund or bank can buy oil futures with a leverage
of 16 to 1.
We are hit with an endless series
of plausible arguments for the high price of oil: A "terrorism risk
premium;" “blistering” rise in demand of China and India; unrest in the
Nigerian oil region; oil pipelines' blown up in Iraq; possible war with
Iran…And above all the hype about Peak Oil. Oil speculator T. Boone Pickens has
reportedly raked in a huge profit on oil futures and argues, conveniently that
the world is on the cusp of Peak Oil. So does the Houston investment banker and
friend of Dick Cheney, Matt Simmons.
As the June 2006 US Senate report,
The Role of Market Speculation in Rising Oil and Gas Prices, noted,
"There's a few hedge fund managers out there who are masters at knowing how
to exploit the peak oil theories and hot buttons of supply and demand, and by
making bold predictions of shocking price advancements to come, they only add
more fuel to the bullish fire in a sort of self-fulfilling prophecy."
Will a Democratic Congress act to
change the carefully crafted opaque oil futures markets in an election year and
risk bursting the bubble? On May 12 House Energy & Commerce Committee
stated it will look at this issue into June. The world will be watching.