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TechnoratiIs There an Oil Shortage?
The popular perception of the recently skyrocketing oil price is that there is an oil shortage in global energy markets. The perceived shortage is generally blamed on the Organization of Petroleum Exporting countries (OPEC) for "insufficient" production, or on countries like China and India for their increased demand for energy, or on both.
This perception is reinforced -- indeed, largely shaped -- by the Bush administration and its neoconservative handlers who are eager to deflect attention away from war and geopolitical turbulence as driving forces behind the skyrocketing energy prices.
Impressions of an oil shortage are further bolstered by Wall Street and its financial giants that are taking advantage of the insecurity created by war and geopolitical turmoil in oil markets and are making fortunes through manipulative speculation in commodity futures markets.
Perceptions of insufficient oil supply are also heightened by the recently resuscitated theory of the so-called Peak Oil, which maintains that world production of conventional oil will soon reach -- if it has not already reached -- a maximum, or peak, and decline thereafter, with grave socio-economic consequences.
However, claims of an oil shortage are not supported by facts. Evidence shows that, in reality, there is no discrepancy between production and consumption of oil on a global level. Citing statistical evidence of parity between production and consumption of oil, OPEC President Chakib Khelil recently emphasized that there was no shortage of oil: "As far as fundamentals are concerned I think we have equilibrium between supply and demand. . . . In fact right now we have more supply than demand."
Facts of abundant oil supplies in global markets are now also being acknowledged and reported by mainstream media. For example, Ed Wallace of Business Week recently reported that "that worldwide production of oil has risen 2.5% in the first quarter, while worldwide demand has grown by only 2%. Production is expected to increase by 3.3% in the second quarter, and by as much as 4.1% by the third quarter. The net result is that the U.S. daily buffer for oil production against demand, which was a paltry 1.5 million barrels as recently as 2005, is now up to 3 million barrels in excess capacity today."
Wallace then asks, "So what is going on here? Why would our Energy Secretary say there's a supply and demand problem when none exists? Why would he say that speculators have little or nothing to do with the incredibly high price of oil and gasoline, when it's clear they do? President Bush -- a former oilman -- gives the ever-growing demand for gasoline as the primary reason prices are so high, yet that notion can be dispelled with one minute of research."
So, if indeed there is no imbalance between production and consumption of oil in global markets, how do we then explain the skyrocketing oil prices?
The answer, in a nutshell, is: war and geopolitical instability in oil markets. Contrary to the claims of the champions of war and militarism, of the Wall Street speculators in energy markets, and of the proponents of Peak Oil, the current oil price shocks are caused largely by the destabilizing wars and political turbulences in the Middle East. These include not only the raging wars in Iraq and Afghanistan, but also the danger of a looming war against Iran that would threaten the flow of oil out of Persian Gulf through the Strait of Hormuz.
Close scrutiny of the soaring oil prices shows that anytime there is a renewed U.S. or Israeli military threat against Iran, fuel prices move up several notches. For example, Agence France-Press (AFP) recently reported, "Crude oil prices went on a record-setting surge Friday as fears of a new Middle East conflict were fanned by comments from a top Israeli official about Iran. New York's main oil futures contract...leapt 10.75 dollars a barrel-its biggest one-day jump ever."
War and political chaos in the Middle East tend to increase energy prices in a number of ways. For one thing, as war plunges the U.S. deep into debt, it depreciates the dollar -- thereby appreciating, or inflating, the price of dollar -- denominated commodities, especially oil.
Depreciated dollar tends to raise the price of oil (and other commodities) in two major ways. First, since oil is priced in U.S. dollars, oil exporting countries would demand more of the cheaper dollars for the same barrel of oil in order to maintain the purchasing power of their oil. Second, when the dollar falls, oil prices rise because investors are more likely to use their money to buy tangible assets or commodities such as oil and gold that won't lose value.
According to a number of energy experts, between 30- and 40-percent of the recent increases in the price of oil can be attributed to dollar depreciation. One of the simplest ways to calculate this is to compare the price per barrel of oil in dollars and euros over the last five years. "The widening gap between the two [dollar price vs. euro price] indicates that 35 percent of the increase in the price of oil could be attributed to currency [dollar] devaluation."
Stronger than the impact of dollar depreciation on the price of oil has been the impact of manipulative speculation: war and political instability have served as breeding grounds for hoarding and speculation in energy futures markets. According to F. William Engdahl, a top expert on energy and financial markets, "As much as 60% of today's crude oil price is pure speculation driven by large trader banks and hedge funds. It has nothing to do with the convenient myths of Peak Oil. It has to do with control of oil and its price. . . . Since the advent of oil futures trading and the two major London and New York oil futures contracts, control of oil prices has left OPEC and gone to Wall Street. It is a classic case of the tail that wags the dog."
U.S. Representative Bart T. Stupak, Democrat - Michigan, chairman of the subcommittee investigating commodity market speculation, attributes even a higher percentage of the oil price hike to market manipulation: "Speculations now account for about 70% of all benchmark crude trading on the New York Mercantile Exchange, up from 37% in 200."
Wall Street financial giants that created the Third World debt crisis in the late 1970s and early 1980s, the tech bubble in the 1990s, and the housing bubble in the 2000s are now hard at work creating the oil bubble. By purchasing large numbers of futures contracts, and thereby pushing up futures prices to even higher levels than current prices, speculators have provided a financial incentive for giant futures traders to buy even more oil and place it in storage.
Unrestrained by an appalling lack of regulation, this has led to a steady rise in crude oil inventories over the last two years, "resulting in US crude oil inventories that are now higher than at any time in the previous eight years. The large influx of speculative investment into oil futures has led to a situation where we have both high supplies of crude oil and high crude oil prices. . . . In fact, during this period global supplies have exceeded demand, according to the US Department of Energy."
The fact that the skyrocketing oil prices of late have been accompanied by a surplus in global oil markets was also brought to the attention of President George W. Bush by Saudi officials when he asked them during a recent trip to the kingdom to increase production in order to stem the rising prices. Saudi officials reminded the President that "there is plenty of oil on the market. Iran has put some 30 million barrels of oil that it can't sell into floating storage. 'If we produced more oil, it wouldn't find buyers,' says the Saudi source. It wouldn't affect the price at all."
And why producing more oil "wouldn't affect the price at all"? Well, because what is driving the soaring oil prices is not shortage but speculation: "with so much investment money sloshing around in the commodities markets, the Saudis calculate they have no hope of controlling short-term price fluctuations. They blame the recent price run-ups on speculation and fear of shortages [not real shortages], factors they say are beyond their control."
To sum up, manipulative speculation and dollar depreciation account for most of the recent increases in the price of oil-speculation accounts for nearly 60 percent, dollar depreciation for almost 40 percent. This is no longer a secret. What remains largely a secret, and needs to be exposed, however, is the relationship between speculation and dollar depreciation, on the one hand, and war and geopolitical instability, on the other.
While it is important to point out the impacts of dollar depreciation and commodity speculation on the price of oil, it is even more important to show that both of these factors are byproducts of war and militarism. Not only has the war played a critical role in the weakening of the dollar (through plunging the U.S. deep into debt), it has also created favorable grounds for manipulative speculation in commodity markets, especially energy markets.
Therefore, while efforts to curb speculation in energy markets (through regulation of the largely unregulated futures markets) or buttress the dollar from further declining may sound comforting, such efforts will remain illusive and ineffectual unless the devastating wars and military adventures in the oil-rich Middle East are terminated; that is, unless the root causes of currency depreciation and commodity speculation are exposed and cut out.
Ismael Hossein-zadeh, author of the recently published The Political Economy of U.S. Militarism (Palgrave-Macmillan 2007), teaches economics at Drake University, Des Moines, Iowa.
28 Comments so far
Show AllThe points about war, currency, and speculation are good. However, I tire of those who say "so-called peak oil".
The fact is that 6.8 billion people can't be sustained without oil. Whether we saddle our children, our children's-children, or our children's-children's-children with the big dinosaur like dying off of human beings is irrelevant. We need to conserve while we still have enough oil to bridge the gap. It's better to start a diet when you're a few pounds overweight than to wait until you're life threatening obese.
Furthermore, it's not just peak-oil, it's PEAK-PEOPLE. We can't get ahead if a 10 percent reduction in oil usage, pollution, etc. is offset by a 10 percent increase in population.
So let's quit whining about the price of gas and get on the stick and make some dramatic changes.
Expensive oil is helping our environment. People are trading in their gas guzzlers for more fuel efficient cars. There is real effort and focus right now on conservation. There is more talk on finding alternatives to oil. This would not be happening if oil were cheap. Who cares what's causing it!! It's a wake-up call to get as far away from oil as possible and begin a serious search for alternatives that benefit the planet.
I would be disappointed to see oil prices recede again.
geo522:
Where on earth do you get that from? Even the most wildly optimistic estimates say that Alaska has only about 90 bbl. With the current US annual consumption around 8 bbl, that amounts to 11 years and change. You are claiming here that Alaska has larger reserves than the geologists estimate for the entire planet.
It's ALL bullshit!! Here are the facts in a nutshell; the world bank and IMF are the ones who dictate the price of oil and reap the big profits. The reason that they have set the price so high is that they recently forgave the loans of many third world countries, and now they need to be paid back, the price of oil is simply a tax on everyone on the planet. And as for peak oil, we are not even close, there is enough oil in Alaska to supply the US for at least 200 years, and that's without importing a drop. Which also points out how useless it would be to open any other areas to drilling, we wouldn't be able to use that oil either, we would have to continue to buy oil from the Arabs so they will continue to finance our runaway debt.
FrederickJohnson:
Just curious. Which universities are failing science students for making new discoveries?
This entire discussion is gravely irresponsible, as is the article that spawned it. To suggest that the oil price problem is just fakery and speculation, that Peak Oil is a myth, that there is no real energy problem, that it's all just some manner of conspiratorial trickery designed to separate fools from their money just plays into the hands of the reckless idiots in charge whose lack of foresight and openly corrupt self-dealing have brought us to the edge of the cliff. Get a clue: There IS An Energy Problem. Oil will be in short supply, if not today, then very soon. And discussions like this that try to focus blame somewhere, that try to suggest that there is not really a need to change our way of doing things, that all we need to do is find the villains responsible and "get" them ignores the very real need to take action as fast as possible to forestall what will, in fact, be the worst crisis ever to befall mankind. When the oil does begin to decline, which no responsible party denies that it eventually will, the entire human race will be screwed if we have not made the necessary preparations to transition to a post-oil future. 10 or maybe 50 or even 200 years from now there will be no oil. Then what? Whom shall we blame then? Answer: Ourselves, for allowing propagandistic drivel like this article to lull us into a false sense of complacency, and allow us to go on thinking that we don't really need to do anything about it, that all we need to do is throw the scoundrels responsible behind bars then go about our business. Oh, and one more thing...google "Lindsey Williams debunked" and you will quickly see why absolutely no one in the professional community takes this jackass seriously. One more charlatan foisting off comforting lies on a gullible public to draw attention (and revenue) to himself.
Peak Oil statistics suggest that the world at its peak right now, which means we should be seeing the lowest possible price, so it has to be other factors. (But PO is a statistical certainty. it will inexorably assert itself, 5-10 years down the road.)
What's interesting is that it is still a killer deal at $200 a barrel....even at $500/ barrel. It is truly astounding how much virtually free energy sits in one of those barrels.
I thought it was a good article. It addressed the primary [not the only] factors driving up oil and gas prices. For those among you who wonder how speculators can control supply, look at how anti trust laws have gone unenforced in the oil industry. Look also at a prospectus from any one of the largest outfits selling and holding large futures contracts. You'll find that, thanks to the lack of regulations, they now may own refineries, storage facilities, and pipeline facilities. Do you think they might use those to control supply and affect their future price predictions?
Using the speculators' [Goldman Sachs, Merril Lynch, Bears Stearns] own numbers, political instability adds $20-$30 to the price of a barrle of oil. Watchdog groups [because the gov't isn't watching] put a $30 per barrel premium on oil because of speculation.
If the oil pirates and war mongers were brought under control, oil would be around $85-90 per barrel based on supply, demand, and weak dollar value.
The writer loses all credibility by saying "... recently resuscitated theory of the so-called Peak Oil,..."
The Paek Oil theory is a PROVEN FACT, as shown by every individual field, and for groups of fields within a state, such as Texas, or nation, like the USA. Or perhaps the author thinks Formerly Big now Little Oil has intentionally witheald billions of barrels in production from US wells since the Peaking of Texas and the USA as a whole in 1970-71. Perhaps he'd like to explain why Alaskan North Slope production is way down from its Peak? Opps.... There's that word again--PEAK.
There's a definate supply problem. There is no more $10 oil; nor $20; nor $30; and so forth. There might be some $100 oil if the Iranian sanctions are lifted, US Troops evacuated from Iraq, and Nigeria's MEND negotiated with. But increased flows from those countries will only mitigate the post-Peak decline in exports from Mexico, Russia, and Norway, to name three of the most prominant declining exporters.
THE AGE OF CHEAP OIL HAS PEAKED!!!
Some people, particularly economists like the writer, can't seem to understand this basic and easily seen fact.
You trust capitalists to produce your energy? After the past eight years you still trust capitalists? God Bless the United States of America!
Iran and Iraq both stopped selling oil in USD in 2007, see: http://uk.reuters.com/article/oilRpt/idUKDAH83366720071208 and http://thegallopingbeaver.blogspot.com/2007/01/it-was-always-about-oil-follow-bouncing.html
and I just finished watching the Energy Non-crisis on video.google that was listed above which explains all that.
Jesusofjonesboro thank you at least someone else is still thinking. Its the speculators on Wall Street and the dollar/inflation problem. All oil is sold in dollars and the US dollar has been destroyed as a result of costly wars abroad (hello trillions of debt for Iraq) and the disastrous housing mortgage lending industry et all. Not to mention the FED which prints more dollars like no tomorrow to bail out the insolvent banks (and soon Freddie Mac and Fannie May). The more dollars in circulation the less the dollar is worth people! Therefore we need more dollars to purchase the same amount of oil since the dollar is worth less. Having been to some of those Persian Gulf States recently the exchange rate sucks when you are trading your dollar in for dinars.
"Then why are McCain and Bush demanding that we open more territory to drilling? Ridiculous"
Ask yourself why they are asking now that Democrats control congress and Obama has been annointed President. They had 6 years where they could have just forced the issue and opened it up. They didn't. The fact is Big Oil does not need more oil, and they find imported much more profitable since they can hide profits in the tax havens and avoid taxes, despite their record "reported" profits. Asking to open up more territory for drilling, pretending the price of oil is a supply issue, is a cover for the speculators.
"Commodity exchanges REQUIRE speculators in order to function. There may be more money in oil market but is is no greedier than ever - it couldn't be."
Speculation by those who take final delivery of the product is fine. Most of these exchanges are now dominated by those who never take delivery of the commodity, and could not even if they wanted to. If the futures price is lower than I think it will be in 6 months, I buy a futures contract and take delivery 6 months later, making a nice piece of change (or not if I guessed wrong). Today, due to margins, some investment firm buys future contracts at 14 dollars (10%) at 140, and if oil jumps from 140 to 145, they sell it, and their 14 dollars just made 5 dollars, if it drops they sell quick and take the loss. If prices are trending down, they short it. Since the big boys can drive the direction, they win 80% of their bets. The Fed could crush the speculation by increasing the margin requirement to 50%, but the sub-prime losses must be covered, so they stand aside.
Big Oil does not buy oil on the market, their deals are with the countries that own the oil, and they pay nowhere near the market price, but they sell to their refineries at market price (the profits on imports get locked offshore) .
"One clarfication. There may not be a shortage of oil per se.. HOWEVER there IS a shortage of CHEAP oil. Aye.. that's the rub!."
Thats true. Cheap oil costs less than 5 dollars a barrel to produce, you just stick a straw in it and out it comes (Iraq was the worlds greatest supply of cheap oil that has hardly been tapped), not so cheap oil that requires more effort to extract may cost as much as 10-20 dollars a barrel, and oil from oil sands costs 40 dollars. Proven reserves world wide have doubled over the last 30 years, from 600 billion to 1.3 trillion. Probable reserves are much higher, but do not become proven until oil is extracted from them.
"...between 30- and 40-percent of the recent increases in the price of oil can be attributed to dollar depreciation. One of the simplest ways to calculate this is to compare the price per barrel of oil in dollars and euros over the last five years. "The widening gap between the two [dollar price vs. euro price] indicates that 35 percent of the increase in the price of oil could be attributed to currency [dollar] devaluation.""
On June 1, 2007 the Dubai Mercantile Exchange opened (NYMEX set it up). Oil was at 60 dollars per barrel.
Today it has jumped 140% in proce over June 1, 2007 levels. The euro has strengthened 17%. Thats 12% due to currency depreciation, not 40%.
Obviously, the other 88% of the increase given there is no supply interruptions is speculation. The price w/o speculation should be 70 dollars a barrel.
In fact, "in a recent hearing held by the Oversight and Investigations Subcommittee of the House Energy and Commerce Committee, four industry experts, representing energy consultants, all agreed, under questioning, that oil prices could quickly be cut in half, with no harm to producers, just by removing the speculative aspect of the market. One, Michael Masters, (who has recently testified for other Committees) even said that if the CFTC (Commodities Futures Trading Commission) would simply enforce their rules as written, a big portion of the speculative bubble could be immediately contained."
http://www.larouchepub.com/pr/2008/080623halve_oil_prices.html
If you haven't seen the Energy Non-crisis, watch it: video.google.com/videoplay?docid=3340274697167011147
Lindsey Williams is annoying but I've been informed by a reliable source that he has his facts pretty straight.
There might be no shortage now but just as the Sun rises every morning there will be a shortage in the future. Unless the supply of hydrocarbons to the chemical industry is somehow secured, an aspect that nobody ever talks about, the production of computers, cars, refrigerators, air conditioners, large medical instruments, water bottles, you name it, anything that is at least in part made of what is popularly known as "plastic" will come to a grinding halt.
War is profitable. Power corrupts. The rich get richer and the poor get poorer. Oil is a finite resource. Speculators don't give a crap for how their actions affect the world. Some people have nothing better to do than argue about how many angels can fit on the tip of an oil derrick while Iraqis die, the planet warms, people starve, and our nation is impoverished. Some professor from Drake University enjoys getting people fired up by telling us the "truth" about oil.
A longer and more interesting version this article can be found at http://www.counterpunch.com/zadeh07092008.html
The counterpunch article does raise some salient points that are not easily refuted.
One clarfication. There may not be a shortage of oil per se.. HOWEVER there IS a shortage of CHEAP oil. Aye.. that's the rub!.
The remaining thousands of barrels of oil that these folks keep talking about will be MORE expensive to get out of the ground.
Take the Tar Sands in Alberta. Figure in the cost of extracting that oil for use? It is far more costly than say getting oil out of a Texas oil well in the early 1900's!.
There is this conservative oil man T Boone Pickens who is admitting that Peak Oil is here.... so... it is just a matter of time when more and more folks in the oil business come clean about what they know. They have been hiding the truth from us, the masses as to not induce panic.. but it was only a matter of time when they could not keep it from us.
Cheney knew.. and that is why he kept his energy task force secret by court of law.
That is also why we are in Iraq. They knew.... the public is a bunch of panicking ignorant fools!...
Open your eyes and see the lies right in front of you!.
Peace
How does a speculator drive up the price of oil? First, there appears to be a lot of confusion about what is the price of oil. There's a future's market in oil. And there's a spot market for oil. And there are long-term contracts to buy oil. None of these conversations seem to recognize that.
A speculator can drive up the 'futures' market for oil. They can buy up futures contracts basically betting that oil will cost more in the future than today. What they are really doing is promising to buy an amount of oil on a future date at a future price.
Now, unless they have an oil tank farm in their backyard, they won't actually by the oil. That's why to me its hard to see that speculators are doing anything to affect the spot market price of oil or the long-term contracts to supply oil at a price. They could only affect those markets by physically buying the oil and storing it until they could sell it later at a higher price. So, how many speculators do you think own oil tank farms and could physically buy and store the oil.
Otherwise, their futures purchases are just placing a bet on the future price of oil. What they'll really do is sell the contract to buy the oil to someone else when the time comes. What that contract is worth depends on the real price of oil, probably on the spot markets, at that time. If the real price of oil is higher than their what they bet the price would be, they can make money. If the real price of oil is lower, then they'll lose money. Neither does much to change the real price of oil.
Now, I could see a big company like Exxon deciding that oil is going to be worth more in the future and trying to stock up. But I wouldn't call Exxon a 'speculator'. And I can see any country with oil in the ground deciding its worth more if they just keep it there for now. It will be worth more in a few years. So a country with oil should probably just be selling enough to make the money it needs today and trying to keep the rest.
And there's nothing wrong that I can see with a market making the decision that oil will in general be worth more in the future than today. That leads to the sorts of decisions seen above. But I don't see anything inherently evil in that.
We keep seeing these simplistic pieces arguing for or against one thing being the cause of a problem. So, one day its 'was the Iraq war about oil'. Now this is about 'is the cause of high prices an oil shortage.'
The problem is, the world is much more complicated than that. So all of these end up being a lot of hot air. There are some useful bits of information in here. And if you read a lot of the different articles that claim to know the single cause of something, then put them all together in your mind, you might be somewhere closer to the truth.
What does it matter? As long as the fake "liberals" and "conservatives" keep derailing new ideas, innovations, and even inventions by allowing Big Oil/Auto to slap frivolous lawsuits and phoney "patents" to kill healthy competition along with allowing academic institutions private and public to FAIL students in science for actually making potentially helpful discoveries, all you're gonna do is simply "speculate" about whether oil is running out or not. In any case, petroleum is an OUTDATED technology. Stop complaining and give other ideas a chance.
llibyah,
Never trust anyone who insists that he is about to bestow upon you the "truth." llibyah, you make statements and expect us all to believe them just because you say so.
"Commodity exchanges REQUIRE
speculators in order to function. There may be more money in
oil market but is is no greedier than ever - it couldn't be"
Was it always a commodity? I guess I'm ignorant. And if it is now, and we have all of these speculators driving up the price, much like real estate investors drove up the price recently, shouldn't there be an eventual popping of the bubble? I'm no economist, but I'll wage with you right now that even if it does, the consumer will not see a reduction in the price. I'm sure, llibyah, Rush Limbaugh and the other assholes have provided you with some pseudo-argument to "answer" this, and I'm just as sure that it's crap.
Unless one believes that oil is a renewable resource, Peak Oil is a geological certainty subject only to timing. For a thorough treatment of Peak Oil see www.theoildrum.com
So, he disproved it by talking to economists and business speculators? What? The single rule of our current commodity economists is that supply will always increase. It's why most of them will never concede a peak oil theory. Sorry, Peak Oil is very real. Peak oil was already proven here in the US, with the lower 48 peaking in 1972. Not to say that's what happening now, perhaps it isn't. But at some point world oil production will peak. Currently, prices have become favorable enough to bring on additional capacity, so oil could become higher in price simple because more expensive (i.e. more difficult to mine and refine) oil is being used, such as the tar sands in Alberta and the shale encased oil of the Dakotas. But eventually it will drop enough that this won't be adequate, and supply will begin to drop at whatever the price point.
It is a little misleading to say that supply is increasing with demand now. The problem was that supply had decreased from May 2005 to September 2007 (check out the EIA numbers), while demand continued to rise. Supply is still lagging behind demand as a hard number; a percentage tells you nothing regarding supply/demand disparities.
If there was a shortage congress shoud at least be talking about reducing the legal speed limit and banning the sale of incondescant light bulbs. Other countries have banned incondescants. 9% approval may be too high.
libyah, simply re-asserting arguments that this article has just debunked is not very convincing. You claim that the article ignores several truths when in fact it covered every point that you mentioned.
It's become obvious to me that certain parties are desperate to conceal the role of speculation in the enormous rise in oil prices. There have been just too many articles and media appearances by so-called energy "experts" screeching hysterical, conclusionary arguments that anything and everything is to blame for this crisis BUT speculators.
jj
Then why are McCain and Bush demanding that we open more territory to drilling? Ridiculous.
Several truths are ignored.
Commodity exchanges REQUIRE
speculators in order to function. There may be more money in
oil market but is is no greedier than ever - it couldn't be.
OPEC has always been a cartel. And cartels have always existed to keep prices up and rising.
The new factor is Peak Oil - Twenty years in advance M. King
Hubbert predicted U.S. oil production would peak in the early 1970s - it did. Most petroleum geologists accept the
Peak Oil doctrine AND an overwhelming majority believe it
has arrived for the world.
Meanwhile the world's two most populous nations (China and India with a combined population seven times ours) are
rapidly industrializing and demanding more oil. With supply
peaking and demand increasing economics teaches us that price will increase enough to bring demand down to match
supply.
Two years from now with gas over $10 a gallon we'll look back at good old 2008 when gas only cost $4.