Wall Street and Big Oil Profit from Global Turmoil

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. 

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.