Oil in a Culture of Control
Oil is a global commodity, although, to be sure, it’s whereabouts are distributed unequally across the globe. Nevertheless, a disruption in supply anywhere in the world has ramifications for consumers everywhere. The damage caused by such a disruption in any given country depends upon that particular countries dependence on oil, and benefits and losses upon the ratio between “imported” and “exported” quantities. In the oil markets, seemingly minor disruptions in the supply of oil can result in a drastic spike in prices; for instance, in Oil ShockWave, a crisis simulation by Securing America’s Future Energy (SAFE), an approximate four percent drop in global supply resulted in a 177% increase in the price of oil (from $58 a barrel to $161 a barrel).1
The demand for oil is categorized as “demand inelastic,” considering there are no ready substitutes available for oil, the implications being consumers have few opportunities to switch to other fuels for the myriad activities which oil enables. Strict supply conditions and a growing demand for oil give rise to an economic environment in which, as a rule of thumb, each 10% increase in the price of oil restricts U.S. GDP growth by up to 0.1 percentage points. Proceeding the Joint Economic Committee in April 2002, Alan Greenspan observed, “all economic downturns in the United States since 1973… have been preceded by sharp increases in the price of oil.”
U.S. oil consumption habits are quite extraordinary: for, due to a monumental privilege made possible by the U.S. dollars current status as reserve currency, the U.S. accounts for more than 25% of global daily demand, despite composing only 4% of the human population. Transportation accounts for 67% of U.S. oil consumption, and 97% of transportation in the U.S. is fueled by oil, with virtually no substitutes. An overwhelming amount of this movement of goods and services is on behalf of the major industries, featuring at center the military-industrial complex.
Over the past three years, gasoline prices in the U.S. and western world have fluctuated dramatically. In the summer of 2008, for instance, they rose to over $4/gallon but subsequently settled; decades of price inflation aside. Many analysts cite the reality of Peak Oil as the main reason for the inflationary and wild oil prices, however others argue that the price of crude oil today is not determined by the relation of supply to demand, but, rather, the control of oil through speculation by four major Anglo-American companies and their associates. This highly deferential pyramid in regards to the number of sellers in the oil market, in and of itself, results in higher prices. More sellers, on the other hand, would lead to more supply, leading to a more competitive environment with lower prices and higher quantity. Many maintain that Peak Oil not an ecological phenomenom, but, rather a political one, such as the prolific researcher and author William Engdahl.
At least 60% of the $128 per barrel price of crude oil in the summer of 2008 was, indeed, the outcome of unregulated futures speculation by hedge funds. While some of the spike has to do with summer’s status as driving season, other factors, such as the paper markets, play a significant role. U.S. rules as stated in Commodity Futures Trading Commission enable speculators to buy a crude oil futures contract on the NyMex, having only to pay 6% of the value of the contract. So, a futures trader in the Summer 2008 was required to pay approximately 8$ for every barrel, borrowing the other $120. This 16 to 1 hyper-leveraging of oil futures abated the high prices and ameliorated bank losses in sub-prime and other disasters by expenses suffered by the population.2
The selling of oil futures and derivatives contracts have major implications for where oil prices sit at any given time, for the number of buyers and expected prices shifts demand. Further, the process of fixing these prices is so open-ended, only few insiders, such as major oil trading banks Goldman Sachs and Morgan Stanley, know who is buying the oil futures and derivatives contracts; that is, “paper oil.”
This perceived anticipation for the future affects our present demand, and when a multitude of investors bet on a bullish oil market, the price will increase. Similarly, cash for clunkers, for instance, increased consumer demand due to the tax write-off and deflated price of the cars featured in the program, shifting demand from the future to the present. In the future, profits of the auto industry and price of automobiles should fall due to depressed demand exacerbated, in part, by this program.
The appearance of unregulated international derivatives trading in oil futures over the past 15-20 years has made possible the present speculative bubble in oil prices. The advent of oil futures trading and the two major London and New York oil futures contracts has landed control of oil prices not with OPEC, but with Wall Street.
In June of 2006. a U.S. Senate Permanent Subcommittee on Investigations report entitled “The Role of Market Speculation in Rising Oil and Gas Prices,” observed “…substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices.” The ability for certain firms to influence prices by way of speculation is one symptom of a decades long process of deregulation in the marketplace and the following explosion in derivatives trading.
The report noted, also, that the Commodity Futures Trading Commission, a regulation of financial futures, had been mandated by Congress to ensure the laws of supply and demand were reflected in the prices on the futures market. The U.S. Commodity Exchange Act (CEA) states, “Excessive speculation in any commodity under contracts of sale of such commodity for future deliver… causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue an unnecessary burden on interstate commerce in such commodity.” The CEA, moreover, instructs the CFTC to implement trading limits, “as the Commission finds are necessary to diminish, eliminate, or prevent such burden.”
The Commodity Futures Trading Trading Commission, a financial futures regulator, had been mandated by Congress to ensure that prices on the futures market reflect the laws of supply and demand rather than manipulative practices or excessive speculation. The US Commodity Exchange Act (CEA) states, “Excessive speculation in any commodity under contracts of sale of such commodity for future delivery … causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and unnecessary burden on interstate commerce in such commodity.”
Therefore, the world’s keystone commodity market, oil, is unregulated and highly manipulated. The global economy runs, so to speak, on oil. The U.S. dollar, since 1971 under Nixon, has been a purely fiat currency, as are the majority of global currencies and all speculative instruments; in other words, it’s intrinsic value has been, since 1971, based solely on arbitrary pronouncement and maintained through responsible fiscal policies and management. No longer backed by gold or silver, paper and digital dollars were effectively backed by the world’s oil, especially when one considers that, in order to buy crude oil, virtually each nation had to first purchase US dollars. This dynamic is what Valery Giscard d’Estaing termed an “exorbitant privilege,” in reference to the benefit the U.S. enjoyed in the U.S. dollar being the international reserve currency: one outcome being, that the U.S. would not face a balance of payments crisis, because it purchased imports in its own currency.
The aforementioned US Senate Report further acknowledged:
Until recently, US energy futures were traded exclusively on regulated exchanges within the United States, like the NYMEX, which are subject to extensive oversight by the CFTC, including ongoing monitoring to detect and prevent price manipulation or fraud. In recent years, however, there has been a tremendous growth in the trading of contracts that look and are structured just like futures contracts, but which are traded on unregulated OTC electronic markets. Because of their similarity to futures contracts they are often called “futures look-alikes.”
The only practical difference between futures look-alike contracts and futures contracts is that the look-alikes are traded in unregulated markets whereas futures are traded on regulated exchanges. The trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron and other large energy traders into the Commodity Futures Modernization Act of 2000 in the waning hours of the 106th Congress.
The impact on market oversight has been substantial. NYMEX traders, for example, are required to keep records of all trades and report large trades to the CFTC. These Large Trader Reports, together with daily trading data providing price and volume information, are the CFTC’s primary tools to gauge the extent of speculation in the markets and to detect, prevent, and prosecute price manipulation. CFTC Chairman Reuben Jeffrey recently stated: “The Commission’s Large Trader information system is one of the cornerstones of our surveillance program and enables detection of concentrated and coordinated positions that might be used by one or more traders to attempt manipulation.”
In contrast to trades conducted on the NYMEX, traders on unregulated OTC electronic exchanges are not required to keep records or file Large Trader Reports with the CFTC, and these trades are exempt from routine CFTC oversight. In contrast to trades conducted on regulated futures exchanges, there is no limit on the number of contracts a speculator may hold on an unregulated OTC electronic exchange, no monitoring of trading by the exchange itself, and no reporting of the amount of outstanding contracts (“open interest”) at the end of each day.
David Kelly of J.P Morgan Funds, the Chief market strategist for one of the world´s leading oil industry banks, recently told 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.” The story is floated around, and generally accepted for that matter, that China´s oil imports are exploding, meaning grave implications for the supply-demand equilibrium, and subsequently reason for the spike in prices. David Kelly´s enunciation, in contraposition, negates that hypothesis.3
OPEC, furthermore, left its 2008 global oil demand forecast unchanged, citing slowing economic growth in the industrialized world and slight growth in the emerging markets. OPEC predicted oil demand in 2008 to be, for the most part, unchanged from its previous estimate. Demand from China, the Middle East, India, and Latin America will rise, offset by lower demand in the EU and North America.
Big oil conglomerations profit enormously from high oil prices. Advocates of Peak Oil argue that, in the near future, Absolute Peak Oil was the coming end to cheap oil. One premise of Peak Oil holds fossil fuel to be the leftovers of fossilized dinosaur remains or perhaps algae, and so therefore characterized by finite supply. Alternatively, a theory of oil formation, arrived at in the Soviet Union of the 1950′s, criticizes the assumptions of western biologists to be unproveable, citing the fact that western geologists have warned an end to oil for more than century, thereafter discovering more supplies.
For the USSR, in the Cold War of the 1950′s, a domestic supply of oil was a geopolitical necessity, and a considerable boost to security. In 1956, Prof. Vladimir Porfir’yev and a team of other scientists concluded: “Crude oil and natural petroleum gas have no intrinsic connection with biological matter originating near the surface of the earth. They are primordial materials which have been erupted from great depths.” They termed this new theory “a-biotic,” or, in other words, non-biological.4
Implications of such a theory being that earth’s oil supply is limited only by the amount of organic hydrocarbon materials present deep in the earth at the time of earth’s formation, as well as the technology available to drill uber-deep wells and explore into the earth’s inner regions. The scientists argued that oil comes from deep in the earth, and from conditions of high temperatures and very high pressure. Porfir’yev: “Oil is a primordial material of deep origin which is transported at high pressure via ‘cold’ eruptive processes into the crust of the earth.”
The theory of Peak Oil originated in a 1956 paper by Marion King Hubbert, a Texas geologist employed by Shell Oil. Oil from wells is extracted, he argued, in a bell curve nature, and once a “peak” was reached, what he termed “Hubbert’s Curve,” decline ensued. By 1970, he argued, oil production in the United States would peak and the oil crises of the seventies are oft cited as evidence of the legitimacy of his theory. Free trade agreements world wide have taught us, on the other hand, that it is more likely the flooding of the US market with tariff free and dirt cheap Middle East imports by Shell, Mobil, Texaco, and the other Saudi Aramco made it impossible for California and many Texas producers to compete.
Exacerbating theories that political posturing promotes the illusion of limited oil supplies, the suppression of alternative modes of transportation is well-documented; from electro-magnetism to water powered cars. Why does the combustible engine reign supreme in an age of moon exploration, globalization and other seemingly sky-high technologies?
How do few companies get to the point of wielding so much influence?
By the 1870′s, John D. Rockefeller’s Standard Oil Empire enjoyed a virtual monopoly over the United States, as well as various foreign countries. The King of Holland, in 1890, supported the creation of an international oil company called Royal Dutch Oil Company for the purpose of refining and selling kerosene from Indonesia, then a Dutch colony. In the same year, a British company founded to ship oil, the Shell Transport Trading Company, “began transporting Royal Dutch oil from Sumatra to destinations everywhere,” and “the two companies merged to become Royal Dutch Shell.”5
In 2008, it was widely reported that the U.S. government secretly led dealings between Shell and the Iraqi Oil Ministry for no-bid contracts. Andrew Kramer, for the New York Times, uncovered the story that the world’s oil giants, “Exxon Mobil, Shell, Total and BP… along with Chevron and a number of smaller companies” were present at “talks with Iraq’s Oil Ministry for no-bid contracts to service Iraq’s largest fields.”
According to the Times, “A group of American advisers led by a small State Department team played an integral part in drawing up contracts between the Iraqi government and five major Western oil companies…”
There is much evidence that the Bush administration, foreign firms and Iraq’s Oil Ministry had conspired during the most important periods of the Iraq War. There are deep financial ties between the military occupation in Iraq and the aforementioned oil giants; for instance, the oil giants Exxon, Mobil, Shell, Total, BP, and Chevron often make appearances on the Pentagon’s payroll. In 2007, these five firms earned more than $4.1 billion from the Pentagon, with Royal Dutch Shell at the forefront with $2.1 billion.
The government of Iraq and Royal Dutch Shell eventually signed a $4 billion deal to “to establish a joint venture with [Iraq's] South Gas Company in the Basra district of of southern Iraq to process and market natural gas.” The Times reported that Shell “established an office in Baghdad.” A “Green Zone” was guaranteed, and Shell was handed a $338 million contract for aviation fuel by the Pentagon. Therefore, the U.S. government was heavily involved in dealings between Shell and the Iraqi Oil Ministry, and the U.S. military regularly pays Shell billions of dollars each year.6
These subsidies should drive the price of oil down, as, from the businesses´ perspective, subsidies lower costs and make firms willing to offer more at a given price.
In an October 6 Business Week article, Robert Fisk elaborates upon the coming demise of the dollar. The phenomenon will see Gulf Arabs, along with China, Russia, Japan and France end dollar dealings for oil. The break from the post World War II Bretton Woods world order will be an in-between period as the aforementioned nations shift to a bread basket of currencies; among which will be the Japanese yen, the Chinese yuan, the euro, gold and a fledgling, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.7
It is possible that such plans partially explain the dramatic rise in the price of gold over the last few weeks. Certainly, they portend the end of the Dollar System as we have known it since the end of the Second World War. Further, these questions center on the strategic importance of Middle Eastern oil to both the rising giant of China and the waning United States. The deadline for the currency transition is 2018. Adding to the drama, Iran recently announced that its foreign currency reserves would from now on be held in euros as opposed to dollars. Many analysts recall what transpired after the last Middle East oil producer decided to sell its oil in euros than dollars. After the decision by Saddam Hussein, the U.S. and Britain invaded Iraq.
Others hold that the timeline for revaluation is much shorter. The decline in consumer spending, which makes up 70% of the U.S. economy, and unemployment rates, which, though their rise has slowed continue on an upward trajectory, are indicators of this. A revaluation of the US dollar, if even only by one-third, would seriously compromise the U.S.’s ability to import commodities, such as oil.
In September, U.S. investment bank Goldman Sachs stated that oil price could potentially peak at $85 a barrel by the end of 2009, and average approximately $90 in 2010. Deutsche Bank, on the other hand, recently raised their prediction $10, but it still lands at $65 a barrel. This is after they predicted in 2008 $150 oil by 2010.8
Securing America’s Future Energy. Fundamentals of the Global Oil Market. [↩]
F W Engdahl. ‘Perhaps 60% of Today’s Oil Price is Pure Speculation‘. Global Research, 2 May 2008. [↩]
F W Engdahl. More On the Real Reason Behind High Oil Prices, Global Research, 21 May 2008. [↩]
F W Engdahl. War and Peak Oil. Global Research, 26 September 2007. [↩]
Andrew Gavin Marshall. Origins of the American Empire: Revolution, World Wars and World Order. Global Research, 28 July 2009. [↩]
Nick Turse. Pentagon Hands Iraq Oil Deal to Shell. Global Research, 4 October 2008. [↩]
Robert Fisk. Oil Not Priced in Dollars by 2018? The Independent, 6 October, 2009. [↩]
Deutsche Bank raises 2010 oil price forecast. Boiler Juice, 6 October 2009. [↩]