Factors Behind Increasing Oil Prices

Source: Media Monitors
[May 15, 2006]

Today global crude oil prices are hovering around US$70 a barrel, compared with merely about US$20 in 2002. Earlier on April 21 and 24 the price of a barrel of oil reached $75.35 on the New York Mercantile Exchange, the highest since the contracts began trading in 1983. So what are the reasons for oil prices?

The causes contributing to the rise of oil prices can be chiefly divided into two categories, namely apparent and underlying causes. The apparent reasons can be summarised as follows:-

Global demand for oil

According to the International Energy Agency (IEA) the world’s oil demand in the first quarter of 2006 was 85.4 million barrels of oil per day. During the same period in 2001 world oil demand was 75 mb/d. In 5 years the global demand for oil has jumped by 13.9 %. The demand for crude oil has been fuelled by the economies of China, India, Japan and lately a resurgent US economy. China alone accounts for 40% in the increase for world’s demand for oil. Given the current trends in oil consumption, the IEA has projected that the world’s demand for oil by 2025 will stand at 119 mb/d. All of this means that the global demand for oil is set to soar and push up the price of oil.

Disruption in oil supply

For a variety of reasons the global supply of crude oil has not been able to keep up with demand. Below is an explanation of some of major causes in the interruption of oil supplies.

a). Natural disasters

Hurricane Katrina had a devastating impact on US oil production. According to the US government, Katrina managed to shut down 92 percent of Gulf oil production and 83 percent of Gulf natural gas production. Bush had to release 30 million barrels of crude oil from America's Strategic Petroleum Reserve and this still was not enough to dampen the price of crude on the international market. With the hurricane season fast approaching another hit on the oil production facilities of the Gulf coast will send prices rocketing. Verleger, an energy consultant who is also a Senior Fellow at the Institute of International Economics says, “If we have a severe hurricane season, it's quite likely that we will see another round of oil production lost like we saw last year.”

b). Volatility in the Middle East

Before the Iraq war in 2003 some analysts were forecasting up to 4 mb/d of Iraqi crude flowing on to the international market and the price of a barrel of crude oil plummeting to $10. Today, crude oil prices still remain high, despite America having spent $2 billion to develop Iraq’s oil infrastructure. Iraq is still pumping about 600,000 b/d less than levels seen in early 2003, before the U.S. invasion to topple Saddam Hussein. The ever popular Iraqi resistance has reduced the flow of oil to a trickle. The almost daily blowing up of pipelines has restricted exports from Iraq’s northern fields, around Kirkuk, and has hampered efforts to modernise the larger southern fields.

Oil prices have also been pushed upwards by the continuing stand off between the US and Iran. Tehran’s threat to use oil as a weapon and the possibility of severe disruption to 15 million barrels of oil which are transported daily through the Straits of Hormuz has driven the oil markets in to a mad frenzy.

c). Other political tension

Fears over Nigeria the world's seventh-biggest exporter and fifth-biggest source of U.S. oil imports has persistently made oil markets edgy. For sometime now a mini conflict has engulfed the oil rich region of Nigeria. The sabotaging of oil pipelines, the kidnapping and killing of foreign workers, and fighting between Movement for the Emancipation of the Niger Delta (MEND) and government forces have damaged Nigeria’s oil producing facilities. Some estimates suggest that up to 25% of Nigeria’s crude capacity has been taken off line.

Another region of contention for the oil markets is Latin America. Here countries like Venezuela and Bolivia have succeeded in re-nationalising parts of their oil and gas industries thereby threatening the cheap supply of oil to America and the West. Western companies have been bitten by Chavez’s Bolivarian revolution and Western governments have so far been powerless to halt this trend. This has contributed to growing war of words between Venezuela and the US. The failure of several coups to oust Chavez has prompted Washington to contemplate military action as the only way out of the impending crisis.

d). Lack of refining capacity

In general there is lack of refining capacity in all of the major oil producing countries. This is because many of the big oil companies (especially the seven sisters) that dominate the oil industry have either connived with governments of oil producing countries to delay investment in the much needed expansion of refining capacity or have been reluctant to invest in extra capacity at home. Last year, when it suited the major oil companies, the Bush administration pressed the Saudi Oil Minister Ali Naimi to announce a plan to spend $50 billion over a five–year period to increase Saudi production capacity to 12.5 million barrels per day by 2009 from the current 11 million limit. Before this declaration the Saudi’s never expressed any desire to increase capacity.

In the US, poor refining capacity became acutely evident in the aftermath of hurricane Katrina. Shortage of crude oil was not the real reason for the increase fuel prices. It was the scarcity of oil refineries to distill the crude into useable forms of fuel that was real culprit behind the price hike. On May 11 2006 the Kansas Star quoted the CEO of Exxon Mobile as saying that it really wasn’t all those environmental laws that prevented his and other companies from building new refineries. In fact he said that they needed to keep the greens in business to have an excuse for disinvesting in refining.

Other factors such as the weakness of the dollar and the falsifying of oil reserve inventories by oil companies such as shell have added to market uncertainty over the past few years and have helped to push up the price of oil.

Whilst the aforementioned only tell part of the story the underlying causes foretell higher oil prices and conflicts between nations over the control of the remaining hydrocarbons. The underlying causes can be summarized as follows:-

a). The peak of global oil supply

Oil as well as other hydrocarbons is a finite resource. Man has been exploiting these resources for well over a hundred years. Numerous studies by eminent scientists have shown that the global supply of oil is about to peak between now and the next 15 years. Peak oil can be defined as a point when the total world production of oil and all known reserves are surpassed by the world demand. In other words oil becomes less available and more expensive to extract. In the 1970’s US oil production peaked and America was forced to import crude oil to meet domestic demand. Britain’s North Sea oil peaked in 1999 and is declining at an increasing rate of 11% a year. The number of major new oil fields discovered around the world fell to zero for the first time in 2003.

Western governments have known about peak oil and its implications on the global economy for sometime but have deliberately kept their people in the dark about its consequences. In March 2001 at the National Energy Summit, Bush’s Energy Secretary Spencer Abraham said, “America faces a major energy supply crisis over the next two decades. The failure to meet this challenge will threaten will threaten our nation’s economic prosperity, compromise our national security, and literally alter the way we lead our lives.” The remarks mirror Cheney’s speech to International Petroleum Institute in London in late1999. Cheney stated, 'there will be an average of two percent annual growth in global oil demand over the years ahead, along with, conservatively, a three percent natural decline in production from existing reserves. That means by 2010 we will need on the order of an additional fifty million barrels a day.' This is equivalent to more than six Saudi Arabia's of today's size.

On September 9 2001, a memo entitled ‘Submission to the Cabinet Office on Energy Policy’ was delivered to the Prime Minister. The memo had been prepared by the Depletion Analysis Centre and stated ‘The world faces severe hydrocarbon supply difficulties. Global oil supply is currently at political risk... Large investment in Middle East production, if they occur, could raise output, but only to a limited extent. The main exception is Iraq…’ the memo also went on to predict the peak in oil supply. It stated ‘best estimates put the global peak between five and ten years away’. The report also predicted a global peak for natural gas too, 20 years away. In May 2003 at a conference on the subject of peak oil, Mathew Simmons an American energy expert and advisor to Bush and Cheney told the audience, “what does peaking mean and when does it occur?” He then answered his own question by stating, “The worry is that peaking is at hand and not years away…”

So it is not surprising to discover that the recommendation of Cheney’s 2001 energy report called for the seizure of foreign oil most notably Iraqi, Saudi and UAE’s oil fields. Some US studies predict that Iraq may hold 423 million barrels of unexplored oil reserves. Thus America used 9/11 to embark upon a strategy of controlling the world’s energy and this venture stretches from Latin America to West Africa encompasses the entire Middle East and Central Asia, and rests on the prevention of a powerful state (EU, Russia, China and the Caliphate) emerging in Eurasia to challenge American hegemony. The pentagon calls this Full Spectrum Domination.

b). Capitalism

Capitalism is the main cause of misery for the people of world today. The rich and powerful do their utmost to safeguard their interests at the expense of their people. The dramatic rise in the price of crude oil has produced huge bonanzas for oil investors and speculators, oil companies and governments. In the first quarter of this year, profit for ExxonMobil was $8 billion, for Conoco Phillips it was $3.3 billion, for Anglo-Dutch Shell it was $6.09 billion and for BP it was $5.282 billion. These are the same companies that have refused to invest in extra capacity and have pushed the UK and US governments to embark on a strategy of controlling the world’s remaining oil supply. Governments instead of penalising these companies are punishing consumers by raising the price of petrol to make greater profits for their treasuries. As long as capitalism continues to thrive any public resource be it energy or water will be exploited by the capitalists to make obscene profits irrespective of the wellbeing of the people.

In conclusion cliques of powerful capitalists are pushing the world towards a forthcoming war over the control of energy and its security. Only a state with an alternative ideology to capitalism will be able to resists this onslaught.