Wringing our hands over Oil

When Hurricane Ike made landfall yesterday, I noticed the price of gas at the local Citgo rose from $4.09 to $4.19. Now, perhaps gas rigs came in yesterday and dropped off their latest load which, coincidentally, increased in price .10/gallon. Maybe Citgo watches the market and prices accordingly? I don't blame the gas station; they're a retailer operating on slim margins.1 Maybe investors are at it again; Ike's 'a comin' and refineries in LA & TX could reduce availability. Economics goes into action: supply is reduced, demand stays the same--price goes up. The only problem is, the supply hasn't been reduced yet. I guess I don't get economics.

Even oil company execs agree that the US is a "declining oil province and have been for 25 years." 2 What seems to be the common denominator among anyone with any energy knowledge (according to all the sources I've found) is, gasp, conservation. As Nelson Schwartz, Fortune's Europe editor, noted in 2006, "a serious push for conservation would get the attention of the energy markets and drive prices lower."3

Oil-producing nations are wary. On the one hand, prices are higher than ever, but production is stable or, in some cases, down. G. Bush has met with the Saudis to try to get a release of more oil, while Congress is pushing for sanctions.4 The mantra is "why are we buying oil from the terrorists." That in turn makes the Saudi's worry. Mike Schaefer of Energy & Capital gives us this history lesson: In 1985, the Reagan administration made a pact with Saudi-Arabia to reduce the price of oil. This would hit the Soviets hard, making it more difficult for them to influence other countries in the area. The prices dropped from $26.46 to $10.25 in about 3 months. The Soviets couldn't keep up because their oil prices were much higher; their economy began to collapse. However, the Saudis (and then the rest of OPEC) now had a trick from our playbook.5

According to Schaefer (The Truth About Oil, Part 2, Energy & Capital, Jan.12, 2007), the lesson OPEC learned was how to "cook the books." Somehow, between 1989 and 1990, Saudi officials claimed oil reserves increased by 87 billion barrels--without finding any major new fields. Five other OPEC countries magically added more reserves as well (see images above). What does this mean? There's even less world oil than we think. Add to that the fact that countries are increasing their demand, and I think you get the picture (if not, go to http://www.energyandcapital.com/articles/oil-reserves-decline/340). Schaefer later points to Canada and extracting crude from oil sands. He also reminds us that the strength of the dollar is directly tied to oil supply and cost. This is proven by the countries who've already shifted their currency from US dollars to the euro, resulting in the huge devaluation of the greenback.6

While Schaefer fails to expound on the conservation issue, others pick up the mantra. You can find video discussions on all energy-related topics at http://video.energypolicytv.com/displaypage.php?vkey=3a8d6aa2308357a268a7&channel=Conservation. I'm sure you can search the web and find writers who insist there isn't an oil shortage, that the reserves are actually much higher or that it's all just politics. But, what if they're wrong? How can you tell? Shell Oil officials are worried that demand for oil and gas will outstrip supply within seven years. 7 (Of course, they want the price to stay high, so there's an ulterior motive). OPEC insisted, a few days ago, that there's no shortage on the oil market. 8 Did you know you have to ask "what type of oil?" Light, sweet crude, which is easier to refine, is in short supply. Heavy, sour crude, with a higher sulfur content, is harder to process, but is more available.9

According to an article by Ismael Hossein-Zadeh, supply is probably at parity with demand, perhaps even a little higher. 10 So, why is the price of oil and gas still outrageously high? Hossein-Zadeh believes it's because of war and geopolitical instability. "...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."

"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."11

Wow. When I started writing this article, I really had no idea that it would result in the following solution: if we get out of Iraq, oil prices will go down!

Sources:
1. http://www.energybulletin.net/node/8994
2. http://money.cnn.com/2006/02/08/news/international/pluggedin_fortune/index.htm
3. Ibid
4. http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/05/15/bcnoil115.xml
5. http://www.energyandcapital.com/articles/oil-consumption-world/337
6. http://www.energyandcapital.com/articles/oil-saudi-ghawar/343
7. http://business.timesonline.co.uk/tol/business/economics/wef/article3248484.ece
8. http://www.chinadaily.com.cn/world/2008-05/09/content_6673565.htm
9. http://www.energybulletin.net/node/2341
10. http://www.counterpunch.org/zadeh07122008.html
11. Ibid