Anatomy of a Price Surge (OIL) By Michael T. Klare

[Demeter]

http://www.thenation.com/doc/20080707/klare


As the pain induced by higher oil prices spreads to an ever growing share of the American (and world) population, pundits and politicians have been quick to blame assorted villains--greedy oil companies, heartless commodity speculators and OPEC. It's true that each of these parties has contributed to and benefited from the steep run-up. But the sharp growth in petroleum costs is due far more to a combination of soaring international demand and slackening supply--compounded by the ruinous policies of the Bush Administration--than to the behavior of those other actors.
Most, if not all, the damage was avoidable. Shortly after taking office, George W. Bush undertook a sweeping review of US energy policy aimed at expanding the nation's supply of vital fuels. The "reality is the nation has got a real problem when it comes to energy," he declared on March 14, 2001. "We need more sources of energy." At that time many of the problems evident today were already visible. Energy demand in mature industrial nations was continuing to grow as the rising economic dynamos of Asia, especially China, were beginning to make an impact. By 2002 the Energy Department was predicting that China would soon overtake Japan, becoming the world's second-largest petroleum consumer, and that developing Asia as a whole would account for about one-fourth of global consumption by 2020. Also evident was an unmistakable slowdown in the growth of world production, the telltale sign of an imminent "peaking" in global output ...With these trends in mind, many energy experts urged the White House to minimize future reliance on oil, emphasize conservation and rapidly develop climate-friendly alternatives, especially renewables like wind, solar, geothermal and biofuels. But Dick Cheney, who was overseeing the energy review, would have none of this. "Conservation may be a sign of personal virtue," the Vice President famously declared in April 2001, "but it is not a sufficient basis...for sound, comprehensive energy policy." After three months of huddling in secret with top executives of leading US energy companies, he released a plan on May 17 that, in effect, called for preserving the existing energy system, with its heavy reliance on oil, coal and natural gas.







But the Administration's greatest contribution to the rising oil prices is its steady stream of threats to attack Iran if it does not back down on the nuclear issue. The Iranians have made it plain that they would retaliate by attempting to block the flow of Gulf oil and otherwise cause turmoil in the energy market. Most analysts assume, therefore, that an encounter will produce a global oil shortage and prices well over $200 per barrel. It is not surprising, then, that every threat by Bush/Cheney (or their counterparts in Israel) has triggered a sharp rise in prices. This is where speculators enter the picture. Believing that a US-Iranian clash is at least 50 percent likely, some investors are buying futures in oil at $140, $150 or more per barrel, thinking they'll make a killing if there's an attack and prices zoom over $200.

It follows, then, that while the hike in prices is due largely to ever increasing demand chasing insufficiently expanding supply, the Bush Administration's energy policies have greatly intensified the problem. By seeking to preserve our oil-based energy system at any cost, and by adding to the "fear factor" in international speculation through its bungled invasion of Iraq and bellicose statements on Iran, it has made a bad problem much worse.

What can be done to reverse this predicament? There is no realistic hope of substantially increasing the supply of oil--drilling in offshore US waters, as favored by President Bush and Senator John McCain, will not reverse the long-term decline in US production--so it is only by reducing demand that fundamental market forces can be addressed. This is best done through a comprehensive program of energy conservation, expanding public transit and accelerating development of energy alternatives. It will take time for some of these efforts to have an impact on prices; others, like reducing speed limits and adding bus routes, would have a more rapid effect. And if this Administration truly wanted to spare Americans further pain at the pump, there is one thing it could do that would have an immediate effect: declare that military force is not an acceptable option in the struggle with Iran. Such a declaration would take the wind out of the sails of speculators and set the course for a drop in prices.


About Michael T. Klare
Michael T. Klare, Nation defense correspondent, is professor of peace and world security studies at Hampshire College. His latest book is Rising Power, Shrinking Planet: The New Geopolitics of Energy. more...

[Sweet Pea]

1. I'm glad...

he mentioned China, and although India is not mentioned, the near vertical climb in those two nation's economies, coupled with China's subsidized oil prices are really the two main reasons for the jump in the price of a barrel of oil. Supply and demand - the world's two largest nations in population embarking on a dizzying economic growth plan, ARE going to suck up an extraordinary amount of the world's oil. What can be done about that? Not a whole hell of a lot.

[Demeter]

2. Isn't That the Spirit of Brotherly Love for America?

We get to subsidize our Chinese cousins with our rapidly depreciating dollars, and the oil companies, and god knows who else....

[groovedaddy]

3. Just speculating...

ICE, ICE, Baby

One piece of legislation is why the price of everything is going through the roof

“There’s a few hedge fund managers out there who are masters at knowing how to exploit the peak theories and hot buttons of supply and demand and by making bold predictions of shocking price advancements to come, they only add more fuel to the bullish fire in a sort of self fulfilling prophecy." — National Gas Week, September 5, 2005 as reprinted in the US Senate Permanent Subcommittee on Investigations’ report, "The Role of Market Speculation in Rising Oil and Gas Prices," June 27, 2006

Part 1 –

http://www.star-telegram.com/ed_wallace/story/651928.html

"What’s been happening since 2004 is very high prices without record-low stocks. The relationship between U.S. inventory levels and prices has been shredded and become irrelevant."

— Jan Stuart, Global Oil Economist, UBS Securities

"What you have on the financial side is a bunch of money being thrown at the energy futures market. It’s just pulling in more and more cash. That’s the side of the market where we have runaway demand, not on the physical side."

— Tim Evans, Senior Oil Analyst, IFR Energy Services

Part 2 –

http://www.star-telegram.com/ed_wallace/story/659081.html

[groovedaddy]

4. Congressional testimonty today

Limiting speculation would push prices to fundamental level, lawmakers told.

By Rex Nutting & Michael Kitchen, MarketWatch

WASHINGTON (MarketWatch) -- The price of retail gasoline could fall by half, to around $2 a gallon, within 30 days of passage of a law to limit speculation in energy-futures markets, four energy analysts told Congress on Monday.

Testifying to the House Energy and Commerce Committee, Michael Masters of Masters Capital Management said that the price of oil would quickly drop closer to its marginal cost of around $65 to $75 a barrel, about half the current $135.

Fadel Gheit of Oppenheimer & Co., Edward Krapels of Energy Security Analysis and Roger Diwan of PFC Energy Consultants agreed with Masters' assessment at a hearing on proposed legislation to limit speculation in futures markets.

http://tinyurl.com/5hbkf8

[Demeter]

5. ICE?

[groovedaddy]

6. Intercontinental Exchange - it's in the article ;-> n.t

[BridgeTheGap]

7. While Klare discounts the impact of speculation in the commodities market

too many people within in the industry say otherwise. We are being had, big time.

[groovedaddy]

8. email from response from Klare after forwarding articles to him

Thanks for calling my attention to these articles. I don't believe in claiming
to know more than I do, so let me say right off the bat that this is not an
area I'm real familiar with - my expertise is in international resource
geopolitics. But that said, I do not believe that speculation of this sort is
responsible for 50 percent of the increase in oil prices - 20 or 25 percent
perhaps, but not half. I say this because I have been watching the rise in
demand from China and the slowing of world oil output since 2000, and in my
mind these are the dominant causes. But I am prepared to admit there are some
aspects of this I don't fully understand, and I am ready to be educated - so
thanks again for sending the articles!

Yours very truly, Michael Klare