Page 1 of 2 Oil price mocks fuel realities
By F William Engdahl
As business and consumers consider the implications for them of crude oil
selling at US$130-plus per barrel, they should bear in mind that, at a
conservative calculation, at least 60% of that price comes from unregulated
futures speculation by hedge funds, banks and financial groups using the London
ICE Futures and New York Nymex futures exchanges and uncontrolled inter-bank or
over-the-counter trading to avoid scrutiny (see
Speculators knock OPEC off oil-price perch, Asia Times Online, May 6,
2008).
US margin rules of the government's Commodity Futures Trading Commission allow
speculators to buy a crude oil futures contract on the Nymex by paying only 6%
of the value of the contract. At the present price of around $130 per barrel,
that means a futures
trader only has to put up about $8 for every barrel. He borrows the other $120.
This extreme "leverage" of 16 to one helps drive prices to wildly unrealistic
levels and offset bank losses in subprime and other disasters at the expense of
the overall population.
The hoax of "peak oil" - namely the argument that oil production has hit the
point where more than half all reserves have been used and the world is on the
downslope of oil at cheap price and abundant quantity - has enabled this costly
fraud to continue since the invasion of Iraq in 2003, with the help of key
banks, oil traders and big oil majors.
Washington is trying to shift blame, as always, to Arab oil producers and the
Organization of Petroleum Exporting Countries (OPEC). The problem is not a lack
of crude oil supply. In fact, the world is in over-supply now. Yet the price
climbs relentlessly higher. Why? The answer lies in what are clearly deliberate
US government policies that permit the unbridled oil price manipulations.
World oil demand flat, prices boom
The chief market strategist for one of the world's leading oil industry banks,
David Kelly, of JP Morgan Funds, recently admitted something telling to 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."
One of the stories used to support the oil futures speculators is the
allegation that China's demand for imported oil is exploding out of control,
driving shortages in the supply-demand equilibrium. Yet the facts do not
support the China demand thesis.
The US government's Energy Information Administration (EIA) concluded in its
most recent monthly Short Term Energy Outlook report that US oil demand is
expected to decline by 190,000 barrels per day (b/d) this year. That is mainly
owing to the deepening economic recession.
Chinese consumption, the EIA says, far from exploding, is expected to increase
this year by only 400,000 barrels a day. That is hardly the "surging oil
demand" blamed on China in the media. Last year, China imported 3.2 million
barrels per day, and its estimated usage was around 7 million b/d total. The
US, by contrast, consumes around 20.7 million b/d.
That means the key oil-consuming nation, the US, is experiencing a significant
drop in demand. China, which consumes only a third of the oil the US does, will
see a minor rise in import demand compared with the total daily world oil
output of some 84 million barrels, less than half of one percent of total
demand.
OPEC has its 2008 global oil demand growth forecast unchanged at 1.2 million
barrels per day (mm bpd), as slowing economic growth in the industrialized
world is offset by slightly growing consumption in developing nations. OPEC
predicts that global oil demand in 2008 will average 87 million bpd, largely
unchanged from its previous estimate. Demand from China, the Middle East, India
and Latin America is forecast to be stronger, but the European Union and North
American demand will be lower.
So the world's largest oil consumer faces a sharp decline in consumption, a
decline that will worsen as the housing and related economic effects of the US
securitization crisis in finance de-leverages. The price in normal open or
transparent markets should presumably be falling not rising. No supply crisis
justifies the way the world's oil is being priced today.
Big new oil fields coming online
Not only is there no supply crisis to justify such a price bubble. There are
several giant new oil fields due to begin production over the course of 2008 to
further add to supply.
The world's single-largest oil producer, Saudi Arabia, is finalizing plans to
boost drilling activity by a third and increase investments by 40%. Saudi
Aramco's plan, which runs from 2009 to 2013, is expected to be approved by the
company's board and the Oil Ministry this month. The kingdom is in the midst of
a $50 billion oil production expansion plan to meet growing demand in Asia and
other emerging markets and is expected to boost its pumping capacity to a total
of 12.5 mm bpd by next year, about 11% up from the present capacity of 11.3 mm
bpd.
In April this year, Saudi Arabia's Khursaniyah oilfield began pumping and will
soon add another 500,000 bpd to world oil supply of high grade Arabian light
crude. In addition, the country's Khurais oilfield development, the largest of
Saudi Aramco's projects, will boost the production capacity of Saudi oilfields
from 11.3 million bpd to 12.5 million bpd by 2009. Khurais is planned to add
another 1.2 million bpd of high-quality Arabian light crude to Saudi Arabia's
export capacity.
Brazil's Petrobras is in the early phase of exploiting newly confirmed oil
reserves offshore in its Tupi field that could be as great or greater than the
North Sea. Petrobras says the new ultra-deep Tupi field could hold as much as 8
billion barrels of recoverable light crude. When online in a few years it is
expected to put Brazil among the world's "top 10" oil producers, between
Nigeria and those of Venezuela.
In the US, aside from rumors that the big oil companies have been deliberately
sitting on vast new reserves in Alaska for fear that the prices of recent years
would plunge on over-supply, the US Geological Survey (USGS)recently issued a
report that confirmed major new oil reserves in an area called the Bakken,
which stretches across North Dakota, Montana and south-eastern Saskatchewan.
The USGS estimates up to 3.65 billion barrels of oil in the Bakken.
These are just several confirmations of large new oil reserves to be exploited.
Iraq, where the Anglo-American Big Four oil majors are salivating to get their
hands on unexplored fields, is believed to hold oil reserves second only to
Saudi Arabia while much of the world has yet to be explored for oil. At prices
above $60 a barrel huge new potentials become economic. The major problem faced
by Big Oil is not finding replacement oil but keeping the lid on world oil
finds in order to maintain present exorbitant prices. Here they have some help
from Wall Street banks and the two major oil trade exchanges - Nymex and
London-Atlanta's ICE and ICE Futures.
Then why do prices still rise?
There is growing evidence that the recent speculative bubble in oil, which has
gone asymptotic since January, is about to pop. Late last month, in Dallas,
Texas, the American Association of Petroleum Geologists held its annual
conference, with major oil executives and geologists present. According to one
participant, knowledgeable oil industry chief executives reached the
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