Page 2 of 4 Are they really oil wars?
By Ismael Hossein-zadeh
crude oil prices .... In fact, during this period global supplies have exceeded
demand, according to the US Department of Energy." [10]
The fact that the skyrocketing oil prices of late have been accompanied by a
surplus in global oil markets was also brought to the attention of President
George W Bush by Saudi officials when he asked them during a recent trip to the
kingdom to increase production in order to stem the rising prices. Saudi
officials reminded the president that "there is plenty of oil on the market.
Iran has put some 30 million barrels of oil that it can't sell into floating
storage. 'If we produced more oil, it wouldn't find
buyers,' says the Saudi source. 'It wouldn't affect the price at all.'"
[11]
And why would producing more oil not "affect the price at all"? Because what is
driving the soaring oil prices is not shortage but speculation: "with so much
investment money sloshing around in the commodities markets, the Saudis
calculate they have no hope of controlling short-term price fluctuations. They
blame the recent price run-ups on speculation and fear of shortages [not real
shortages], factors they say are beyond their control." [12]
War for cheap oil?
The widely shared view that the US desire for access to abundant and cheap oil
lurks behind the Bush administration's drive to war in the Middle East rests on
the implicit but dubious assumption that access to energy resources requires
direct control of oil fields and/or oil producing countries. There are at least
three problems with this postulation.
First, if control of or influence over oil producing countries in the Middle
East is a requirement for access to cheap oil, the United States already enjoys
significant influence over some of the major oil producers in the region -
Saudi Arabia, Kuwait, and a number of other smaller producers. Why, then, would
the US want to bring about war and political turmoil in the region that might
undermine that long and firmly-established influence?
Let us assume for a moment that the neoconservative militarists are sincere in
their alleged desire to bring about democratic rule and representational
government in the Middle East. Let us further assume that they succeed in
realizing this purported objective. Would, then, the thus-emerging democratic
governments, representing the wishes of the majority of their citizens, be as
accommodating to US economic and geopolitical objectives, including its oil
needs, as are its currently friendly rulers in the region? Most probably not.
Secondly, and more importantly, access to oil no longer requires control of oil
fields or oil producers - as was the case in times past. For more than a
century, that is, from the early days of oil extraction in the United States in
the 1870s until the mid-1970s, the price of oil was determined
administratively, that is, by independent producers operating in different
parts of the world without having to compete with each other. Under those
circumstances, colonial or imperial wars of conquest and occupation were
crucial to the control of oil (and other) resources.
Beginning with the 1950s, however, that pattern of local, non-competitive price
determination began to gradually change in favor of regional and/or
international markets. By the mid-1970s, an internationally competitive oil
market emerged that effectively ended the century-old pattern of local,
administrative pricing. Today, oil prices (like most other commodity prices)
are determined largely by the forces of supply and demand in competitive global
energy markets; and any country or company can have as much oil as they wish if
they pay the going market (or spot) price.[13]
To the extent that competitive oil markets and/or prices are occasionally
manipulated, such subversions of competitive market forces are often brought
about not so much by OPEC or other oil producing countries as by manipulative
speculations of financial giants in New York and London. Wall Street financial
institutions have accomplished this feat through "innovative" financial
instruments such as establishment of energy hedge funds and speculative oil
futures markets in New York and London.[14]
It is true that collective supply decisions of oil producing countries can, and
sometimes do, affect the competitively determined market price. But a number of
important issues need to be considered here.
To begin with, although such supply manipulations obviously affect or influence
market-determined prices, they do not determine those prices. In other words,
competitive international oil markets determine price with or without oil
producers' supply manipulations. Such supply managements are, however,
designed not to create volatility in energy markets, or chronic oil price
hikes. Instead, they are designed to stabilize global oil prices because oil
exporting countries prefer stability, predictability and long-term planning for
their economic development and industrialization projects. Here is how Cyrus
Bina and Minh Vo describe this relationship:
As a result, we conclude
that the global oil market is the prime mover [that is, the prime determinant
of oil price] and OPEC indeed follows its trajectory accordingly and
consistently. When market price (both spot and futures) is falling, OPEC
decreases its output; when market price is rising, OPEC attempts to increase
its output; and when market price is steady, OPEC keeps its output unchanged
... And, this is a kind of oil market we have experienced after the dust
settled following the crisis of de-cartelization and globalization of oil
industry in the 1970s.[15]
Producers' policy to
sometimes curtail or limit the supply of oil, the so-called "limited flow"
policy, is designed to raise the actual trading price above the
market-determined price in order to keep high-cost US producers in business
while leaving low-cost Middle East producers with an above average, or "super",
profit. While for low-cost producers this limited flow policy is largely a
matter of making more or fewer profits, for high-cost US producers it is a
matter of survival, of being able to stay in or go out of business - an
important but rarely mentioned or acknowledged fact.
A hypothetical numerical example might be helpful here. Suppose that the
market-determined, or free-flow, price of oil is $30 per barrel. Further,
suppose this price entails an average rate of profit of 10%, or $3 per barrel.
The word "average" in this context refers to average conditions of production,
that is, producers who produce under average conditions of production in terms
of productivity and cost of production. This means that producers who produce
under better-than-average conditions, that is, low-cost, high productivity
producers, will make a profit higher than $3 per barrel while high-cost, low
efficiency producers will end up making less than $3 per barrel. This also
means that some of the high-cost producers may end up going out of business
altogether. Now, if the limited flow policy raises the actual trading price to
$35 per barrel, it will raise the profits of all producers accordingly, thereby
also keeping in business some high-cost producers that might otherwise have
gone out of business.
Furthermore, supply manipulation (in pursuit of price manipulation) is not
limited to the oil industry. In today's economic environment of giant
corporations, many of the major industries try and often succeed in controlling
supply in order to control price. Take, for example, the automobile industry.
Theoretically, automobile producers could flood the market with a huge supply
of cars. But that would not be good business as it would lower prices and
profits. So, they control supply, just as do oil producers, in order to
manipulate price.
During the past several decades, the price of automobiles, in real terms, has
been going up every year, at least to the tune of inflation. During this
period, the industry (and the economy in general) has enjoyed a many-fold
increase in labor productivity. Increased labor productivity is supposed to
translate into lower costs and, therefore, lower prices. Yet, that has not
materialized in the case of this industry - as it has in the case of, for
example, pocket calculators or computers.
Another example of price control through supply manipulation is the case of US
grain producers. The so-called "set aside" policy that pays farmers not to
cultivate part of their land in order to curtail supply and prop up price is
not different - nay, it is worse - than OPEC's policy of supply and/or
price manipulation.
It is also necessary to keep in mind that OPEC's desire to sometimes limit the
supply of oil in order to shore up its price is limited by a number of factors.
For one thing, the share, and hence the influence, of Middle Eastern oil
producers as a percentage of world oil production has steadily declined over
time, from almost 40 percent when OPEC was established to about 30 percent
today.[16] For another, OPEC members are not unmindful of the fact that
inordinately high oil prices can hurt their own long-term interests as this
might prompt oil importers to economize on oil consumption and search for
alternative sources of energy, thereby limiting producers' export
markets.
OPEC members also know that inordinately high oil prices could precipitate
economic recessions in oil importing countries that would, once again, lower
demand for their oil. In addition, high oil prices tend to raise the cost of
oil producers' imports of manufactured products as high energy costs are
bound to affect production costs of those manufactured products.
War for expensive oil?
Now let us consider the widely shared view that attributes the Bush
administration's drive to war to the influence of big oil companies in
pursuit of higher oil prices and profits. As noted, this is obviously the
opposite of the "war for cheap oil" argument, as it claims that Big Oil tends
to instigate war and political tension in the Middle East in order to cause an
oil price hike and increase its profits.
Like the "war for cheap oil" theory, this claim is not supported by facts.
Although the claim has an element of a prima facie reasonableness, that
apparently facile credibility rests more on precedent and perception than
reality. Part of the perception is
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