Page 1 of 2 Oil floats high on easy money
By Julian Delasantellis
Survey after survey shows that history bores to tears young people the world
over, yet it invariably continues to be taught in the same mindlessly tedious
fashion.
Maybe this can change. Consider a new way to teach of the assassination of
Julius Caesar in 44 BC. According to William Shakespeare, prior to the
nefarious deed, the soothsayer Artemidorus tried to warn the would-be dictator.
"Caesar, beware of Brutus; take heed of Cassius; come not near Casca; have an
eye to Cinna, trust not Trebonius: mark well Metellus Cimber: Decius Brutus
loves thee not: thou hast
wronged Caius Ligarius. There is but one mind in all these men, and it is bent
against Caesar."
It's obvious how to make this more appealing to young people.
Randy Jackson: "Brilliant, Arty, brilliant. I could feel the fear radiating
from you, and even though I had no real idea whether the warning referred to
earth-shaking matters of politics and commerce, or just your laundry service
washing your whites and coloreds together, I was still terrified."
Simon Cowell: "Poppycock. All these people Caesar needed protection from, I
couldn't tell whether you should warn him or provide him with a How To Win
Friends and Influence People paperback."
Paula Abdul: "Did my pharmacy just call?"
These days, history is not taught of the intercourse, social and otherwise, of
kings and queens and their admirals and commanders; instead, the emphasis is on
how historical events impacted the various assorted average Johns and Joes, or
Johanns and Giuseppes, of whatever period in question.
I've learned my lesson. Whenever I lecture on the oil crisis of the 1970s, the
events that stopped the post-World War II Western economic boom right in its
tracks, I no longer talk much about the Yom Kippur War or the Iranian
Revolution, about the fall of Richard Nixon or the rise of Ayatollah Ruhollah
Khomeini.
Instead, I weave a far more compelling tale, about how an American teen got a
driver's license just a few weeks before the commencement of the troubles, and
how he had to conjure up various non-economically based solutions to gasoline
lines created by government price controls that cleared the market too cheaply,
that could easily take the better part of the day to get through.
I was working my way through college delivering medical supplies and sundries
to nursing and convalescent homes. This may sound more important than it really
was; after all, if you're not the intended consumer, just how important is a
delivery of the five kilogram canister of Metamucil? Still, I carried in my
possession, at work or not, a letter signed by the local chief of police
stating that I was a "critical medical worker" with the right to go to the head
of any gas line at my discretion. Besides its obvious utility to me, a good
photocopy of the letter could go for US$300; with good-looking girls, my fellow
drivers made many other remarkable arrangements.
But though I was spared the full sufferance of the lines, I knew well what was
going on inside them. People were mad. They blamed the politicians, first
Nixon, then Jimmy Carter, or the hippies, the Rockefellers, the Arabs or the
Jews. A more sophisticated version of the fine whine had it all the fault of
the oil companies; they were said to be withholding supplies from the market to
keep the price up. As proof of this, there were said to be dozens of tankers
absolutely chockerblock full of oil and petroleum products just over the
horizon in New York harbor, waiting until the price rose even higher before
offloading their cargo.
Nobody ever proved, or even attempted to prove, this contention; I suppose all
it would have taken was a news helicopter with a full tank of fuel to actually
go out and take a look. I, a detached cynic even then, just attributed it to
Richard Hofstadler's famed 1964 Harper's magazine essay, "Paranoid Style in
American Politics".
Forty or so years later, oil prices are climbing again, up over 100% since last
winter. As night follows day, the "withholding of oil from the market" charge
is being proffered yet again. How much more fertile and receptive is the ground
where conspiracy theories could now take root, with essentially the whole
capitalist world having crashed due to corporate malfeasance and corruption.
So, now, just like then, the entire corporate conspiracy to keep prices up must
be more public disillusionment than public percipience, right?
But if that's the case, somebody had better come up with a pretty clear and
convincing explanation as to just what's going on in the southern stretches of
the Strait of Malacca, just off the coast of Singapore, these days. Is this a
massive worldwide corporate conspiracy, one that, unlike the assassination of
Caesar, you could actually follow on TV, or at least online?
From time immemorial, mankind has struggled with the biblical injunction from
Genesis 19 that "by the sweat of your brow shall you get bread to eat". In
olden days, this might be a warning of a wild beast or predator that could eat
the toiler in the fields; today, an equivalent danger might be the threat of
getting bored to death in the face of the prospect of spending eight hours a
day under a cloud of freshly distributed methane in a work cubicle.
But, lo and behold, a saviour has arisen - the Internet - just filled with
interesting ways, from solitaire to fantasy shuffleboard, to waste time. Much
in contrast to the perceived wisdom, surely, no machine has yet been created
that so boosts worker productivity; just think of how many actual work
assignments get finished with Formula 1-like speed in order to get back to the
sex chat room.
A while back, I found a really good time-waster, www.marinetraffic.com. This
site provides one- or two-minute delayed graphical depictions of the sea
traffic at most of the world's major ports, and on many of the ocean's sea
lanes as well. Sign on to the site, pick one of the world's ports, and what
will draw on your screen are maps of the coastal bodies of water besides the
major ports. Brightly colored arrows, if the vessel is in motion, provide
information as to the name, type, direction, maybe even the destination, of all
but the smallest ships moving in and out of the harbor. If the ship is not in
motion but at anchor, it is depicted by a square.
Choosing Seattle, you see arrows depicting and identifying the familiar
Washington State Ferry boats crisscrossing Puget Sound. Looking at Los Angeles,
one can immediately see the containerized cargo activity around Long Beach, to
the tune of about US$400 million of cargo loaded and offloaded each day.
But what's that going on in Singapore? Why, on one recent morning, were there
almost 40 petroleum tankers riding at anchor a few kilometers offshore, where
the curvature of the Earth would prevent them from being seen onshore?
I hope that people who hunger for a slower, more measured pace of life have
spent as little time as possible in the vicinity of the crude oil market
recently. Last year at this time, crude oil was selling on the NYMEX futures
exchange at around $77 a barrel, not much changed from where it is currently.
Still, that one isolated factoid is indicative of anything but market
stability; last year the market had come down over $70 a barrel, from July's
$150 top; by mid-December the market would fall another $45 to the low 30s.
Since then, the rally has resumed, with prices more than doubling to be now
just under $80 a barrel.
Thus, this has been the perfect market in which to take up residence as a
pundit - whatever you say, whether bull or bear, you've recently been right. A
much better question relates to why this has all been happening, with the hope
that the answer will turn out to be such a grand unified theory of the
petroleum markets that it will also provide an answer to what's going on off
Singapore.
Any market gourmand has two choices for explanations for all these market
gyrations. One, the standard fair on the menu - blaming it all on China - has
been being served up by the financial media for most of this decade. Late in
June 2008, about the time of the absolute top in the market, an unfamiliar
diner took a seat at the table of the market supremacists/excess Chinese demand
believers - New York Times columnist Paul Krugman.
"What about those who argue that speculative excess is the only way to explain
the speed with which oil prices have risen? Well, I have two words for them:
iron ore. You see, iron ore isn't traded on a global exchange; its price is set
in direct deals between producers and consumers. So there's no easy way to
speculate on ore prices. Yet the price of iron ore, like that of oil, has
surged over the past year. In particular, the price Chinese steel makers pay to
Australian mines has just jumped 96%. This suggests that growing demand from
emerging economies, not speculation, is the real story behind rising prices of
raw materials, oil included."
But by the end of the summer, oil had already fallen $50, with another $70 to
go. It's true, the world economy was stumbling, but, outside the US, which had
entered recession a full eight months before oil topped out, Britain and a few
more free-market acolytes, the pullback would prove to be far less severe than
in the Margaret Thatcher/Ronald Reagan world; surely, not nearly enough to
justify an 80% haircut in the base commodity of world industrial activity.
Even during the oil price boom, a distinct minority of market and commodity
analysts demurred from the conventional wisdom, saying that it was market
participants within the markets - speculators - who were really driving demand,
not Chinese industrialists. At a hearing before the US Congress, Michael
Masters, of Masters Capital Management, presented this dissenting opinion.
In
the popular press, the explanation given most often for rising oil prices is
the increased demand for oil from China. According to the DOE [US Department of
Energy], annual Chinese demand for petroleum has increased over the last five
years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920
million barrels. Over the same five-year period, index speculators' demand for
petroleum futures has increased by 848 million barrels. [Index speculators
allocate funds according to indices such as the Standard & Poor's-Goldman
Sachs Commodity Index and the Dow Jones-AIG Commodity Index.]
The increase in demand from index speculators is almost equal to the increase
in demand from China. In fact, index speculators have now stockpiled, via the
futures market, the equivalent of 1.1 billion barrels of petroleum, effectively
adding eight times as much oil to their own stockpile as the United States has
added to the Strategic Petroleum Reserve over the last five years.
What Masters was explaining to congress was something that
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