Oil at $111 a Barrel: We Are Being "Sovereignly Screwed"!

The price of oil has diverged from fundamentals in such a dramatic way that it is placing our economy at grave and immediate risk, not to speak of the consequences of the enormous, unprecedented transfer of wealth that is taking place.

There are no crude oil shortages. Commercial inventories of crude oil, even excluding our Strategic Petroleum Reserve are 9% higher than they were at the end of last year. Crude inventories increased in seven of the last eight weeks. This past week crude oil inventories jumped by 6.2 million barrels far more than the 1.7 million barrels forecast. Yet prices barely budged below their all time highs of $111/bbl. Gasoline inventories are at their highest levels in the past 18 months.

Geopolitical concerns, though always present and forever overplayed are no more problematic presently than they have been in years past. Supply and demand? Largely adequate supply and diminishing demand. Yet, the price for crude oil continues to escalate to ever higher highs.

Turn on the television or read the papers and the reasons are always the same. The falling dollar (rarely a mention that the price of oil has increased by over 120% over the past 15 months, far more than the dollars the 18% fall over the same period (see "A Short Tutorial on the High Price of Oil and the Falling Dollar," 10/19/07). The dollar weakness can be blamed for much, but hardly the massive and disproportionate increase in oil prices. In addition the economy is slowing markedly and gasoline consumption is being impacted appreciably by higher prices as well as the weakening economy -- Economics 101 prescription for lower oil prices which just isn't happening (today's overall turbulence excepted but still to levels that are historically steep highs).

To better understand what is happening we need a time warp moment. With a tongue in cheek heading -- "Oil Baron Longs for Past, Not Futures" -- Newsday reported on November 2, 1990 -- (yes, 1990. Leon Hess, erstwhile owner of the New York Jets, was Chairman and Founder of Hess Oil & Chemical now known as the Hess Corporation -HES-):

"Leon Hess, whose oil company made more than $200 million by trading oil futures during the Persian Gulf crises..."I'm an old man, but I'd bet my life that if the Merc (the NY Mercantile Exchange) was not in operation there would be ample oil and reasonable prices all over the world, without this volatility" Hess said at a hearing the Senate Committee on Government Affairs held on the role of futures markets in oil pricing."

Ah, but, we are told, hedge funds, speculators, individual investors and even conservative institutional investors such as the CalPERS (the California Public Employees Retirement System) given the risks of the stock market and the disastrous bond markdowns are pouring significant funds into commodities as an asset class. As quoted by Reuters, "the financial flows have been overwhelming the fundamentals of the oil market." The inflows are large and the aforementioned groups are forever cited as the source of liquidity flooding the commodity pits. Yes, but oil continues to go up, up, up while other commodities such as grains have occasional and significant retracements.

But wait, there is a conspicuous absence in virtually all these analyses. Let me explain. In an eye-opening article that surprisingly received little or no attention by our forever somnolent press on issues of oil pricing, London's Financial Times headlined "Brazil Sovereign fund to target currency" 12.10.07. According to the FT Brazil's finance minister Guido Mantega Brazil is to create a sovereign wealth fund with the primary aim of intervening in foreign exchange markets to counter the appreciation of the country's currency.

Now consider the following. The vast transfer of wealth to oil exporters, most especially members of the OPEC cartel are accumulating enormous currency surpluses, permitting them in their own manner, to create sovereign wealth funds, deep reservoirs of cash without oversight, without transparency, without regulatory constraints, without operational standards, without disclosure requirements including conflicts of interest, without being subject to due diligence. This staggering accumulation of wealth has resulted in the formation of such behemoths as the United Arab Emirates with its $875 billion fund, Kuwait $250 billion, Qatar, Libya, Algeria, (coincidentally or not, all members of OPEC) among others and then of course Saudi Arabia whose sovereign fund according to the FT is expected to dwarf that of the UAEs.

Now given the lesson learned from the candid Brazilians, it doesn't take an advanced degree in Rocket Science to begin to discern a relationship between these opaque pools of capital and the otherwise inexplicable price moves in the energy trading pits. Are there valid reasons that underlie high oil prices? One could certainly put forward reasons supportive of strong pricing. But nothing either in demand nor supply nor market dislocation that in any way could reasonably substantiate the exacerbated degree of current price increases other than concerted manipulation toward ever higher prices, pure and simple. If Brazil presumes they can control the value to the Real on world currency markets through their sovereign wealth fund, influencing the price of a commodity, even one as widely traded as oil, would be equally plausible.

Can one reasonably suggest that these massive holdings of capital would not seek to support the price of the primary resource which is the mainstay of their economies by underpinning the price of oil on commodity exchanges around the world? Remember, trading on these exchanges is largely opaque and barely regulated. Anonymity of buyer and seller is easily achieved, especially so in the commodity exchanges outside the U.S. and over electronic traded markets. The way the price of oil is now traded provides it perfect cover to those who have the means and the objective of gaming the system.

Circumstantial evidence, circumstantial presumption? Perhaps. But certainly the logic is inescapable and cries out for congressional hearings on the role of the futures markets and the sovereign wealth funds and their offshoots in determining oil pricing.

Of course, there are many in this oil addled administration who are content with oil prices as they are, given the riches being visited on colleagues, friends and supporters in the oil industry no matter the crocodile tears now, at long last, being shed at the current level of prices. The same is true for too many in Congress especially those from states closely related to the oil and energy industry.

To expect much from this administration and the Congress given its craven obeisance to the oil industry these past years is wishful thinking at best. What is needed is an entirely new approach that needs be defined, ideally in the upcoming presidential debates whereby each candidate defines clearly his policies toward energy, and its consumption.

Certainly a way needs be found to divorce oil pricing from the commodities futures pits or at the very least, that trading on those exchanges become transparent and represent freely functioning markets that are not riddled with conflicts of interest or purposeful manipulation.

Some further thoughts of what might be done in future posts.

Comments

[hoopesaz]

Liberals should be cheering this. We truely live in a market driven economy. Expensive oil is the only way to motivate market forces towards alternative energy. The move to alt energy is bound to be expensive and painful, but with oil at this price it is inevitable and likely to happen much more quickly.

[raymurt]

Here's the real story. It's not that oil that is worth more. The dollar is worth less.
This administration has devalued the dollar intentionally. .
$12 billion a month for Bush's war. Tax cuts for the rich. Uncontrolled spending.
A decisive victory for Al Queda, who intended to destroy our economy.
The Head Chimp went right for it.

[LeftRight]

You're right about everything you said, EXCEPT the main point. Yes, the dollar is worth less, BUT it has fallen less than 50% against a few currencies, and much less than that against others. It has done this only over the last year or so.

Meanwhile, the price of oil has gone up more than 300%, and almost ALL of that rise was BEFORE the last year or so. It went from less than $30/bbl when bushco(tm) took office, to more than $90/bbl in 2005. Since then, it's only gone up around another $20/bbl!

[Durango]

Something is going on besides "market forces". Something is rotten.

I suspect that to some degree, and perhaps it is being accomplished through Sovereignty Funds, the Saudis are punishing GW Bush for the catastrofuck on their northern border.

Certainly other OPEC members like Venezuela and Iran have no love lost for the Shrub. But the Saudis are supposed to protect American interests by keeping the supply going. That was the deal they made with Roosevelt back in WW II. And for the most part have kept up their end of the bargain.

(Most people don't realize how good a friend the Saudi's have been to the USA. And vice versa.)

But now Saudi Arabia is screwing the USA with oil production. And putting the US economy in the tank. This is a sharp change from previous Saudi policy.

I figure it is the backhanded way the Kingdom is showing it's displeasure with the policies of Bush/Cheney/ Rice. They can't come out and openly criticize the Shrub. But they can, and will, play a more sophisticated game.

They are VERY, VERY unhappy with the Neo-Con game plan and the way it has disasterously gone wrong.

I suspect that when the new President, be it Obama or Clinton takes office (not McCain) the Saudis will turn on the spigot, or turn off the sovereignty funds, and get the price of oil back down to earth.

After all, it is not in the Saudi's interest to destroy the world economy. Not in the long run.

[GnitenGoodLk]

"But now Saudi Arabia is screwing the USA with oil production. And putting the US economy in the tank. This is a sharp change from previous Saudi policy."

Saudi citizens brought our towers down. That is where the real fight has been all along. Iraq & Iran are minor players. They have been screwing us a long time. THAT is the crux of the war lie.

Until, and unless we address Saudi Arabia, moderate governments all over the world are at risk.

I have no problem fighting for my country, and having my child go off to defend our nation and our allies. I have a problem with that when we're taking the cowards way out and making it worse. That is why Shrub considers Afghanistan a "romantic" mission, he is too much of a coward to deal with the true source of terrorism. Fast-tracking alternative energy, gaining support from other nations to take over Saudi's oil global hegemony. We should have taken out Saudi Arabia from the beginning. They are the ones who sent, and paid for, terrorists to our shores. He has botched this so bad and continues to do so he has endangered every nation in the world. Iran is going to be a massive debacle that will make Iraq look like a speed bump.

But "stay the course!" Maybe the anti-government Republicans are right. They can't do anything right and at least acknowledge it.

[Durango]

There is a world of difference between the Saudi government and the Saudi people.

The Saudi government has played a very, very tricky balancing act. Supporting the USA, and receiving protection in return and then looking like they are the proper guardians of Mecca and Medina.

Spending their oil billions on hookers and palaces while playing the righteous Muslims and the protectors of the Holy Sites.

But if you look strictly at oil prices and production you will see that the deal made in 1945 has been stuck to. Despite ALL the posturing over the years.

True, the majority of 9/11 hijackers came from Saudi Arabia. As well as Osama Bin Ladin. There is no doubt that members of the Saudi royal family (which is huge) have supported Al Qaida in the past. And I would be very surprised if the majority of funding for the Iraqi Sunni Insurgency came anywhere but from the Kingdom.

But that is NOT the Saudi government. It is after all, a complicated place.And a very,very complicated Royal family.

What is happening with the price of oil today is different from what has happened in the past. And I believe it is a deliberate policy of the King to screw George W. Bush.

[Sundialsvc4]

"Address" in what way? Nuke 'em? Invade 'em?

Good sir or madam, you've probably heard the phrase "king of kings" only in a religious context, but they really do exist on earth, and the King of Saud is one of them. You're not gonna touch him, not even gonna get near him, and by the way he owns a great deal of your country. He hasn't forgotten the agreement, negotiated long ago by Henry Kissinger, that persuaded his kingdoms to accept your Dollar. But maybe that agreement is growing old. You know, of course, that if your Dollar is no longer the reserve-currency, it's going to be more worthless than it already is.

The man who would be "King George the Lesser," but who is in fact no king, presented his supplications not too long ago to the King of Kings, and admired the King's horses and his luscious bed-linens, but in his entreaty he was rebuffed. A vassal does not thusly address a King in this manner.

As the King is now demonstrating. How much would you like to have to pay for gasoline? Don't you see that your country's economy can be stopped entirely if the King but lifts his finger to say so?

[davedave]

emergency tax of 50 cents a gallon.

consumption goes down--all monies to alt energy and development of fuel sources--ie make nice w those that have oil, don't invade them...

that 50 cents will be here soon--lets use it.

for those who doubt, a class collectively described as "hummers", you didn't see this 6 years ago.

" heah me now , beleaf me later!".

d

[Cathexis]

Effective, yes, but quite regressive for many on the lower economic rungs.

[davedave]

absolutely.

but its coming....­...more regressive to be a deer in the headlights.

will higher fuel prices without alternatives help the bottom of the totem pole?

d

[StillAmused]

Want a reality check? Strange, isn't it, how the 45-degree climb in oil prices begins precisely at the time of Junior's criminal invasion of Iraq? Payback's a bitch.

All the other explanations -- market instability, Asian demand, storm damage, etc. -- are distractions.

Gonna take one hell of a cross-wired abacus to explain how, while crude prices are allegedly at fault, the major oil companies have recorded ASTRONOMICAL, disgraceful, insupportable PROFITS. "Grand theft" sounds about right.

"We have met the enemy, and he is us." -- Pogo (Walt Kelly)

http://static.seekingalpha.com/wp-content/seekingalpha/images/OilPrices.GIF

[Merg]

Why not open the strategic oil reserves and flood the market for a while to improve our economy and bring oil prices down? At least stop buying oil at these prices to continue adding to the reserves.

[LeftRight]

SPR wouldn't really help for more than a small blip. The amount of oil stored there is only a couple of months of US usage. PLUS, the shrub ahs said that he will never open it, and will only keep adding to it, which DOES contibute to the higher price.

[cylindar]

You are way off base with your theories. It would appear to me that the run of your articles here have been to hang every crime in the book on OPEC. Most people are aware that it is speculators that are causing this bubble and they do not have anything to do with OPEC. They have to do with themselves and their own greed. Many of these speculators are Americans who want to make a buck through trashing other Americans. Why are you trying so hard to obfuscate this fact and blame OPEC.

[GnitenGoodLk]

"Bush Asks Saudi King to Open Oil Spigots Makes Personal Appeal After Public Rejection"

http://abcnews.go.com/US/Politics/Story?id=4141964&page=1

"arlier Tuesday, Bush made his case for having OPEC, and particularly American ally Saudi Arabia, increase oil production as the price of gas hovers around $3 a gallon.

The Saudi oil minister, however, waited only a short time before announcing that oil prices would remain tied to market forces — a direct slap at Bush. "

Bush: ""These are smart people. They know that the price of oil can affect our economy, and they know that if our economy weakens and there's less purchasing power, that it will affect their ability to sell barrels of oil,"

Wrong again. They can sell their oil just fine. To China, after we screwed over Iraq like that.

[BARRISTER]

cylindar, can you actually read? You didnt see the part about the Sovereign Investment Funds and their use by these OPEC Nations?

Try again please.

[FearlessFreep]

How galling! When it comes to international trade, Uncle Sam is supposed to be on the business end of "sovereignty screwing," not the receiving end. (Ask Cuba.)

[darker]

Cheney's deregulated BIG OIL CABAL met "first thing" with him and outlined their "entitlement" to HUGE PROFITEERING off the American public. BIG OIL controls oil markets and prices.

The Saudis and others just go along. They all PROFIT BIG while vitually bankrupting middle income Americans.

[GnitenGoodLk]

In 2003, the spike of oil prices were expected and forcasted and directly correlated with the Iraq invasion.

http://www.etla.fi/files/896_FES_03_1_iraq_war.pdf

The global economies Iraq supplied oil to were disrupted. Output has not reached pre-war levels.

The excuse given to not worry about it? We still get it cheaper than Europe. How long is that going to last? Not much longer. Even though it's more expensive there, recall, they get more bang for their Euro than we do.

Republicans, liars and failures.

[TakeSake]

Ten years ago gas was $1.25 and in Japan it was about $3.00.

Now it's $3.25 and in Japan it's (someone update this) around $4.50.

It seems reasonable that if $1.50 is due to the increase in the price of oil, then the remaining $0.50 is due to the decline in the value of the dollar.

[GnitenGoodLk]

Japan hit 5.09 a gallon in 2006, it's came down for them.

http://news.3yen.com/2006-08-09/japan-gas-prices-hit-highest-on-record/

But you made a good point.

Netherlands $6.77
Norway $6.56
Denmark $6.29
Belgium $6.02
UK $6.02

All higher because they are heavily taxed to discourage driving. But take into consideration these countries have health care, higher wages, etc, they don't complain about it.

http://www.msnbc.msn.com/id/8994313

Japan, on the other hand, is struggling (capitalist society of ours there) Funny, they're fighting privatizing social security too. No retirements there, they open mom/pop stores when they are too old to work.
http://www.geocities.com/japanfaq/FAQ-Prices.html

It's the "make do with less' society?

So is that what's happening? Is that why bush isn't too nervous? it's just a "readjustment" We pay higher prices, get less bang for our buck?

Taking Iraq's oil off the UN market didn't affect the prices at all? Losing access to Venezuela s market not being felt by us yet?

[Myst]

Exaclty five years ago today, oil was $23.00 a barrel.

What major event happened five years ago? Anyone know?

[TakeSake]

Gosh, you got me.

Golly, an affair? Something to do with baseball?

Oh, I know! Americal Idol started! I KNEW there was something important that happened back then!

[Sundialsvc4]

Yep. We invaded a country, itching to show off our "sooper dooper weapons," and looky what happened. Heap big man on campus comes swaggering on the world-war stage wearing impenetrable body armor ... and no pants. Can't even MAKE his own pants without a sweatshop half a world away. Tried to open a shoe-shop and had to close it (no kidding). Can't come close to producing enough oil for itself, yet demands that all oil must be bought and sold in its own currency which it shamelessly manipulates (and manufactures to the tune of more than $1 million a minute, 24/7/365).

Yeah, mister heap-big-m­an-on-camp­us no-pants, here... take THIS! (Yeah, you know where.)

*Ooof!* ow-thathur­t... clunk.

Sorry that you citizens have to be caught-up in all this, but it's either this or "World War Three: The Return of the Nukes." Now, put away your silly Starbucks and start calling your legislators and demanding Impeachment. Quick, while there's still time. Don't take "no" for an answer anymore. If it's "off the table," then it must be "on the floor."

[swift goat pet for truth]

On top of THAT, we provide the security for all the Middle Eastern Countries (such as it is). And, in return, they give us access to all the $110 bbl of oil we want!

Can you imagine how costly it would be if we did NOT provide the US mercenary corps at taxpayer expense to protect the royalty of those states?

[alvdh1]

Peak oil is here and it is not going to go away. Economist Stephen Leeb, in 2005, predicicted the price oil would rise to $100/ per barrel by the end of the decade. The price reached $111 last week. His premise is based on peak oil coupled to rising demand. Here are some important distinctions and facts that he made in his book: " The Coming Economic Collapse When Oil Hit $200 Per Barrel".

The world economy is dependent upon readily available inexpensive oil for growth. Without it, there will be economic chaos. 87% of the worlds oil production is in 20 countries. 10 of those countries have reached peak oil. Several of the countries, who have not reached peak oil, are using an ever growing percentage of their excess capacity for their own needs in pursuit of prosperity. Hubbert's Law
states that once 50% of the oil has been extracted from a given oil field, production begins to decline.

I agree with his premise that cheap and abundant energy is necessary for growth. I disagree with his notion that it has to be sustained with oil or its derivitives. If you accept that peak oil is here or just around the corner, then we are not going to produce our way out of it. It is pretty well accepted that new, large discoveries are lagging world demand. A prolonged world recession may delay the inevitibility of peak oil, but continuing our dependence on oil will hasten its arrival. His assumption that derivities of oil from coal, shale and LNG will have to be brought on line to make up for declining oil production will require to much energy to make energy efficiency sense with the possible exception of LNG which also burns much cleaner.

North Sea oil production has been in decline since 1999 for the U.K. and 2001 for Norway. Combined production peaked at 4.5 million barrels in 1999. By the end of 2006, production had fallen to 2.9 million. The Cantarrel oil field in Mexico peaked in 2005 at 2 million barrels per day and is projected to decline to 1.43 million barrels per day by the end of 2008. It was the world's second largest oil field when it was discovered in 1976. Oil consumption in ten of the 20 countries is growing at rates of 7 to 11 percent per year. In 1998, Indonesia was a net exporter of oil and today they are a net importer. At the same time China and India are on the cusp of explosive automobile growth as they continue to prosper at double digit rates.

Their combined populations are approaching 2.2 billion. We are reaching the tipping point of economic collapse from dependence on oil. It wont be solved by increasing production because all of the easy oil discoveries have been acheived. We are going into deeper and deeper waters and finding smaller new oil fields while many countries are increasing consumption and experiencing declining production. In 2006. the five largest U.S. oil companies paid out $83 billion in dividends and repurchased $87 billion in stock instead of investing it in production while receiving billions in tax incentives from tax payers.

New Energy Bill for the World
1) Mandate 50 mpg by 2010, 60 mpg by 2012 and 100 mpg by 2015
2) Eliminate Internal Combustion Engine by 2020
3) Develop

[Americanabroad]

Thank you for your comments.

A site worth reading in this regard is the Rocky Mountain Institute:

http://www.rmi.org/

[Americanabroad]

Thank you.

A site worth reading in this regard is the Rocky Mountain Institute's homepage:

http://www.rmi.org/

[BOfever]

It sure would have been nice if we would have drilled for our own oil long ago in Alaska and in the Gulf instead of waiting until we are in total control from other countries. Thanks environmentalists :)

[FearlessFreep]

Scapegoat time again (sigh).

[BOfever]

What you don't think it would be a good thing to have our own oil supply instead of forking over billions to foreign companies?

[straightshooter]

What is perceived as a dramatic increase in the price of a barrel of oil is in fact a reflection of the massive drop in the value of the dollar under Bush and his cohorts. In terms of the purchasing power of a dollar in 2001, the price of a barrel of oil today is a mere $30.00. Given the accelerating decline of the dollar, oil producers will inevitably abandon it. They have no other choice.

[BOfever]

The value of the dollar is losing so much ground because the people of this country are in debt up to ther eyeballs because they have been living outside their means. To add to that you have the fed cutting rates all the time which basically makes invisible money and causes inflation.

[straightshooter]

BOfever

No argument. What the Fed. is trying to do is get the American consumer to drink more of the poison that is killing him/her, i.e., debt. It won't work. Americans are drowning in debt and it is increasingly credit card debt that charges beyond usurious interest rates. The only meaningful effect of cutting interest rates is that it reveals how bad the situation really is and how panic stricken the Fed. is.

[Americanabroad]

I agree. We're in the same syndrome as we were in the 60s under another president from Texas. Johnson wanted the Great Society, Cold War, Space Program and NASA with no sacrifice, and it led to the eventual breakdown of Bretton Woods and the devaluation of the dollar. Bush wanted massive tax cuts and two wars, with no sacrifice.

Here in Denmark, on the other hand, the government in 2007 paid a full 25% of outstanding debt, and the country became a net creditor for the first time in over half a century. And the unemployment rate now stands at 2.1%

This has not come about easily. Denmark took a different road in the 70s. High taxes on energy consumption, investment in alternative energy - especially windmills, and stringent efficiency regulations. Almost none of the McMansions in the US could get a building permit here. And Denmark made oil companies pay top price in royalties and taxes for Norh Sea drilling rights, which, by the way has not discouraged investment in exploration one bit. Americans need to stop being schmucks when leasing rights to federal resources.

Over 3 decades, the high price of energy has been internalized by businesses and consumers, who use energy far more efficiently than Americans. Prices have gone up here the past 5 years, but at only a fraction of the percentage increase in the US. Oil has gone from $30 to $110, but the dollar has gone from 9.3 crowns to 4.72 crowns today. Recent price increases have been felt here far less than in the US.

Finally, wind power is now cheaper than electricty from oil and gas, and burning our trash and biomass is cheaper than coal for electricty. Long term planning is paying off.

[Americanabroad]

Sorry, missed a couple of things in the edit phase.

I should have added Vietnam to Johnson's list of priorities.

And yes, Denmark does spend less on defense, but it should be noted that Denmark has troops in both Iraq and Afghanistan. Two Danish soldiers were killed Sunday in Helmand Province. Danish troops operate in danger zones in both countries.