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

[kae]

"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."


Paul & Kucinich tried that and everyone laughed in their faces and told them they were not electable. More of the $ame is what we get every 4 year$. Campaign finance reform is a talking point and that is all it will ever be...the wealthy spend lots of money to buy the Whitehouse's turned back.... The neocon agenda is the real 'mission accomplished'.

[vippy]

Exactly, people are way too dumb to be listening to the ideas of candidates. They simply cannot
comprehend the outline. They know a few key words and when they are skewed they take it the
way they desire. Like Hillary's vote for Iraq and now she wants to get out but she does not commit
herself, she only says she is concerned with the security of the USA, that means, if she does not
think we are secure enough then she will stay in Iraq or have another war with Iran.
And with Obama, I don't think we see much of a difference. People now are much more concerned
with what his preacher said, like Obama is black only, which would fit their bill, or that he is anti-American LOL. We get what we deserve!

[BlueBerryPickN]

Vice
.
.
.
Think about it...

The Thieves of Virtue: legislating morality undermines representative government.

really, VICE is contextual:
* gender
* ethnicity
* age
* race...

all pay a part in morals. but VICE, should never be *criminalized*, especially in a nation where PRIVACY has been abolished.

Who is PERFECT ENOUGH to represent THE PEOPLE or a populist reform when there is neither privacy nor the Will to preserve privacy in society?
Who stands *for the People* when Money & Power exert corrosive controls to extend their oppression & corruption?

You've been *had*

Nobody is immune to *vice* as VICE is about how ONE PERSON privately & personally determines *how to enjoy their own body*... Naked Truth: Civil Rights & CNN coverage of "F.B.I. biometric database - 'Server in the Sky'"
http://thiscanadian.typepad.com/this_canadian/2008/02/cnn-coverage-fb.htm
...& THAT is how THE MORAL MAJORITY ensured Money & Power will kill representative government for The Peoples who seek JUSTICE, Freedom & Human Rights.

"corruption is why we win":
http://thiscanadian.typepad.com/this_canadian/2008/03/there-is-no-we.html

"Yell Fire!": Bush to freeze peace activist assets? - Executive Order to "Blocking Property of Certain Persons Who Threaten Stabilization Efforts in Iraq"
http://thiscanadian.typepad.com/this_canadian/2008/03/the-thieves-of.html

NSA's Domestic Spying Grows As Agency Sweeps Up Data
http://thiscanadian.typepad.com/this_canadian/2008/03/nsas-domestic-s.html

Diamond Age? - Kids, RFID Chips... & Minority Reporting?!: thoughts on the new US Project Hostile Intent (PHI)
http://thiscanadian.typepad.com/this_canadian/2007/08/kids-rfid-chips.html

Watching the "Ownership Society": follow-ups on Shareholder Surveillan­ce...
thiscanadian.typepad.com/this_canadian/2007/08/undermining-the.htmle.html


THERE IS NO "WE" in Corruption
http://thiscanadian.typepad.com/this_canadian/2008/03/there-is-no-we.html


~~~

Spread Love...

BlueBerry Pick'n
can be found @
ThisCanadian
~~~
"We, two, form a Multitude" ~ Ovid.
~~~
"Silent Freedom is Freedom Silenced"

[fact finder]

Blue Berry.Exce­llent post , complete with links. You now have another fan. Peace ,love and Harmony for all.

[BBackSoon]

As long as the Powers that Be are in control we will never have a real energy policy. This government will not do anything prudent or reasonable. They never have and they never will. There is open speculation as to if any future governments will take this on either.

We all know that there are enough technologies available today to cut our consumption of fossil fuels in half with little or no pain. If our the Feds simply gave real tax cuts to promote renewable energy at the consumer level and perhaps at an industry level we would see strides in both the technology and the affordability of these alternatives as well as a whole new jobs market. But these people will continue to beat this golden egg laying goose until we all die.

Viva la Revolution.

[TXfemmom]

HuffPost's Pick

It isn't just the oil producing nations that are behind this. It is the oil companies and traders who are doing this, as well.

The United States has tremendous reserves, and one can leave out Alaska in that equation for the moment, and they are not being developed. If the oil companies won't do it, then the government should establish a national oil company, do everything it can do to keep out the political forces to corrupt it, and develop those reserves as quickly as possible.

In the interim, there are things which can be done. Tax those oil hogging vehicles and start stigmatizing them, socially. Shun people who drive those Hummers and 4 X 4's, just so they can be manly, when we see them with one person in them all the time. Every individual in the country should attempt to cut their gasoline usage by ten percent, beginning today. Consolidate those trips, neighbors should speak to one another and go to the grocery store together, and save the fuel. Act as though we are in a fight for our lives, as we are. Outlaw those plastic bags that everyone carries home from Wastemart, and other stores. It uses millions of gallons of petroleum and clogs our garbage and waterways. Everyone see that they recycle their oil changes. Put those high schoolers on school buses, instead of hundreds of them driving back and forth to school...a­nd parents don't take them to school and pick them up.

Get on those buses folks, if one can. Take the vehicle in the family which gets the best gas mileage.

Then, locate and shun all these oil execs and traders because they are destroying the country.

[philistine]

" locate and shun all these oil execs and traders because they are destroying the country."

I'd like to "shun" them, if by "shun" you mean "impale on a wooden stake."

[colbert2422]

A basic flaw in our system is that of the thousands of lobbyists in Washington DC not a one offers high powered incentives to elected officials to make the whole public better off.

What would you think of us treating our legislators somewhat as our rich, sophisticated friends treat those who manage THEIR assets? The typical plan is called 2 AND 20. Two Percent of assets under management per year as a base pay, plus 20 percent of profits made per year as performance based pay. As it is, we, the public, pay the base pay, which our officials get whether they are awake or asleep, while the performance based pay is provided by our more sophisticated friends via PACS, lobbyists, direct contributions, etc.

While former energy secretary Schlesinger reassured OPEC that the US would do nothing to harm OPEC, solid authorities have published and signed their names to assertions that the US could drive oil prices down to the marginal cost of the lowest cost producer by exerting its power in the marketlplace. For instance, if we contracted out the generation of our electric power to the French, or at least did as well as them ourselves, we might be able to match them in producing 80 percent of our electricity from nuclear. Among all the other basic uses, this could be used to power electric automobiles, massively reducing sources of greenhouse gases, while eliminating completely our dependence on at least middle east oil.

Kohler, Heinz 1986: Intermediate Microeconomics Theory and Applications, Scott, Foresman. He gives an example on pages 234, 235 [his chapter on cartels, example 8.3] of how the price of oil could have been pushed back to the marginal cost of production of the Saudis - about ten cents per barrel, at that time. Kohler gives 25 cents, but that probably includes exploration costs, not just marginal production costs. Professor Kohler is a major authority. His books are avalable at AMAZON, as are those of his major source on this, MIT Professor Morris Adelman.

There are other programs based on very high quality knowledge that could increase Americans' wealth and income by several years worth without soaking the rich or raising any taxes or fees, or transferring wealth from anyone to anyone else, just by making better use of what we already have. See era2000.net for more on this.

Wolff, Edward N. 1987: *Growth, accumulation, and unproductive activity, an analysis of the postwar U.S. economy,* Cambridge University Press, London. His estimate of efficiency of about 20% is spelled out on p. 135. Wolff's analysis goes beyond the mere statistical, as called for by Hal Varian. He analyzes the usage of labor, as it is actually allocated among productive applications that differ greatly in their contribution to production.

[colbert2422]

I agree with this post completely. see era2000.net for a path to creating a national oil [and everything] company

[Aaror]

Fastest way to cut your gas consumption, lay off the lead foot.
Going 65 costs 10% more gas per mile than 55. Going 80 costs almost double . Not only will you cut gas consumption, you will save money, far more than the time you save is worth.
Aggressive driving-weaving in and out of traffic-costs even more per mile, because every time you accellerate only to slow down a few feet later you are burning gas for nothing.
Check your tire pressure and keep your tires inflated. This will cut gas use too.
And remember, every major terrorist group besides the IRA and ETA is funded by oil money, so not only do you save money by reducing gas usage, you help fight the war on terror. You do more this way than our hapless gov't has to date.

[philistine]

"Going 65 costs 10% more gas per mile than 55. Going 80 costs almost double . Not only will you cut gas consumption, you will save money, far more than the time you save is worth.
Aggressive driving-weaving in and out of traffic-costs even more per mile, because every time you accellerate only to slow down a few feet later you are burning gas for nothing."

A good friend of mine referred to this as "Hurry up and wait." I've yet to find a more elegant description.

[SevenSteps2Kevin]

I had no idea that you could control that price of commodities through means such as this, but it certainly makes sense and is indeed a grim and foreboding sign that we in the USA are caught in a global web that is far more complicated than any of the language we have been talked to with by our government. It seems to me that we as average, wage earning Americans, are being leveraged against by a number of motivations, all playing to the same end. OPEC, of course, is interested in keeping oil prices as high as humanly possible, and since they hold the leash, they are able to set prices as they see fit, even if it means revving up false demand. Then, of course, our current Republican administration, both to satisfy their big business big donors as well as to satisfy their economically minded allies in the Middle East, could care less about the price of oil. Their prime donors get rich and richer, aided by abhorrent government subsidies, and they get the necessary political support abroad from the very countries that hold the leash. I feel that the very worst part of it all is that this heavy burden comes down on the bottom level consumer. The costs of all this are passed along to us in the worst possible way. We pay for high oil costs in more than wages. We pay with inflation caused by our war to obtain and protect the oil resources in the middle east, we pay the middleman, who is only interested in building liquid reserves that will be used to corner and control the next emerging energy market (and hence, us), whatever that may be, and we pay the middle easterners themselves, who are interested in obtaining their own cash reserves so that their countries will have a future after they have drained every last bit of oil from under their sand encrusted deserts. In our current relationship with big oil, in all its incarnations, we are beset from all sides by predatory and selfishly motivated individuals who care nothing for either the common American or the common man in general. What this amounts to is a massive redistribution of wealth from many, into the hands of a few, a few that have proven they don't care about the majority of the people of our nation. The weaker we become, the stronger they become (money wise) and we lose even more control over our own country and its futures. Truly, we need to remove ourselves from this vicious cycle and seek out self-sufficient forms of energy that can free us from being pawns to this huge financial game. The longer we play, the harder it will be to quit without suffering serious economic hardship.
Post Comment Edit Cancel

[joeythetrollslayer]

Here's what you do:
1) buy all your junk online-it's usually cheaper anyway-don't drive to the store unless it's a social thing
2) carpool to work with someone else
3) instead of going 85 go 65, you'll have lots of gas
4) let your engine warm up-don't make lots of 2 mile trips. mileage can drop by half in cold engines
5) coast to a stop
6) look at replacing your car with propane or natural gas-we have this in abundance, and it's cheap

if you do these things, guaranteed you'll lower the fuel bill

[mainmonkey]

This analysis is completely wrong. You talk about increasing reserves but don't talk about rate of production (extraction) having exceeded the rate of new discoveries for DECADES now. Meanwhile, the Oil Production (extraction) rate has leveled for the past THREE YEARS, as demand has continued to increase. It is PRECISELY because of supply and demand that prices are going up, and why they are going to KEEP GOING UP.

STOP MAKING EXCUSES.

EDUCATE YOURSELF NOW ABOUT PEAK OIL.

[chx]

Not to be a simpleton, but it seems that at some point, all the other industries, which are quite large and powerful, who are getting screwed as well by bad energy policy, will weigh in on things. Am I naive?

[SevenSteps2Kevin]

yea you are definitely right. everybody has to pay energy costs associated with oil- transportation, plastics, electricity, and even taxes, although most corporations don't seem to pay any. Just wait and watch the price of foodstuffs increase like crazy in the next six months.

[SevenSteps2Kevin]

oh, also forgot to mention, it is already hitting the trucking industry really hard. Their main resource used is petroleum fuel, usually diesel. No doubt with the massive increases in fuel prices they will surely pass those costs along down the line until it hits consumers.

[RENREVARD]

LET ME SEE ENRON POWER SHORTAGE WHEN BUSH TOOK OFFICE NOW A .OIL SHORTAGE WHEN BUSH IS IN OFFICE. I DONT SEE ANY REASON TO THINK THAT BOTH STOCKS ARE BEING PLAYED WITH DO YOU?

[zenx98]

Most troubling (even circumstantially) is how tightly knit the incestuous band of money men and oil handlers is becoming even more so thanks to the Wall Street meltdown. Devaluing the worth of nation’s assets by any means necessary including a revolving door into which U.S. tax dollars disappear by the skid load and reappear on the bottom line of bailed out brokers and OPEC, consolidating wealth into limited hands while simultaneously using foreign policy to inflate the cost of basic commodities to the masses is a chemistry 101 recipe that preceded both previous world wars. The sinking of the market on the heels Admiral Fallon’s departure from CENTCOM and Cheney’s trip to Iraq is becoming the stuff of nightmares.

[IanStuart]

This is OPEC's revenge for the Iraq War. The Neocons in the Bush Administration wanted to invade Iraq and sell off its oil industry to private operators who would naturally pump to the max to maximize their profit. With the entire nation pumping oil like there's no tomorrow, the theory went, the price of oil would drop through the floor and OPEC would be crawling.

But Cheney and Rumsfeld and Wolfowitz failed in their fantasy crusade and all of us are experiencing the revenge for the attempt to attack Arabian riches. And, of course, all the while the oil sellers are laughing as your retirement and your kid's college money shift to their checking accounts. And sure, billions of our hard-earned money is also going to the Saudis and the like to strengthen their fundamentalist regimes and hence fund anti-american terrorism. We're being hung with our own noose.

There's an old saying: "If you're gonna kill the king, then you better kill the king. Otherwise, the king will kill you." The king is now killing us.

[zenx98]

Foot dragging the Iraq oil sharing legislation by Iraq has been a particular thorn in Cheney"s side since it papers over Cheney"s secret energy commission dividing up Iraq"s oil resources against a list of "potential investors" in the early days of the administration LONG before 911 and holds up the "investing" that was supposed to sponsor the reconstruction in the first place. It is the single stick the Iraqi"s hold against their "liberators". Hence Cheney’s trip to visit this issue (among others)

The failure of the administration to plan for this contingency in the PNAC"s white knight takeover of U.S. strategic resources is yet another scorching example of how criminally short sighted the veep"s" vision" really is (see also Cheney"s acquisition of Dresser Industries while chairing Halliburton for precedent).

[JacobSinger]

I have felt very strongly for some time now that blatant market manipulation was at the heart of this issue; your article has cast a light on the underlying issues that make this so easy to do and difficult to understand.

[sa]

i am certain
all washington thinktanks
are riveted
upon the question -
"how do we funnel all iraqi oil straight to america
without being looked at as greedy oil warmongerers?"

it will happen in subtle changes.
it will happen over years.
it will happen as people forget.
but it will happen.

p.s. people screamed for alternative fuel sources decades ago.
p.p.s. bush and cheney are oil men.
p.p.p.s. "men" was used very liberally. (people rarely refer to cowards as "men".)

[MajorKong]

I remember being told back in 2000 that we needed to elect an oil-man to the White House so that he could keep the price of oil down. How's that working out so far?

[Rule Of Law]

I guess the red states heard that as "oily man..." and they got one!

[Stanley]

We are causing the price to escalate with our foreign policy disasters that create instablilty. We need to invest heavily in energy independence based on technology like nano-solar and biofuel engineering. We need to create independence on a homeowner level as well to remain less vulnerable to manipulation from the outside. each home can produce it's own energy and even sell back to the grid. We are in a trap we created from our own greed and now we can't get out of it. The quickest wy to devalue oil is to create competing sources that burn cleaner.

[marinade]

Obviously.

The trillion dollar question is, why isn't this being done?

The answer is because those in power serve themselves and not the best interests of the country.

[philistine]

"The quickest wy to devalue oil is to create competing sources that burn cleaner."

I don't know about that being the quickest way, but decentralizing our energy production and increasing efficiency would deal most directly with the problem. It will be very difficult to do, however. Big Oil, both producers and sellers, will fight tooth and nail to keep our money flowing into their pockets. We, and by that I mean "we little folk," will need to do it on our own - never mind the enormous strategic importance to protect our country from undue influence by foriegn oil producers, who almost universally want to damage us as a country.

And we have exactly the wrong people setting policy. When Chimpy and Cheney gained the White House, they became foxes guarding the henhouse. They should be tried for treason for what they have done to our country--not even including drawing us into war under false pretenses. In my opinion, PNAC should be declared a terrorist organization.