THE BLOG
03/02/2006 07:46 am ET | Updated May 25, 2011

Oil Price Panic Crescendo

When suicide bombers from Al Qaeda tried to attack Saudi Arabia's biggest oil-processing plant the other day, they failed in their objective. Guards spotted two cars trying to come through the gates, shot at them, and the cars were destroyed. There was a small fire and two guards were killed, yet the oil continued to flow uninterruptedly. Still, in consequence the price of oil on world markets spiked by some $2.00 a barrel.

Roughly the same scenario played out a few days earlier, when a ragtag band of insurgents forced Royal Dutch Shell to shut down some of its facilities in Nigeria. World oil prices jumped by some 5 percent in two days from already egregiously high levels.

This was pure panic. There's no basis in fact or logic to justify such an increase. If anything, the failure of the Saudi attack proved how hard it would be to do any real damage to the world's biggest oil producer. And Nigeria's insurgents have been pecking away at Shell for years now, kidnapping workers, making threats, and blowing up pipelines, despite which Nigeria's average output continues to be 2.36 million barrels a day. But oil traders and customers have been carefully conditioned to their knee-jerk response: OPEC, and oil patch flacks have persuaded the world that pumping capacity is so tight that any glitch in supply could touch off an international shortage and result in gasoline lines around the world.

In reality, the system is highly elastic. At every stage of production, from crude oil to refined products, there are millions of barrels of oil in the pipelines and storage tanks, ready to cushion shocks small and large. Beyond that, the International Energy Agency (IEA) reports that its members alone i.e. EU, USA, Japan etc. have squirreled away more than 4.1 billion barrels of crude oil. The key fact is one that the alarmists never mention, the oilfield version of Sherlock Holmes's dog that didn't bark: Through all the wars, earthquakes, hurricanes, and terrorist threats of the past three plus decades, there has never been any actual shortage of oil except when OPEC itself chose to close the spigot.

Never mind; the threat of imminent disruption is constantly touted as hanging over our heads. The cartel, the oil companies that happily conspire with it, and the industry's paid consultants and tame journalists have been singing from the same hymnbook for years. The producing nations are nearly all pumping at top capacity now, they say; and only Saudi Arabia is deemed to have any extra capacity available, so any kink in the pipeline anywhere in the world could bring the industrial nations to their knees.

The result is what you've seen almost daily in headlines: Any problem, anywhere, sends the price up in hysterical anticipation of what always turns out to be a phantom shortage. When supplies continue, the price drifts back down -- but over time, the trend is decidedly up. Back, not so very long ago, when the price of oil was hitting records at $45 a barrel, consultants said the fear factor was adding about $15 to the "real" price, measured by supply and demand. At today's levels, we're paying an extra $30 to $40 a barrel for being scared much to the oil patch's pleasure and profit.

There isn't any "real" price, of course, because the market isn't free; OPEC manipulates the price, and panic is part of its strategy. And no one knows how much oil the producers could pump if they wanted to, because each OPEC cartel nation's true capacity is a state secret as is that of Russia's, just like the real figures for reserves of oil in the ground. But if you honestly think that people who have been living for years on oil can't run their business well enough to meet a rise in demand -- well, better not open any e-mails from Nigeria.

When the sun comes up tomorrow, there will be enough gasoline to run all the cars. If you're paying more for it, it won't be because there's a shortage of available supply. You're just paying the masterly orchestrated panic premium.