To quote Federal Reserve Chairman Ben Bernanke "energy has an influence that is disproportionate to its share in real gross domestic product (GDP)". All the more reason for a dispassionate and objective assessment of current market phenomena , especially as regards crude oil the bellwether of the energy complex. Yet, Mr. Bernanke, in his talk to the Ecomomic Club of Chicago proved adept only at repeating the oil patch mantra which we have been spoon fed by the oil industry , OPEC , beholden industry analysts and the press for the last half dozen years while prices catapulted some 500 percent!
Waving his pom-poms, Bernanke led the oil patch cheer for Saudi Arabia and the Organization of Petroleum Exporting Countries (OPEC) whose members, he advised us were able to boost production relatively quickly in changing market conditions by using production capacity that had been idle. His cheer, however, left out the stanza that with each production increase came a dramatic increase in price. One can only commend OPEC for training our government officials so well that while we are being plundered we extend our appreciation and thanks.
And then, dolts that we are, advises us that OPEC's oil production flattened out over the past year even as oil prices continued to soar, as though one had nothing to do with the other. No mention that OPEC currently claims to be producing some 30 milliom barrels a day and tells us that they are at the limits of their capacity. Mr. Bernanke accepts this as received gospel. There is no curiosity that some 25 years ago OPEC's pumping capacity was approximately 31 million barrels a day and no hard questioning why in the interim quarter century additional capacity to accommodate their customer base was neither installed nor seemingly anticipated by OPEC.
In echoing the OPEC and the oil patch pitch about limits of capacity, growing demand, political instability, hurricane disruptions, etc. no mention is made of the lack of transparency by say, Russia (where oil reserves are a state secret), and OPEC countries who have steadfastly refused to clearly set forth their reserves and production capabilities so that decisions by the world's economies can be made on facts rather than hearsay. Or as one adviser to the Saudi Government bluntly stated, " Western nations are not dealing with oil producers as partners. Why should they have the advantage of knowing details of oil producers' reserves? Data on reserves is information, and information is power".
For Bernanke, there is a good explanation for everything that is bad in the oil patch. By way of rationalizing today's prices, he is quick to point out that production leveled off this past year given the effects of hurricanes Katrina and Rita. Bernanke advised that as a result there was a cumulative loss in production totaling 160 million barrels of oil. Though he highlights that 160 million barrels represent one half of the present level of commercial crude oil inventories in the United States, he doesn't clarify that during the course of the year commercial reserves never dropped under 300 million barrels at any given moment in time and that the 160 million barrels were not lost as oil, but only as production capability within a given time frame. Nor any mention that this shortfall could have easily been accommodated by our government's Strategic Petroleum Reserve currently totaling 700 million barrels.
Chairman Bernanke could not have been more supportive of the oil industry's dogma, that the price of oil is determined by the unfettered hand of the free market. Those who have read these blogs know that is a position I find highly questionable especially when 40% of world production is controlled by a cartel (OPEC) and when national producers, such as Russia, Mexico, and Norway are major beneficiaries of OPEC's manipulation and more often than not, align their production policies to accommodate OPEC's curtailments. And then, of course, is the oil industry both here and abroad, who have ridden OPEC's coattails to undreamed of profits. Oil interests, in corporate boardrooms, in Congress, on "K" Street, in the executive branch are sleeping happily tonight in that they now know the man (they?) appointed to head the Federal Reserve is going to make it that much easier to keep the oil soaked wool pulled over the public's eyes, keeping them oblivious of the hijacking in progress, and keeping those oil profits rolling in.