Slog Exclusive: Oil – The Real Motives Behind the Price Increases

By John Ward

In this Slog special:

How the numbers on oil supply disruption don’t add up

Why the IEA doesn’t believe them

Why and how oilcos are profiting from the spin

What links Iran, Nigeria, Israel, and Greece in US foreign policy

Why Obama wants to open up the reserves, even though they aren’t needed

The carrot he’d like to offer the oil business to ensure his re-election

An in-depth investigation by The Slog reveals that disruptions in oil supply have been massively hyped – and used as the cover for naked oil company profiteering, US Presidential politics, market speculation, and broader geopolitical aims.

The reason I’ve waited until now before posting anything about the oil ‘shortages’ – and subsequent price hikes –  is that I truly could not get my head round them. It appears as of yesterday that the US, UK, France and Japan are thinking about starting talks to release some of their strategic reserves. Yesterday morning, the FT reported, ‘Industry officials said the four countries were quietly drawing up contingency plans for the release, which could surpass the size of last year’s use of the strategic stocks to offset the shortage triggered by the war in Libya.’ As the FT is wrong about almost everything these days, I decided to dig a little deeper. Having already invested a couple of weeks in the energy subject, it seemed the right time to do it.

Throughout the ‘liberation’ of Gadaffiland, I kept on seeing this statistic telling me that Libya produces just 2% of the world’s oil. So even if Libyan production had stopped dead – which it hasn’t – I figured that, in a global economy not exactly bounding along at the moment, there wasn’t a lot to worry about. To offer a comparison, oil production dropped by about 1 million barrels a day in 2005 when Hurricanes Katrina and Rita forced companies in the Gulf of Mexico to shut down many of their wells. It was a disruption, but not an economic catastrophe. The total output from Libya is roughly 1.6 million a day. At midpoint last year, it was estimated that the world had a surplus of some 4 – 5 million barrels a day.

Hmm. Maria van der Hoeven, the International Energy Association’s (IEA) executive director, claimed only last week, “As no specific supply disruption is currently under way, we are not planning any co-ordinated actions at the present time”.  And earlier this week, Business Week talked about ‘resurgent Libyan oil exports’.

The very latest ‘reason’ being offered for all this panic floating around the MSM is the gas leak in the North Sea’s Elgin platform. But all the price rise malarkey was taking place long before that happened. Late last week, Reuters suggested that, ‘Civil unrest, adverse weather and technical glitches disrupted 1.2 million barrels per day of global oil output in March’. But it added that such a combo was ‘rare if not unique’…and it didn’t, as such, give us a clue about where all this bad weather and glitching had happened.

However, the investment site recently instanced one example: ‘Disruption of supplies from unstable oil producer Nigeria’. Now this is more like it: 10% of US oil is imported from Nigeria, which is capable of producing overtwice as many barrels per day as Libya. But other sources are quick to point out that Nigerian production is set to increase later this year with the sale of new drilling rights.

Another obvious ‘culprit’ is Iran. At 4 million barrels a day capacity, the Tehran regime could produce twice as much again as Nigeria, and has the third biggest reserves in the world. But because of its obsession with developing nuclear power for peaceful purposes (the way you do when you’re sitting on more oil than anyone could ever use) investment in oil machinery updates has lagged behind the search for atom-splitting street lights. Thus, since roughly early 2010, it’s been producing about 2.2 million bbds. And in recent months, that’s dropped a further 300,000 barrels.

Once again, it doesn’t add up, does it? The world has lost 2 million barrels from its fourth biggest oil producer – and nary a peep of pain from the West. Now it loses 300,000 barrels, and immediately the price sky-rockets.

Yet again, the IEA said that it “does not see any significant disruption”. I italicise the word ‘see’ there because I think it is quite significant. It’s in the present tense, and there’s no ‘think’ or ‘maybe’ about it. The IEA is politely saying it doesn’t know WTF the four countries planning to release reserves are on about.

You can sort of see why. Qatar, the world’s biggest producer of liquefied natural gas, increased its capacity to make natural gas to an annual 77 million tons last year with the start of its 14th liquefaction plant. It also opened the world’s largest plant that converts gas into liquid fuels such as diesel and jet fuel. Clearly, all this is unlikely to lead to gas rationing any time soon.

Nor is all this anything to do with fears about reserves. Huge new finds have emerged under the seas that lie between Greece and Israel, and around the coasts of Cyprus. Nigeria alone is known to have 53 billion barrels of reserves, and Chinese engineers talk of a potential 300 billion in total there. Every month now – as world demand makes exploration sensible once more – new fields are being found from the Maltese waters to the Mississippi delta.

Then there is the shale issue. Industry websites estimate that this method of gas production will rise to around 7000 billion cubic feet by 2021, or roughly 12% of the globe’s energy needs. Finally, thisismoney quotes warm weather across Europe, and the EU debt crisis, as further factors already depressing demand. As most Western leaders must have grasped in private by now, demand is not going anywhere northwards over the next two years. Yet some folks are predicting $140 a barrel by mid 2013.

The real motives behind the spin

So what gives? Why all the pressure to release reserves from the major industrialised nations? [Surprise, surprise, excluding Germany – which has massive reserves, and is doing its ‘serves you right’ display on this issue too]

Speculation is clearly a factor to some degree. Over-zealous trading makes the market more volatile than it would otherwise be. And speculation is definitely on the increase. The simple truth is that, according to the IEA, world oil demand is expected to increase by a mere 1.5% to around 90 million barrels a day in 2012. In reality, the market is already behaving far too capriciously to be based solely on supply and demand: look across the major traders and analysts in the sector, and you will note that almost ubiquitous is the frantic attempt at self-fulfilling prophecy. It’s a bit like looking at the UK’s real estate sites in 2011: total, nonstop bollocks from end to end.

But there are much bigger factors in play behind the scenes. They concern geopolitics, profiteering, and re-election politics.


The geopolitics of all this is pretty obvious, and not news to anyone who’s awake: we saw late last year how America’s control of the global Dollar transmission system brought Iran close to its knees, and we also saw how peace-loving Islamists in Nigeria blew up a church full of Christians on Christmas Day in Nigeria – as the formal kick-off for a murderous campaign of gentle killing. Some 3,200 Nigerian citizens have since perished – although the newish Government there denies this.

So, one reason why the price of oil is rising concerns the War on Terror, and the closely associated worry about Islamic fundamentalists controlling African oil production. What Nigeria and Iran have in common is Islamist nutters, and unstable government of a population in pretty bad shape. What they also have in common is Chinese technicians just gagging to lend a hand.

I wrote in the summer of 2010 about the inevitable flashpoint we will reach as a species when Beijing meets Allah in Africa. The Chinese already have a serious foothold in southern Africa (spend any time there, and one of the most common sights is Chinese blokes with surveying equipment) and they will soon effectively control South Africa. That the place needs propping up cannot be denied: I learned from S&P yesterday that they’ve downgraded SA debt again, citing  how (my italics) ‘…fundamental structural economic and social problems continue, such as very high unemployment, and a structural current account deficit that makes the economy dependent on external financing….’

The dominant Left Wing of the ANC now more or less accepts that it’s in hock to Beijing. The boss of one of its biggest banks and the biggest gold mining company has long been an enthusiastic traveller to and from China, initiating a two-way technical flow that benefited both countries. The Beijing politburo (itself in some disarray at the minute) sees precisely the same set of bankrupt, unstable politics in Iran and Nigeria. Iran in particular has kicked the West out…and is already heavily dependent on China for foreign currency.

This Friday, President Obama will without doubt sign off a Bill designed to turn the screw more tightly on Iran. He has also, off-stage, been fully briefed about Nigeria’s social problems. Nigerian President Goodluck Jonathan (that is his real name) was elected in 2010 on an anodyne reform programme, since when there has been little or no reform as such. Almost none of Nigeria’s oil wealth is trickling down to the poor folks, and Goodluck made a bad decision earlier this month when he decided to remove the petrol subsidy. Faced down by thousands of demonstrators, demands for his removal and a weeklong general strike paralysed the country. Mr Jonathan quickly gave in, partly restoring the fuel subsidy that — more than an Islamic insurgency in the north or a long-running conflict in the south — seemed to draw citizens onto the streets in rage.
In short, there really is going to be a potential oil shortage later this year or by early 2013. And a White House desire to increase its access to oil, while halting the marches of China and Islam, could very easily exacerbate the supply problems that already exist. All that’s happened thus far is the analysts, markets, hedge funds and sector experts have factored in what will probably happen….and got it kick-started in order to maximise the potential profit stream.  The suckered investors will eventually realise that a Global economy on its arse is not going to need anything like the oil it has already: at which point, the price will plummet.
The Electioneering politics
Barack Obama obviously doesn’t need a US in panic about gas-pump prices. So why is he hyping the whole business by talking about releasing oil reserves? Well, at this point we need to return to November’s Presidential Election.
There are powerful elements in the oil industry who do not like Barack Obama one bit. Again this Friday, Barry hopes to finalise and pass a Bill to remove the oilco tax breaks and subsidies. Even I as a lifelong capitalist would tend to view these subsidies as an outrage when most people under 21 can’t even find a job. But as with things here in Merrie Olde England, Americans are not really “all in this thing together”.  And to be fair – knowing the Obama Administration’s track record on, say, housing market intervention – they’d probably waste all the new money on hare-brained schemes that failed to address the real econo-fiscal problems faced by the US.
The sum of money involved – some $4bn net to the Treasury per annum – is a gnat bite on the bum to the oil business – it makes $200m each and every day. But with prices rising at the pumps, Barry desperately needs to show he is taking action against profiteering: for nothing riles an American voter more than some jumped-up Arab or fat oilco suit denying his eternal right to cheap motoring. What Obama won’t do (because he lacks the necessary cojones) is put forward a game-changing oil-tax bill – because the guys in the big hats would pass it on to John Doe, who in turn would stick it to the Black Dude in the privacy of the ballot booth.
Now the truth is, there is no financial point or logic to the removal of these subsidies: the Obamites are positioning it as the President getting tough with big oil, and the more downmarket Democrat voter base is too insular or thick to question that. The issue has no bearing at all on the pump-price of petrol – but it sounds good. (And, to my mind, it represents good governance over an industry that has been taking the piss for decades).
However, at the same time it enhances a threat to Obama’s re-election.
Oil company profiteering
Estimates suggest that 93% of oilco political contributions go to Republican candidates – added up, it comes to roughly $54m a year: but that doesn’t include the vastly greater amount spent lobbying Congress about tax; and in an election year like this, it doesn’t include the monies invested in getting rid of a bloke you don’t much care for. Just to get him this far in the Primaries, the oil business has contributed in excess of £2m to the Mitt Romney campaign alone.
But these guys are much smarter than that. They have much more subtle ways to help turf out the Black Dude from the White House: and they can make yet more money while doing it.
Read this startling admission from the California Energy Commission:
The Energy Commission cannot estimate profit margins based on average retail prices and observed wholesale market prices. This is because detailed data on refining and distribution costs, costs paid by approximately 10,000 retail locations, hundreds of wholesale marketers, jobbers, and distributors is not available.’
Nice work if you can get it, eh? Basically, the oil barons can hide, fiddle, manipulate and exaggerate the accountancy of all this any which way to suit their needs.
However, the Commission provides handy tables of the bare facts. Drilling down into these, we find out how all that money spent lobbying Congress about tax has kept all taxes on the oil business at 64 cents per retail gallon for some time. Since the end of January, however, the price of crude has risen 25 cents. What the oilcos need to explain to us is why, over the same period, the retail price has increased by 64 cents. What an ironic coincidence that the industry is raking off, in unjustified margin increases, exactly what the IRS takes per gallon….but only 25 cents of that reflect crude increases.
And there’s yet more. A funny little column three in on the best table there shows that, since the start of the year, ‘refining costs and profits’ have leapt from 19 to 54 cents a gallon. Now, fans of GAAP will know that that is just accountancy bollocks: something is either a cost or a contributor…it can’t be both. What we can say is that the oil business has trebled its take on refinery (which it does itself, of course) in 2012 alone…..the re-election year for a man whose fan club they have chosen not to join.
The White House is well aware of what’s going on. Just as Slick Willy once said ‘it’s the economy, stoopid’, it is also a truism that the US doesn’t re-elect Presidents who preside over petrol price hikes.
And this is the real reason why Barry and Dave were so cuddly-snuggly last time they met: because they both have an interest in keeping pump prices down. Cameron has his own additional strike problems, but right now they are friends in need. So too does Sarkozy want to be seen to be tough on petrol prices….he too is in the middle of an election. And with their own special ‘lost decade’ problems, the Japanese need rising oil prices like another Nagasaki.
Angela Merkel has flatly (and smugly) refused to join the Gang of Four. Not only does she have lots of reserves (and some intriguing influence with the Eastern bloc as was) she would also much prefer to deal with Mitt Romney than Barack Obama. Berlin has, as a whole, had more than enough of Obama plots and Geithner demands. She favours a more isolationist America: all the more room for her to be the undisputed Queen of Europe.
Stick and Carrot from Obama
Look at the US/UK MSM spin in recent weeks about unrest, glitches, supply problems and the Iranian threat: then look at the numbers (as I have done in this piece) and you see an immediate mismatch.
Barack Obama and others have hyped a supply disruption in order to be able to solve a problem that doesn’t exist.
On Obama’s home patch, that ‘solution’ will involve unleashing massive barrelage into the US domestic refining process, telling the American people that this must inevitably bring down retail petrol prices….and then daring the oil barons not to fall into line. That barrelage should last just beyond November: it which point, the re-elected President Obama won’t give a tinker’s cuss about oilco profiteering.
Do you think Obama has the power to make this stick? If the bankers screw up again – and more banks start falling over – then a lurch to the Left – by damning Big Business generally – would play very well among the American middle and lower class voter. But me – I doubt it: for a calculating man like the President, that’s far too big a risk.
But supposing alongside the Rooseveltian Big Stick, he dangles a 24-carat carrot right in front of the oil industry’s dollar-dazed eyeballs? You may not realise it yet, but we are right back in Iran….and Israel…and Greece.
The win-double of compliant oilcos and good geopolitics
Israeli Prime Minister Benjamin Netanyahu left Washington earlier this month well satisified with Barack Obama’s attitude and assurances. Since that time, several senior members of the US Administration have hinted that an American-led ‘solution’ to the Iranian problem would be vastly preferable to an Israeli one. There has also been much gobblydegook on both sides of the Atlantic about how the Tehran regime “represents a threat to global recovery by restricting oil output”. Again, the recent history and the facts associated with it simply do not bear that assertion out.
But Netanyahu and Israel also discussed the enormous mineral and energy wealth the Israelis have found in their own waters, stretching across to Greece and further still to Cyprus. Greece, Israel and Cyprus have already issued an accord about joint prospecting – albeit it vague and not as yet formally signed. And as we saw with the ‘amputate Greece’ plan, Obama wants friendly folks owning the Med’s undersea oil: folks he can influence by bankrolling the exploration. Further, the Americans have eyed Greece as a perfect military base from which to face off China, Russia and Islamism at the eastern end of southern Europe. Hence the desire to befriend a Greece which finds itself somewhat isolated.
However, the final ace up the White House sleeve is this: ensuring profitable oil concessions for the oilcos in a defeated/neutralised Iran and/or Nigeria – and with new best friends (like a eurozone-ejected Greece) in the Mediterranean.
As so often, it takes a long time to get to what’s really at stake in today’s 24/7 news events mania. But the bottom line on rising petrol prices is, I would suggest, very roughly 50% oilco profiteering from a groundless scare, 20% market speculation, and 30% politics. Plus ca change.
This essay was put together with the help of industry sources, Slog readers, media folk and political insiders in the US, UK, eurozone and Africa. My sincere appreciation of their efforts goes to all those concerned.
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