With gas prices breaking the $3 barrier, it seems that the oil age is coming to an end.
The notion of “peak oil,” – that geological constraints will force a decline in crude oil production – is the apocalyptic flavor of the moment. Any number of websites, books, organizations and discussion groups warn that the post-carbon age is nearly upon us, with everything from industrial agriculture and plastics to pharmaceuticals and the car industry in danger of vanishing.
While peak oil is a sexy theory, it’s not valid. An analysis by Cambridge Energy Research Associates of existing oil reserves and future projects predicts increasing production for at least the next two decades. Peak oil is also a dangerous distraction because it shifts the discussion away from political and economic actors – Big Oil,Wall Street and the White House – that bear most of the responsibility for rising oil and gas prices.
Evidence can be seen in the oil market. While government data from this April shows crude oil supplies are 6 percent above the levels from a year ago, oil is about 50 percent more expensive at a whopping $75 a barrel.
The “terror premium” is one of the main causes of rising crude oil prices, and industry analysts estimate that it’s added about $15-20 to the price of a barrel – so far.
The terror premium refers to White House saber-rattling against Iran. Oil markets fear loss of Iran’s 4 million barrels daily production or a retaliatory attack that could block the critical oil route through the Straits of Hormuz.
Iran is the third major oil producer threatened by the Bush administration. In the case of Iraq, the war, a bungled reconstruction and the insurgency have reduced its oil exports by some 700,000 barrels a day. Venezuela lost about 900,000 barrels a day in productive capacity after the U.S. backed an oil sector strike in 2002-03. Separately, political unrest in Nigeria has caused 500,000 barrels a day to go offline. That’s about 2 million barrels a day lost.
Qatar Oil Minister Abdullah bin Hamad al-Attiyah, observed on April 2: “We are doing all we can to meet demand but prices are rising because of Iran, Nigeria and Iraq.”
Increasing demand from the United States and China is also pushing up prices. China’s appetite is growing much faster, but its plate is much smaller. We consume about 21 million barrels a day, while China is a distant second at 6.5 million barrels.
Our increased demand stems from ever-more massive vehicles. Increasing fuel standards and encouraging conservation would reduce demand – and oil company profits – which is why Bush prefers to talk of a “hydrogen economy” that may never exist.
Oil companies are also to blame. After oil prices crashed to $10 a barrel in 1998 following the East Asia currency crisis, exploration dried up.
It takes up to 10 years for mega-projects to come online. So supply constraints now are partly due to the lack of drilling and exploration from earlier. But some oil traders say outright that Big Oil deliberately cut exploration so as to reduce supplies and drive up profits.
The result is extremely tight supplies. Oil producers are pumping 85 million barrels a day, with all but 1 million barrels a day being consumed. This compares to an excess of about 6 million barrels a day in 2002.
Economic factors include the drop in the value of the dollar, which has fallen by some 50 percent against the Euro since 2001. Back then, OPEC’s target price for a barrel was around $25. So to make up for declining dollar, the main currency for trading on the oil markets, producers need the price to rise by $12 to $15 a barrel.
Explosive growth in speculative interest in oil futures, mainly from hedge funds and pension funds, has also driven oil prices up by $10 to $15 a barrel.
James Burkhard, director of oil market analysis at Cambridge Energy Research Associates, explained to the New York Times in August 2004, “Speculators don’t set the price, but they intensify a price movement in either direction…”
The Times recounted one speculative frenzy in May 2004: “When low inventories and news of violent attacks on oil executives and facilities in Saudi Arabia drove oil futures up, speculators piled on, according to market analysts. Their buying forced crude prices up even higher, attracting yet more investors betting on a continued rise, and so on in a classic spiral.”
Qatar’s Al-Attiyah also noted that “more than one million barrels a day are going into inventories,” further crimping supplies. In response to growing consumer anger over high gas prices, Bush suspended deposits of crude oil into the Strategic Petroleum Reserve. Yet this will do little to affect prices at the pump.
While crude supplies are high, gasoline inventories are low. Big oil has manipulated the U.S. refinery market to ensure tight gasoline supplies.
A New York Times article from June 15, 2001, quoted a document from Chevron written in November 1995 that spelled out the strategy: “If the U.S. petroleum industry doesn’t reduce its refining capacity, it will never see any substantial increase in refinery profits.”
A study by the Consumer Federation from October 2003 noted that in the last 15 years about 75 refineries have closed. Gasoline stocks have declined from 10 days above minimum operating needs in the early 1980s to just two days in 2003. All it takes is one accident at a refinery to send the price of gasoline shooting up.
For the oil companies and producing countries, it’s the best of both worlds: high demand and high prices. ExxonMobil raked in a phenomenal $36.1 billion profit in 2005.
The high prices haven’t caused an economic downturn so far because Americans spend a smaller part of their budget on gas than during the 1970s. In addition, around 80 percent of purchases at the pump are now made by credit card, so the increased costs just get cycled into the massive debt serviced by most households.