Eva Cheng
World crude oil prices have shot up by 70% in the last year, with little sign of them coming down substantially soon. In Australia, petrol prices seem to have settled above $1 per litre, a level hard to believe even just a year ago.
If oil prices don't fall markedly, the hesitant world economic recovery will be undermined, consumer prices and interest rates will rise, and more jobs will go. Worse, another Third World debt crisis might be just around the corner, with banks from the advanced capitalist countries among its first casualties.
In April, following an earlier rush of crude prices to above US$40 per barrel, the International Energy Agency (IEA) did a detailed simulation projection, with help from the Organisation for Economic Cooperation and Development and the International Monetary Fund, of the impact on the world economy if crude prices rose in a sustained way from US$25 to US$35 a barrel. The IEA study concludes that such a rise would drag the global gross domestic product down by 0.5% — or a net loss of US$255 billion — in the first year alone.
The "oil price" adopted by the IEA is an average of its 26 member countries'. The US crude oil benchmark, the West Texas Intermediate (WTI), is the most dominant price measure and is most often quoted in news reports.
The WTI hovered around US$30 in the second half of 2003. By October 22, however, it had gone as high as US$56.3. It has since eased to below US$50, however, the damage to the world economy of such a sustained big rise has far exceeded the scale envisaged by the IEA study. On October 25, Associated Press estimated that the world would have footed an extra oil bill of US$295 billion this year compared to 2003.
Another Third World debt crisis?
Such damage is not evenly spread, hitting the Third World much harder. Under the IEA scenario of a US$10 rise, the euro zone's GDP would drop by 0.5%, the US by 0.3% and Japan by 0.4%. Asia's GDP loss would average 0.8% (1% for India, 1.6% for the Philippines and 1.8% for Thailand) and the Sub-Saharan African countries exceed 3%.
On October 12, the World Bank's chief economist, Francois Bourguignon, said that the oil price rises have already hurt poor countries' "welfare" by 2-5%. To "absorb the shock", said Bourguignon, oil-importing countries have been paying for the oil from their foreign exchange reserves, and then not topping up the reserves. He added that these reserves have already been depleted by up to 33%.
Many Third World countries' foreign exchange reserves have already been depleted in order to service the enormous debts they have incurred as a consequence of their economic dependance. This opens the way for another round of defaulting in Third World debt repayment if the oil price hike drags on. Africa alone owes US$305 billion in foreign debt.
A number of factors are at play, including escalating uncertainties in Venezuelan supplies since the counter-revolutionary coup in April 2002; the stubborn resistance to the US occupation of Iraq, which threatens Iraqi oil pipelines; recent oil workers' strikes in Nigeria and Norway; hurricanes' devastation of US oil production and refineries in the Gulf of Mexico since September; uncertainties over the supplies from Russian oil giant Yukos; and China's oil demand growth, forecast to be nearly 16% this year compared to the world's average of 3.3%.
Monopoly
But it is not just these conjunctural factors at work. A typical trick in a monopolised industry is for capitalists to limit their own production capacity in order to squeeze up prices for the consequently scare product.
The heavy investments involved in oil exploration and production (upstream activities), down to refinery of crude into various fuel and other products (downstream), make the oil industry an easy target for monopoly domination.
The wave of nationalisation in oil production in the Third World since the 1960s and the rise of the Organisation of Petroleum Exporting Countries (OPEC) as a unified bargaining tool has reduced the control of the huge oil companies over the industry in a significant part of the world. Nevertheless, by monopolising new technology and using its market dominance, Big Oil retains crucial control over the pump price.
US Senator Carl Levin's statement to the US Senate on April 30, 2002, gives a rare glimpse on how major oil companies manipulate petroleum prices.
Levin stated: "During the spring of 2000, three major refiners determined it wasn't in their economic self interest to produce any more RFG [reformulated gas/petrol] than that required to meet the demands... so in that year they produced 23% less RFG... That contributed to the short supply in the spot market for RFG, contributing to the price spike in spring 2000. While Marathon [a major US oil firm] did have surplus RFG, it withheld some of it from the market so as to not lower prices.
"In the summer of 2001, major refiners deliberately reduced gasoline [petrol] production, even in the face of unusually high demand... contributing significantly to the price spike of 2001.
"... demand fell and inventories rose following [9/11]...prices fell. As a result, refining profits fell and refiners cut back on production in order to obtain higher profits. Along with the increase in the price of crude oil and market speculation, these reductions in production and the increase in industry concentration significantly contributed to the run-up in price...
"Internal documents from several oil companies confirm that the oil companies view it to be in their economic interest to keep gas inventories low and the supply and demand balance tight." Levin backed his assertion with a long list of internal documents from major oil companies.
A similar investigation by US Senator Ron Wyden presented in the US Senate on June 14, 2001, gave different evidence but drew the same conclusion about Big Oil's ruthless profiteering. And according to an April 8 report of the US Congressional Research Service on petrol prices, no new refinery has been built in the US in the last 25 years.
This capacity-limiting strategy is not limited to the US. Quoting the IEA, the November 3 Washington Post reported that "international oil companies and countries' national oil companies need to invest about $200 billion a year to keep up with demand but are falling 15 percent to 17 percent short".
Oil majors have made clear they will only invest in new projects that will meet their profit targets, no matter how high oil prices may get.
Speculation
This capacity-limiting strategy has worsened capitalism's problem of excess capital — that is, capital that can't find a productive outlet, but is used for speculation. The amount of excess capital is responsible for the continuous formation of speculative "bubbles", where excessive investment pushes the price of an asset above what its future earnings would justify.
The IT/telecom sector was the medium of such a bubble in the second half of the 1990s. It burst in early 2000. A housing/property bubble soon followed, practically worldwide. Oil is the latest "star".
On October 5, the Associated Press quoted Fadel Gheit, a senior vice president in oil and gas research at the New York-based Oppenheimer & Co, as saying that "oil has become the only game in town... Every other [speculative] investment vehicle has disappointed over the last 12 months".
Is the recent oil price hike also driven by a fundamental shortage of oil supply? Not in recent months. According to OPEC's October "Monthly Oil Market Report", while the world oil demand has increased from 79.17 million barrels per day (mb/d) in 2003 to 81.45 mb/d in the third quarter this year, OPEC has managed to provide a net surplus supply (in addition to oil provided by non-OPEC sources). OPEC oil is currently meeting about 40% of world demand.
Yet OPEC's oil is not the most desired lately. It requires more intensive refining processes than the "lighter" or "sweeter" varieties that are in shorter supply, mostly because refineries have not activated or installed the capacity to create them. As a result, sweet crude has been most speculated about and its prices shot up.
Profiteering
Big Oil's profiteering, assisted by speculation, is the most decisive reason for the recent oil price hike. While oil prices rose most sharply during the third quarter, British Petroleum's profits leapt 43% to US$3.94 billion, Shell made US$4.4 billion, ExxonMobil US$5.7 billion and ConocoPhilips US$2 billion. The world's top five oil firms made combined profits of US$53 billion in 2003.
The share price of ExxonMobil, the largest integrated oil company, jumped 30% in the year to October while that of Schlumberger, a key oilfield service provider, shot up 37%. Over the same period, Dow Jones Industrial average (a measure of the top US shares) climbed only 2%.
From Green Left Weekly, December 1, 2004.
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