GREENLEFT WEEKLY, 1 DEC 2004.

http://www.greenleft.org.au

BEHIND THE PATROL PRICE JUMP

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 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 Banks chief economist, Francois
Bourguignon, said that the oil price rises have already hurt poor
countriesle 2-5%. To absorb the sho, 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 worker's strike in Nigeria
and Norway; hurricanes devestation on 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 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
contriuted to the run-up in price.

"Interal do***ents 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 do***ents 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 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.

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 Repored "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
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 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 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. Visit the Green Left Weekly
home page.

GREENLEFT WEEKLY, 1 DEC 2004.

http://www.greenleft.org.au

BEHIND THE PATROL PRICE JUMP

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 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 Banks chief economist, Francois
Bourguignon, said that the oil price rises have already hurt poor
countriesle 2-5%. To absorb the sho, 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 worker's strike in Nigeria
and Norway; hurricanes devestation on 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 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
contriuted to the run-up in price.

"Interal do***ents 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 do***ents 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 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.

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 Repored "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
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 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 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. Visit the Green Left Weekly
home page.