The factors behind the increase in the price of oil

Abid Mustafa

Posted May 13, 2006      •Permalink      • Printer-Friendly Version
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The factors behind the increase in the price of oil

By Abid Mustafa

Today global crude oil prices are hovering around US$70 a barrel, compared
with merely about US$20 in 2002. Earlier on April 21 and 24 the price of a
barrel of oil reached $75.35 on the New York Mercantile Exchange, the
highest since the contracts began trading in 1983. So what are the reasons
for oil prices?

The causes contributing to the rise of oil prices can be chiefly divided
into two categories, namely apparent and underlying causes. The apparent
reasons can be summarised as follows:-

Global demand for oil

According to the International Energy Agency (IEA) the world’s oil demand in
the first quarter of 2006 was 85.4 million barrels of oil per day. During
the same period in 2001 world oil demand was 75 mb/d. In 5 years the global
demand for oil has jumped by 13.9 %. The demand for crude oil has been
fuelled by the economies of China, India, Japan and lately a resurgent US
economy. China alone accounts for 40% in the increase for world’s demand for
oil. Given the current trends in oil consumption, the IEA has projected that
the world’s demand for oil by 2025 will stand at 119 mb/d. All of this means
that the global demand for oil is set to soar and push up the price of oil.

Disruption in oil supply

For a variety of reasons the global supply of crude oil has not been able to
keep up with demand. Below is an explanation of some of major causes in the
interruption of oil supplies.

a) Natural disasters
Hurricane Katrina had a devastating impact on US oil production. According
to the US government, Katrina managed to shut down 92 percent of Gulf oil
production and 83 percent of Gulf natural gas production. Bush had to
release 30 million barrels of crude oil from America’s Strategic Petroleum
Reserve and this still was not enough to dampen the price of crude on the
international market. With the hurricane season fast approaching another hit
on the oil production facilities of the Gulf coast will send prices
rocketing. Verleger, an energy consultant who is also a Senior Fellow at the
Institute of International Economics says, “If we have a severe hurricane
season, it’s quite likely that we will see another round of oil production
lost like we saw last year.”
b) Volatility in the Middle East

Before the Iraq war in 2003 some analysts were forecasting up to 4 mb/d of
Iraqi crude flowing on to the international market and the price of a barrel
of crude oil plummeting to $10. Today, crude oil prices still remain high,
despite America having spent $2 billion to develop Iraq’s oil
infrastructure. Iraq is still pumping about 600,000 b/d less than levels
seen in early 2003, before the U.S. invasion to topple Saddam Hussein. The
ever popular Iraqi resistance has reduced the flow of oil to a trickle. The
almost daily blowing up of pipelines has restricted exports from Iraq’s
northern fields, around Kirkuk, and has hampered efforts to modernise the
larger southern fields.

Oil prices have also been pushed upwards by the continuing stand off between
the US and Iran. Tehran’s threat to use oil as a weapon and the possibility
of severe disruption to 15 million barrels of oil which are transported
daily through the Straits of Hormuz has driven the oil markets in to a mad

c) Other political tension
Fears over Nigeria the world’s seventh-biggest exporter and fifth-biggest
source of U.S. oil imports has persistently made oil markets edgy. For
sometime now a mini conflict has engulfed the oil rich region of Nigeria.
The sabotaging of oil pipelines, the kidnapping and killing of foreign
workers, and fighting between Movement for the Emancipation of the Niger
Delta (MEND) and government forces have damaged Nigeria’s oil producing
facilities. Some estimates suggest that up to 25% of Nigeria’s crude
capacity has been taken off line.
Another region of contention for the oil markets is Latin America. Here
countries like Venezuela and Bolivia have succeeded in re-nationalising
parts of their oil and gas industries thereby threatening the cheap supply
of oil to America and the West. Western companies have been bitten by
Chavez’s Bolivarian revolution and Western governments have so far been
powerless to halt this trend. This has contributed to growing war of words
between Venezuela and the US. The failure of several coups to oust Chavez
has prompted Washington to contemplate military action as the only way out
of the impending crisis.
d) Lack of refining capacity

In general there is lack of refining capacity in all of the major oil
producing countries. This is because many of the big oil companies
(especially the seven sisters) that dominate the oil industry have either
connived with governments of oil producing countries to delay investment in
the much needed expansion of refining capacity or have been reluctant to
invest in extra capacity at home. Last year, when it suited the major oil
companies, the Bush administration pressed the Saudi Oil Minister Ali Naimi
to announce a plan to spend $50 billion over a five–year period to increase
Saudi production capacity to 12.5 million barrels per day by 2009 from the
current 11 million limit. Before this declaration the Saudi’s never
expressed any desire to increase capacity.

In the US, poor refining capacity became acutely evident in the aftermath of
hurricane Katrina. Shortage of crude oil was not the real reason for the
increase fuel prices. It was the scarcity of oil refineries to distill the
crude into useable forms of fuel that was real culprit behind the price
hike. On May 11 2006 the Kansas Star quoted the CEO of Exxon Mobile as
saying that it really wasn’t all those environmental laws that prevented his
and other companies from building new refineries. In fact he said that they
needed to keep the greens in business to have an excuse for disinvesting in

Other factors such as the weakness of the dollar and the falsifying of oil
reserve inventories by oil companies such as shell have added to market
uncertainty over the past few years and have helped to push up the price of

Whilst the aforementioned only tell part of the story the underlying causes
foretell higher oil prices and conflicts between nations over the control of
the remaining hydrocarbons. The underlying causes can be summarized as

a) The peak of global oil supply

Oil as well as other hydrocarbons is a finite resource. Man has been
exploiting these resources for well over a hundred years. Numerous studies
by eminent scientists have shown that the global supply of oil is about to
peak between now and the next 15 years. Peak oil can be defined as a point
when the total world production of oil and all known reserves are surpassed
by the world demand. In other words oil becomes less available and more
expensive to extract. In the 1970’s US oil production peaked and America was
forced to import crude oil to meet domestic demand. Britain’s North Sea oil
peaked in 1999 and is declining at an increasing rate of 11% a year. The
number of major new oil fields discovered around the world fell to zero for
the first time in 2003.
Western governments have known about peak oil and its implications on the
global economy for sometime but have deliberately kept their people in the
dark about its consequences. In March 2001 at the National Energy Summit,
Bush’s Energy Secretary Spencer Abraham said, “America faces a major energy
supply crisis over the next two decades. The failure to meet this challenge
will threaten will threaten our nation’s economic prosperity, compromise our
national security, and literally alter the way we lead our lives.” The
remarks mirror Cheney’s speech to International Petroleum Institute in
London in late1999. Cheney stated, ‘there will be an average of two percent
annual growth in global oil demand over the years ahead, along with,
conservatively, a three percent natural decline in production from existing
reserves. That means by 2010 we will need on the order of an additional
fifty million barrels a day.’ This is equivalent to more than six Saudi
Arabia’s of today’s size.

On September 9 2001, a memo entitled ‘Submission to the Cabinet Office on
Energy Policy’ was delivered to the Prime Minister. The memo had been
prepared by the Depletion Analysis Centre and stated ‘The world faces severe
hydrocarbon supply difficulties. Global oil supply is currently at political
risk… Large investment in Middle East production, if they occur, could
raise output, but only to a limited extent. The main exception is Iraq…’ the
memo also went on to predict the peak in oil supply. It stated ‘best
estimates put the global peak between five and ten years away’. The report
also predicted a global peak for natural gas too, 20 years away. In May 2003
at a conference on the subject of peak oil, Mathew Simmons an American
energy expert and advisor to Bush and Cheney told the audience, “what does
peaking mean and when does it occur?” He then answered his own question by
stating, “The worry is that peaking is at hand and not years away…”

So it is not surprising to discover that the recommendation of Cheney’s 2001
energy report called for the seizure of foreign oil most notably Iraqi,
Saudi and UAE’s oil fields. Some US studies predict that Iraq may hold 423
million barrels of unexplored oil reserves. Thus America used 9/11 to embark
upon a strategy of controlling the world’s energy and this venture stretches
from Latin America to West Africa encompasses the entire Middle East and
Central Asia,  and rests on the prevention of a powerful state (EU,
Russia, China and the Caliphate) emerging in Eurasia to challenge American
hegemony. The pentagon calls this Full Spectrum Domination.

b) Capitalism

Capitalism is the main cause of misery for the people of world today. The
rich and powerful do their utmost to safeguard their interests at the
expense of their people. The dramatic rise in the price of crude oil has
produced huge bonanzas for oil investors and speculators, oil companies and
governments. In the first quarter of this year, profit for ExxonMobil was $8
billion, for Conoco Phillips it was $3.3 billion, for Anglo-Dutch Shell it
was $6.09 billion and for BP it was $5.282 billion. These are the same
companies that have refused to invest in extra capacity and have pushed the
UK and US governments to embark on a strategy of controlling the world’s
remaining oil supply. Governments instead of penalising these companies are
punishing consumers by raising the price of petrol to make greater profits
for their treasuries.  As long as capitalism continues to thrive any public
resource be it energy or water will be exploited by the capitalists to make
obscene profits irrespective of the wellbeing of the people.

In conclusion cliques of powerful capitalists are pushing the world towards
a forthcoming war over the control of energy and its security. Only a state
with an alternative ideology to capitalism will be able to resists this