The Story Behind The Oil Crisis
Oil at $150? Very likely and could be soon. How about $170, or even $200? That is possible before the end of this year. There are those who see the price of a barrel of oil hitting $300 and even $500 in the next few years. Impossible you say, well just remember that last year a barrel of crude was selling at $70 and even then the markets were complaining that it was already too high.
The oil conundrum is playing havoc with local, regional and international markets. The producers say it’s not their fault and consumers blame speculators and a battered dollar. Others point to the current crisis between the West and Iran, which in recent days moved from rhetorical ranting to sabre-rattling. There is confusion, fear, mistrust and greed in the oil business today, but what else is new?
Oil has been a central pillar of international politics and trade for decades, and the West has traditionally played dirty games when it came to preserving the life-line of its economy and civilization. Cheap oil enabled Western societies to flourish and expand, the United States being the most notorious example. Wars were waged, coups staged and regimes toppled in order to maintain control of production, exploration rights, distribution and price.
It is unlikely that the rules of the game have changed in recent years, but it is now a fact that the new economies of China, India, Russia and others are competing ever more with the West for a bigger share of available oil. Economic displacement is a matter of time, with studies predicting that China will unseat the US as the biggest world economy in 30 to 40 years if not before.
This is probably why China is now eyeing Africa as the next source of new oil finds and is investing tens of millions of dollars in Sudan Chad, Nigeria, Angola, Algeria, Gabon, and Equatorial Guinea. According to US energy sources the Chinese now account for more than 40 per cent of total growth in global demand for oil and have replaced Japan as the world’s second largest oil importer, after the United States.
It is not all speculation that is driving energy prices to new territories, although President George W. Bush and a number of prominent experts would disagree. Try conspiracy and behind-the-scenes power struggle between the United States and China. The US economy is officially in recession and is unlikely to recover for years. Meanwhile, China, along with India and other emerging economies, are trying to prevent their markets from overheating. But investments are still pouring in and the shift will continue to move from the north to the south.
But expensive oil is hurting the US economy as much as emerging ones. That is true, but with trillions of dollars – generated over the years by trade surplus – in the coffers of China, Russia and India, these countries may have a better chance at weathering the current storm. The question then is who is twisting the other’s arm? In this game of finger biting China and others may be the ones who will be left standing by the end of the day.
According to Charles Biderman in a recently published article in Forbes, what is happening now could spell a financial disaster for the US. He writes that at present levels the US consumes 21 million barrels of oil per day. “At $135 per barrel, the US spends $1 trillion per year on oil, which is equal to 15 per cent of the $6.8 trillion in take-home pay of everyone who pays taxes. If oil prices rose to $200 per barrel, the US would spend $1.5 trillion per year on oil, which would be equal to 22 per cent of take-home pay. In other words, the US will be broke long before oil prices hit $200 per barrel, and the rest of the world would be sure to follow.”
But if this is the case then why can’t governments work together to chase away speculators who are driving energy prices through the roof? There are few indicators that consumers and producers are doing just that. The US insists that the crisis will go away if senior Organization of Petroleum Exporting Countries (Opec) members, such as Saudi Arabia, increase production. In fact the Saudis did just that recently, but prices continued to soar.
There are other reasons behind the unchecked rise of oil prices besides speculation. One is the weak dollar and another is the ailing state of the US economy where investors have given up on stock markets and embraced commodity futures. It is a strange situation that we find ourselves in today; ample supplies of oil, slow growth at global levels and yet soaring energy prices.
Opec has rebuffed calls to increase production citing mismanaged US economy as one cause for current speculative run. But with the recent tension in the Gulf over a possible Israeli strike against Iran, speculators have another good reason to push prices north.
In all it seems that bad US policies have contributed to the dire state that the world finds itself in today. If the US wanted to derail the Chinese economy by “allowing” prices to rise to these dangerous levels, they have failed to achieve their goals. If they thought that applying pressure on producers would force them to increase production, they have failed to do that as well. Meanwhile, the US economy is hurting and whether the Americans know who is behind the crisis or not, they certainly have done all the wrong steps to contain it.