Oil soaring

The 280-mile round trip from here to Portland and back just cost us over $25 in gas. That is a record for the Subaru. Fuel price placards all over the place in Bangor have cracked $2.10/gal. for unleaded regular. Everyone is abuzz about the soaring gasoline price.

There is an interesting rationale going around to explain these recent surges in the oil price, now over $40/barrel: there is a terror premium. That's probably quite true. Last week, the New York Times reported that, "Attacks drive price of oil to $40 a barrel".

According to the Times, "Attacks on oil facilities in Iraq and Saudi Arabia in recent weeks have largely been responsible for driving up the price, industry experts said".

Furthermore, I think we are beginning to see cracks in the OPEC swing production role. Today's news really is terrible for price futures if the following quoted remarks from the Times story are true:

"The rise in crude oil prices comes one day after the Saudi Arabian oil minister, Ali al-Naimi, called for the Organization of the Petroleum Exporting Countries to increase its production quota by 1.5 million barrels a day, to 25 million. Since the 11-nation cartel is already overproducing its quota to cash in on high prices, pumping about 25.7 million barrels a day, Mr. al-Naimi's proposal was seen as a gesture intended to calm the market and signal that the Saudis do not want to imperil the global economy, according to Leonidas F. Drollas, chief economist at the Center for Global Energy Studies, a London consulting firm".

Additional stories agreed with the point implied by the preceding excerpt, for it seems that "OPEC [is] powerless to stem oil price surge.

"OPEC President Purnomo Yusgiantoro of Indonesia said on Wednesday the cartel is already pumping more than two million barrels daily in excess of official supply limits in a bid to cool world oil prices.

"We have not discouraged our members from producing more because we want to do everything we can to stabilise prices," Purnomo was quoted as saying in a statement released from OPEC headquarters".

A BBC story puts it more bluntly:

"... major oil producing countries are adding an extra 2 million barrels per day—2.5% of worldwide demand—without having an effect on prices".

Very similar remarks from Oil Minister Obaid al-Nasseri of the United Arab Emirates are being reported today by Forbes:

"'I don't think that control is in OPEC's hands', said Nasseri on his arrival in Amsterdam for talks between oil producers and consumers starting on Saturday. 'There are many factors behind these prices'".

Financial machinations
Reasons for the run-up reported by mainstream media run the gamut. This Reuters story gives a pretty good summary. Pay close attention to the buried lead, however: "A wave of mergers following 1998-1999's price crash also reduced the number of companies holding inventory".

The story goes on to describe in pretty clear detail how the financial machinations that followed these mergers work, especially because, "'OPEC strategy has shaped oil markets into a bullish machine in a tense international environment', said consultants PFC Energy. 'This has caught the attention of speculators and hedge funds, who have magnified the current pressures in oil markets'".

A March report from Public Citizen gives a good background on recent sharp increases. They say, "Since 2001, President Bush has been removing more than 100,000 barrels of oil a day from the market to stock the SPR, filling it by more than 100 million barrels since he’s been in office to over 640 million barrels—well more than 90% capacity..."

But the causes of the increases are really much worse than just this. The underlying uncompetitive environment has led, "Over the past few years, [to] mergers between giant oil companies—Exxon and Mobil, Chevron and Texaco, Conoco and Phillips, just to name a few—[these mergers] have resulted in just a few companies controlling a significant amount of the U.S.’s gasoline market, squelching competition. As a result, consumers are paying more at the pump than if they had access to competitive markets and five oil companies are reaping some of the largest profits in history."

Democrat presidential contender John Kerry may ask for release of Strategic Reserve oil, but he won't do too much more. He's locked into corporate oil in many surprising ways. Plus, both the Administration and the Democrats understand the importance of oil profits for financing the war, and the rest of the huge budget deficit. The US Treasury has to have someone with a lot of extra money in order to sell its paper at 1% to 4% rates.

We ain't seen nothin' yet
Not immediately, but perhaps just a few years into the future, petrol sharply will double in real terms, perhaps two, three, four or more times over. This is because world production rate will reach a maximum, beyond which increasing demand will not be satisfied. This is a phenomenon known as peak oil.

We'll know we're there when gas lines form until demand sinks to a satisfiable level. This hasn't happened just yet, so we know that right now the immediate cause of the high prices is artificial profiteering.

People better pay attention. While we don't have a serious supply shock, yet, the world oil supply system is fragile. It is especially vulnerable now, because

* world tension is high,

* capital requirements in the world's largest economy are massive,

* the worldwide oil production peak is approaching rapidly, and,

* the loudest message citizens of the US and other key parts of the world hear is promotion of consumption – China has a rapidly growing demand for new vehicles.

Only a very few producers have any ability at all to significantly increase production. The only significant "swing producer" is unstable Saudi Arabia. To a much lesser degree, some other OPEC members may have some extra capacity. Iraq will be a basket case for years and everyone else in the world has every significant oil valve they have in the wide open position.

This is a recipe for disaster. The US taking of Iraq will not solve the problem.