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Wednesday, April 23, 2008

The Soaring Price of Oil and Terrorism

By Victor Comras

A few days ago, when oil was just $115.00 per barrel, Iranian President Mahmoud Ahmadinejad declared that the price of oil was still “unrealistically low,” and that “Oil … needs to discover its real value." And, within a few days the market seemed to comply driving the price up to $120.00 per barrel! The effects of this spiraling oil price on the US and world economy has been staggering, and the impact will continue to be intensified as the price of oil works its way through the international economic system. Al Qaeda and other terrorist groups could never had imagined that events they set off at the turn of the millennium could ever have caused such oil dislocation and demand around the world.

Against this background it is with great trepidation that I put my pen to addressing the link between the price of oil and terrorism. The factors involved in the pricing of oil are both extremely obscure and enormously complex, and few people can truly claim to understand them. I certainly am not one of them. But, broken down into its most basic components it apparently involves a mixture of the following factors: OPEC Oligarchy practices, intensified international competition for secure access to essential commodities, increased reliance on middlemen for oil lifting, profit-motive purchasing policies and upstream practices of major oil companies, the falling dollar, and intense speculative upward bidding of oil futures on the world’s merchantile exchanges. Taken together these factors have driven up the spot price of oil and pumped tens (dare I say hundreds) of billions of dollars into the coffers of countries known to either encourage or tolerate state and/or private funding for terrorism. One may well conclude, as I am beginning to believe, that mercantile speculation, greed, and corporate profit taking are as responsible as OPEC, if not more so, for the windfall profits that help fund terrorism.

Iran's Oil Minister Gholam-Hossein Nozari had a different answer. Speaking before the representatives of some 60 exporting and consumer countries at the bi-annual International Energy Forum, he blamed the spike in oil prices on “war and sanctions,” alluding to the measures the US had adopted toward both Iran and Iraq. But, this simplistic explanation doesn’t match reality. In fact, today’s oil prices don’t seem to have any direct relationship to the actual oil market conditions, demand and consumption. The fact is that oil output has generally kept pace with actual consumption rates, and bookings for oil transport ships and tankers are actually declining showing a slackening in demand. Speculation based on future worst case assumptions seems to be pressing the price of the oil, not past events. This includes anything from a projected heavy hurricane season to recent attacks on Nigeria’s Shell oil pipelines. But, the supply effect of such events in the past have been shown to be quite minimal and of short duration. Any reason to push oil prices higher seems to suffice for the oil traders.

Another explanation for today’s high oil prices is the declining value of the dollar. So why isn’t it that Europe is getting a bargain when it comes to buying oil? The fact is that the price of oil in Europe has also hit the roof, causing European leaders to consider extraordinary measures, such as drawing on their emergency oil reserves. The EU commission has just decided to launch its own “ public consultation” on whether changes should be made to the management of emergency oil stocks held by EU members in the face of these skyrocketing prices.

Today’s oil prices are considerably higher than anyone could have predicted a year or so ago. Look at what the International Energy Agency projected in their annual World Energy Outlook for 2007. They predicted that oil prices would now be the range of $45 to $56 per barrel, and would only reach $95.00 per barrel sometimes in 2030. Boy, are we ahead of that curve!. Remember, that in 2000, OPEC oil was selling for under $28.00 a barrel and oil consumption somewhere around 76 million barrels per day. Current estimates put oil consumption at around 84 million barrels, about the same as current production levels.

So, in actual fact, it is the oil speculators that appear to be responsible, more than any other group, for the high prices of oil, and the revenue boasts that may help support terrorism. Perhaps its time for governments to get a handle on such speculation by intervening in the oil market, as necessary to stabilize the price of oil. Just a thought!

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Blogger Brendan said...

But oil price has to go higher.

1) Growth in Emerging Economies --> Rising Oil Consumption --> Higher oil price

2) OPEC --> Government depend on oil income --> Cartel restricts supply --> Higher Oil price

3) Geopolitical Issues --> Cause disruption / thread of oil production --> Lower global spare capacity --> Higher Oil price

4) Peak Oil Theory --> Declining Oil production --> Less Supply --> Higher oil price

5:43 AM  
Blogger Shawmut said...

Brendan makes very good points. However, allowing for the fact that he expects a more erudite reasereship, citing the obvious it only that.
Does anyone really believe that even if we found a way to reduce the consumption (to include both necessities and accomodations), that 'Americana' (a term I define on my blog) will still seek means to reduce demand.
I have little faith that the country takes it any more seriously than the weather. They don't believe anything can be done about it (won't prepare in light of the variances), but wants to blame someone. We only have to look in the mirror.
Typically, we look at our driving expenses and not those other expenses; home and work-place heating. So someone leaves their car at home and rides the bus; that vehicle doesn't run on wishes either.
When in global competition we must either play the game and improve our play. We've proven that our commonality of purpose, has yielded great results in the past.
We seem to have forgotton that.

5:42 PM  
Blogger Ted said...

Can you tell me where the gas comes from at your Omaha station?

Isn't it from the same supply that goes to the local Kwik Shop and other stations?

6:51 PM  
Anonymous Anonymous said...

Can you tell me where the gas comes from at your Omaha station?

- NCRA refinery

Isn't it from the same supply that goes to the local Kwik Shop and other stations?

- We don't know what Kwik Shop source is

8:52 PM  

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