Oil and Finance
The Epic Corruption
By Raymond J. Learsy
Copyright © 2011 Raymond J. Learsy
All right reserved.
Chapter One OPEC, the Saudis, and Our National Security
Cheney, in Saudiland, Don't Hold Abdullah's Hand! January 6, 2006
Vice President Dick Cheney is about to visit Saudi Arabia, where he will be meeting with King Abdullah. Beware! No hand-holding, please.
The last time Abdullah's hand was held was during his April 25, 2005, visit with President George W. Bush at the Crawford Ranch. Then—as now—oil prices and supply were a topic of discussion. At the time of the Crawford barbecue, the price of oil hovered around $48/bbl, near to and breaching levels that had never before been achieved in the oil market—and nearly 50 percent above prices from the year before. Whatever was said at the time and in spite of the widely reproduced images of President Bush and then-Prince Abdullah holding hands in fraternal companionship, the net result bordered on disastrous.
Abdullah left Texas reassured with little concern that the already egregious price of oil had reached the limits of American tolerance. Within four months of the visit, the price of oil continued its aggressive spiral upward, reaching $65/bbl—this before Katrina's sweep—a staggering increase of some 35 percent. Prices have hovered around these levels since the summer of 2005, costing Americans, who consume more than twenty million bbl of oil a day, an additional $340 million in increased daily disbursements to OPEC and to the bottom line of the oil industry.
Vice President Cheney, in his discussions with the king, might determine whether Saudi Arabia and its OPEC cartel brethren can supply more oil to the marketplace to break the fevered advance of crude oil prices. To put the current situation in proper context, the OPEC cartel, led by Saudi Arabia, currently supplies fewer than thirty million bbl of oil a day to the world market.
In 1979—I repeat, in 1979—the OPEC cartel pumped thirty-one million bbl per day. Today OPEC tells us that they are at the virtual limits of their pumping capacity. The Vice President should be clear in his discussions that this claim (that the OPEC cartel and Saudi Arabia have not added to their pumping capacity in more than a quarter of a century) is either dubious or an attempt to disguise a willful constraint of production, undertaken to manipulate prices.
In any event, our vice president should restrain himself, no matter his impulse, from walking hand in hand with King Abdullah. The last time this came to pass, it cost us dearly. A similar percentage jump in prices from today's levels would cost us all an additional $440 million a day. Vice President Cheney, hands in pockets, please.
Oil Company Profits and Our National Security January 26, 2006
Not long from now, oil companies will be reporting their year-end profits. They will show massive gains over the past year. This week ConocoPhillips reported a jump of 66 percent in earnings to $13.5 billion. As ExxonMobil, Shell, BP, and others report their profits, this story will be strikingly reinforced.
A simple fact needs be stated and understood. The greater the profits of these oil companies, the greater the risk to our national security. The logic behind this is straightforward. Higher oil company profits go hand in hand with higher oil prices (now in excess of $65/bbl). Higher oil prices result in a massive transfer of wealth to hostile nations that fund the dissemination of hate-filled preaching calling for the demise of the United States and the West. Higher oil prices enable the activities of dysfunctional governments that are tyrannical to their own populations and, in an era marked by the proliferation of weapons of mass destruction, are increasingly dangerous to the world at large.
We are led to believe by the oil patch pundits that company profits are a fair reflection of free markets at work. They are not. The market for oil, more so than for any other major commodity, is rigged, and the oil companies are riding the coattails of this manipulation to ever greedier levels. They do this, in effect, by taxing us, the public, by selling us back the nation's natural resources of gas and oil at profit levels that have little or no connection to the cost of production.
How is this possible? The royalty system as enacted by the US government in the Federal Oil and Gas Royalty Management Act of 1982 is the patchwork of an oil-friendly administration and the influence of K Street lobbyists. It permits oil and gas extraction on public lands and coastal waterways at minimal benefit to the public—the presumptive owners of these resources—and maximum benefit to the oil companies and their shareholders. The public gets hit twice. The transfer of title to the resources is tantamount to a giveaway at today's prices. Then the public has to buy back the resources at rigged market levels.
The rigging of prices is done outside the purview of our present laws and to the enormous benefit of the oil patch. To achieve high prices and profits, international oil companies and our own need not collude. If they did, they would be subject to civil and criminal prosecution under our antitrust laws. But they have a better method. The OPEC cartel takes care of matters for them, by restraining production or making the public believe that the members of OPEC have reached the limits of their capabilities.
What our oil patch has done is piggyback on OPEC's machinations whilebeingthecartel'sgreatestcheerleaderandconvincingus,thegullible public, that the cartel is simply a kindly group of nations struggling to meet our energy needs and that its prices are the manifestation of market forces. While prices go up, oil companies increase their profits without adding any economic value to their product. A gallon of gas takes your car only so far, whether you pay $1.50 or $2.75 for it.
If you are an oil producer as well as a refiner, as many oil companies are, the difference is pure gravy, hence these earnings reports we are seeing now. Take the oil patch to Las Vegas, and these guys would be railroaded out of town.
OPEC Agonistes January 29, 2006
OPEC will meet in Vienna, Austria, this week. Even with crude oil prices near all-time highs, Iran and Venezuela are pressing for a reduction in production quotas from current levels of twenty-eight million bbl per day (excluding Iraq, which is barely producing one million bbl per day in addition). Meanwhile, the Saudi oil minister, Ali al-Naimi, is quoted in a statement to the private Indian NDTV television channel, as reported by Pat Boyle of the Irish Independent on January 24, 2006, as saying "Unless the market changes significantly between now and the meeting, there is probably no real reason to do anything different."
Bolstering al-Naimi's air of "reasonableness," we have OPEC song masters—such as Matthew Simmons, the author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy—predicting that oil prices will approach $190/bbl by the end of winter in 2006 and the often-quoted oil analyst Philip Verleger predicting that "[w]e'll see prices well over $100 a barrel before the end of the year."
To round out the chorus, there is our own energy secretary, Samuel Bodman, who claims regular contact with oil producers. "By and large, they seem to be understanding that there needs to be more oil rather than less oil in the world," he was quoted last week as having said in the New York Times (Jad Mouawad, "OPEC expected to reject Iran's and Venezuela's push to cut output," January 27, 2006). His supplications must be extremely well-mannered. Back in 2000, when Bill Richardson was secretary of energy and placed a call to the then-president of OPEC, Iranian officials waxed indignant at the thought that one of their robbery victims might have a say in the matter. "In the forty-year history of OPEC," they fumed, "there has never been a case of the secretary of energy calling OPEC ministers in the middle of a meeting.[...] We are very upset and disappointed at the external pressure. We don't like it" (Edmund L. Andrews, "Reluctant Iran Falls in Line with OPEC Production Rise," New York Times, March 30, 2000). It was as though fixing quotas to manipulate prices had become a divine right.
We have learned our lessons well since then. We have learned to say thank you to the Saudis for holding the bad guys (Iran and Venezuela) in check, all the while paying through the nose (now over $67/bbl) for a product that costs them less—in many cases, considerably less—than $1.50/bbl to produce (speech by Saudi Minister of Petroleum and Mineral Resources Ali Al-Naimi in Huston, Texas 1999). If General Motors and Ford had such margins, they could sell their Chevy Blazers and Tauruses for three hundred thousand to four hundred thousand dollars each.
What Mr. Bodman should be saying to his interlocutors at OPEC is this: "Listen, my good friends, as you are fully aware, the price of oil today is at levels that are far beyond any economic justification. I have seven hundred million bbl of oil in my strategic petroleum reserve, and the industry is holding a further 310 million in reserve in commercial stocks that are now 10 percent higher than a year ago.
"We are also members of the International Energy Agency, which holds an additional seven hundred million in its strategic oil reserves (http://www.iea.org/stats/oildata.asp?COUNTRY_CODE=US). Together, we hold a total of 4.1 billion in reserves both strategic and commercial. If you cut production, we will begin to introduce these reserves into the market to stabilize availability and price, and you, my good friends at OPEC, will be losing your equivalent market share. By the way, are you listening, Iran?
What we would really like you to do is increase the availability of oil so that the price returns to levels that make economic sense and reflect free market conditions. And please don't tell me you are doing all you can by pumping twenty-nine million bbl a day (including Iraq). For those of you who keep a diary, turn to 1979 when you will see that you were producing thirty-one million bbl a day. Here we are, more than a quarter of a century later, and you tell me you can't do better? C'mon, guys, give me a break. I've got a job to keep here, and you can't make me look that dumb.
OPEC to Bush: "Drop Dead"; Texas to the Rest of Us: "Say Please" February 3, 2006
President Bush runs the risk of alienating the world's biggest source of oil with his plan to end America's oil addiction. So proclaimed OPEC delegates and oil ministers yesterday. His plan was neither "achievable nor prudent and could make investment in the industry more difficult. He has not heeded the call to give producers a road map of future demand" (Carola Hoyos et al, "Bush misfires in drive to end 'oil addiction'" Financial Times, New York edition, February 2, 2006) to help petro-states decide how much to spend on future capacity. This complaint came from members of the same cartel that has steadfastly stonewalled any attempt to solicit its reserves and production capacities for outside audit, thus preventing consumer nations from planning their energy needs intelligently with real data instead of with OPEC press releases.
Saudi Arabia's ambassador to Washington, Prince Turki al-Faisal, expressed further puzzlement about President Bush's singling out of the Middle East in his State of the Union address. "Is that a declaration that the US is going to work to be independent of Canadian oil, Mexican oil, and Venezuelan oil? I see no threat to America from receiving its oil from the Middle East" (Elisabeth Bumiller, "State of the Union: Energy; Bush's Goals on Energy Quickly Find Obstacles," New York Times, February 2, 2006).
Keep in mind that al-Faisal made this outrageous statement as a representative of the nation that gave us fifteen of the September 11, 2001, hijackers, a nation that, to this day, provides the largest number of foreign suicide bombers in Iraq, to say nothing of the billions of its dollars going to anti-Western Wahhabi madrassas and mosques throughout the world.
The commedia continues with Secretary of Energy Samuel Bodman's craven backtracking at the first sign of Saudi and OPEC displeasure. His conciliatory gesture was to state to reporters in a conference call on Wednesday, February 1, 2006, that the president's mention of Middle East oil was "purely an example" (Elisabeth Bumiller, "Make Industries' Tax Breaks Permanent, President Urges," New York Times, February 3, 2006). This must have been a thank you to Saudi Arabia for holding the line against Iranian and Venezuelan pressures at the ongoing OPEC meeting to push oil prices even higher than the current excessive level, having Bodman's Department of Energy subscribe to and give public credence to the fiction that oil is a freely traded commodity.
A depressing insight into where the government really stands on energy issues was provided by Joe L. Barton, republican from Texas and chairman of the powerful Committee on Energy and Commerce. Upon hearing the President's address, Barton advised us that "America runs on energy that is both abundant and available at prices we can afford to pay" (Elisabeth Bumiller, "State of the Union: Energy; Bush's Goals on Energy Quickly Find Obstacles," New York Times, February 2, 2006). I did not make that up. May I suggest we send our heating bills to Representative Barton's Texas address? And, of course, let's not forget to send thank you notes to the oil patch in Texas and to the ministers of the OPEC nations for making it all so affordable.
OPEC Pushing to Refine Our Addiction February 18, 2006
As its latest favor to Western consumers, OPEC plans to increase refinery capacity in the Persian Gulf by 60 percent over the next decade. If we want to lower oil prices, said Saudi oil minister Ali al-Naimi just a few days ago, "Build, build, build more refineries!" (Javier Blas and Kevin Morrison in Vienna and Carola Hoyos in London, "Opec urges nations to build more refineries," Financial Times, June 16, 2005, http://www.ft.com/cms/s/0/699e2966-de63-11d9-92cd-00000e2511c8. html#axzz1HGVpBJjk).
Al-Naimi reminds me of Tom Lehrer's "The Old Dope Peddler," because the peddler was spreading joy wherever he went and building tomorrow's business by giving the kids free samples.
Led by al-Naimi, OPEC has been claiming for several years that it is a lack of refining capacity (among other scapegoats) that is to blame in driving oil prices higher. This argument is transparently false. A shortage of refineries could certainly account for higher prices of refined product—gasoline, diesel oil, jet fuel, and the like—but it would not push up the price of crude oil. In fact, if crude oil were flowing freely and there weren't enough refineries, it would tend to drive down the price of crude. The reverse is happening. Yet again, OPEC simply wants to hide the fact that it is manipulating the oil market with phony shortages and artificially high prices.
It's true enough that we are pushing the limits of refinery capacity in the United States. There hasn't been a new refinery constructed in this country in three decades, primarily due to environmental concerns and the understandable not-in-my-backyard reactions of local communities. Existing refineries, however, have been expanded and modernized, and we have been importing enough refined product, mostly from Latin America and the Caribbean, to keep up with demand.
If we don't want refineries in our backyards, the OPEC nations will be happy to build their own refineries in situ, exporting not only crude oil but also downstream production as well. But this sample from the peddler will have two main effects. First of all, it isn't really free. The producers will keep the refining profits on top of the roughly $60/bbl they already get for their crude—an enormous windfall. Secondly, and more importantly, the Persian Gulf will become the world's biggest source of refined product, and it already makes up the major portion of OPEC's 40-percent share of the world's crude production.
Put simply, even as President Bush vows to reduce America's dependence on Middle Eastern crude by 75 percent, we would become even more deeply and dangerously addicted.
Have a snort, kiddies. It's really cool!
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