The Great Oil Shortage Myth
As with many other untruths coming from the Bush/Cheney administration and the media, it is not true that we have an oil shortage.
This perception has been encouraged by the administration as a ploy to divert attention away from a number of issues, including the economic debacle in Iraq and the devaluation of the dollar. This was made quite clear to President Bush by the Saudi government when he approached them to increase production in an effort to reduce rising prices. As he was told, there is a surplus of oil available and further increases in production would not affect price. In fact, Iran had to put 30 million barrels of oil in floating storage due to lack of a market. How embarrassing to the US, having a President so out of touch with reality.
In actuality, total world supply and demand for crude oil in the first quarter of 2008, as reported by the International Petroleum Monthly-June 2008, showed world supply at 85,640,000 barrels/day versus demand at 85,430,000 barrels/day or a surplus of 210,000 barrels/day.
A DOE report (#DOE/EIA-0380-2008) projects total US hydrocarbon supply (mainly crude oil) to be 21,230,000 barrels/day by 2011 and total hydrocarbon demand to be 20,900,000 barrels/day or a surplus of 330,000 barrels/day.
Additionally, US crude oil stocks (inventory) for the past year are shown in the graph below:
As you can see, crude stocks in millions of barrels, while dropping in May and June, have continued in the expected range for the year Aug-2007 to June-2008.
If we take the above facts regarding supply and demand into consideration, how can we possibly believe that crude oil prices during the same period have increased as much as shown in the next graph?
Both graphs were obtained from the Energy Information Administration and represent the official energy statistics from the US government. It is clear that in the past year an increase in crude prices of approximately 100% is in no way the result of supply and demand inequities. In fact, based strictly on economic fundamentals, most oil economists believe the present price of oil should be in the $60/barrel to $70/barrel range. It is interesting to note that crude prices were at about this level in August 2007. It must be clear that the constant harangue from media, government, and the oil industry for more drilling and refining simply does not address the present issue. So what is going on?
In an article by Ismael Hossein-za, an economics professor at Drake University, he cites the finding of a number of energy experts that between 30-40% of the increases in oil prices can be attributed to dollar depreciation. This is based on comparing the last five-year discrepancy in the difference between the value of the euro and the dollar. What then accounts for the remaining 60% of the increase? According to F. William Engdahl, an expert in the energy and financial markets, as much as 60% of the crude oil price is pure speculation driven by large trader blocks. It has nothing to do with supply and demand.
Many of these blocks neither own nor use crude oil. Crude oil was made a commodity in the 1970s to allow legitimate oil producers and refiners to “hedge” their risks in drilling costs and raw material costs. However, this concept opened the door for blocks of speculators to enter the markets with very limited control on their behavior. One can enter the crude commodities market by investing in a minimum of one contract, that is, 1000 barrels of light sweet crude oil at Cushing, OK. This individual can either buy a contract (going long) or sell a contract (going short). He is not required to clear this position until the end of the contract period. He can do this by either taking the physical barrel at Cushing or selling a barrel at Cushing. Or, he can simply find an offsetting sell or buy contract and wash the paper transaction out. In most cases this is what happens. In other words, it is usually a paper transaction, played strictly for financial gain with no physical barrel moving to either party. This has resulted in a significant upward pressure on the price of the commodity and a price that is quite arbitrary.
As long as our congress continues to bury its head in the myth that there is and has been a crude and product shortage the American people will suffer needlessly. There are controls that can be placed on the oil commodities market that will greatly mitigate the energy pricing problem. This can probably be done fairly quickly. The only knowledgeable voice I have heard coming from our congress in this regard is that of Senator Byron Dorgan of North Dakota, who presented on the Senate floor very compelling evidence of why we need to control the commodities market.
As Americans we should not continue to let this government’s misinformation program lead us into complacency. Write your congressmen and express your concern over the oil pricing nonsense that is being shoved down our throats.