Barnett - How much are global oil prices still fixed?
¦"Our Puzzling Tolerance for Oil-Price Fixing," by Steven Pearlstein, Washington Post, 13 October 2004, p. E1.
¦"Not a Ship to Spare: A Tanker Shortage Contributes to Rising Oil Costs," by Jad Mouawad, New York Times, 20 October 2004, p. C1.
¦"High Oil Prices Take Toll on Europe: With a Weak Growth Rate, Region Is More Vulnerable To Shocks Than Asia, U.S.," by Marcus Walker, Wall Street Journal, 20 October 2004, p. A15.
I like Steven Pearlstein of the Post a lot. I almost always peruse his articles because it's the deepest economic analysis I find consistently appearing in a national newspaper.
Here's the opening on one of his latest:
"Energy independence" has crept back into the national conversation, which is too bad, because it's a silly idea. Without some miracle breakthrough like controlled fusion, energy independence is unattainable, probably undesirable and discussion of it avoids the real question of why the world continues to let the price of a crucial commodity be set at artificially high levels by a notorious cartel.
Ironically, at this moment of $54-a-barrel oil, OPEC is no longer in control. Given the current realities of supply and demand—and the panic and speculation driving oil traders—it is the market that is setting prices.
But let's not let that distract us from the underlying reality: The reason supply is short is because OPEC members have set things up that way, aided and abetted by cooperating nonmembers and major oil companies who have become rich taking a free ride on the price-fixing gravy train. Even if oil prices returned to OPEC's target of $30 a barrel, that is still three times the price that would be generated by a truly competitive oil market open to free trade and investment, according to energy analyst Edward L. Morse and others.
Or put it this way: Even at $30 a barrel, we allow foreigners to impose an energy tax on Americans of at least $140 billion a year—the equivalent of $1,400 for each household.
Now when I last checked, price fixing violates the criminal laws. We put people in jail for doing it, and fine companies millions of dollars when they get caught. But because OPEC is made up of governments that control their oil industries, U.S. courts have decided that its price fixing is immune from prosecution.
Makes you think, don't it?
His answers beyond that charge are sort of weak in my mind (buyers cartel, trying to get at the National Oil Companies via the courts by going first through the Core's major oil companies, etc. But Pearlstein reminds us how artificial the oil market remains for all practical purposes.
But, of course, just blaming OPEC is misleading. The reality is that all aspects of the supply chain are tight right now, including tankers that conducted an oil run last year for $2M and now charge $6M. How can they do it? The tanker business was glutted with ships two decades ago, so companies stopped building. At the same time, the New Core joins the Old Core in the expanding global economy and demand picks up. But companies don't build ahead, instead waiting for the money to appear on the table. As one Dept of Energy analyst puts it: "It's not fear that's driving prices. It's the market fundamentals that everyone overlooked."
Who feels the pain first? Old Core Europe? Old Core North America? Or New Core Asia?
Barclay's Capital estimates that a $10 increase per barrel cuts the U.S. GDP by 0.44%, Asia/Pacific by 0.59% and Euro Zone by 0.87%. Of course, Asia will still grow the fastest out of that trio, plus the U.S. might eventually feel more pain translated through higher prices coming out of China in a follow-on effect (not sure that's really accounted for here in this model).
No matter how you look at it, having the Old Core absorb the New Core over the past 20 years, in combination with the lack of investment in the global oil industry (with reserves located overwhelming in the Gap/Middle East) meant that an "oil crisis" was predetermined, in the same way that globalization's creeping penetration of the traditional societies of the Middle East was predetermined by the information revolution and the quickening pace of the global economy's spread.
There is no mystery why America is leading the charge to transform the Middle East. History determined both the timing and the identity of the only military superpower capable of starting the ball rolling.
Posted by Thomas P.M. Barnett |
