What's behind oil prices

For my first post, I want to air my thoughts on the phenomenal rise of crude oil prices in the past 3 years, which has had global implications that few in media or business grasp or care to grasp. Currently, futures prices for late April delivery are in excess of $105 per barrel, a figure few in the oil business dared to hope for in 2004, when prices hovered around $30, held up by the failure of the Iraq invasion to provide quick relief in crude supplies. Back then, the Saudi oil minister observed that his government would work to bring prices to a $22-28 range, which he said his government was comfortable with. But even that announcement, followed by this claim, failed to slow the juggernaut of the oil price rise. Now, of course, the Kuwati oil minister says that a low price of $50 per barrel is "worrying", despite Qatar's oil minister remarking that the fair price of oil, based on supply and demand, "would be closer to $50 or $55 a barrel".

One of the main support arguments for the current record prices for crude is that they are no higher than prices back in 1980-81 when adjusted for inflation. Strong corollary arguments are that there is a supply-demand gap of around 1 million barrels per day, and that strong demand from China and India shrink that gap.

The first argument mires itself in irrelevance, because the price of oil from 1979 to 1983 was driven by real fears of disruption, and was understood to be temporary in nature. The crude market today is driven much like the NASDAQ in the 1990s, on speculation, hype, disinformation, rumor and rumors of rumors. This is not how a vital commodities market should run itself. But it does, fueled with money and motivation from the biggest players in other markets looking for new ways to fuel their money growth.

Let's look at the second argument, that of the 1-million bpd supply-demand gap: I've heard this argument for years now, during which time the demand has risen, and supply has risen to keep pace. China, as we all know, is a voracious consumer of crude oil, but in many ways, it has replaced consumption of crude elsewhere in the process of manufacturing relocation, and had done so for almost 25 years before the oil traders discovered the magic of irrational exuberance. India's crude oil consumption, in relation to it's population, is marginal, and the growth in demand for crude oil by India is less than what could be saved by simple and relatively painless conservation in North America alone. Oil consumption by the US remained relatively flat from the mid-70s all the way through to the internet boom of the 90s. Consumption has grown by 20% in the past 10 years. Why? A large part of that is the relaxing of curbs on fuel-efficiency in the automotive sector coupled with unreasonable energy use both in the domestic and business sectors. 13 mpg automobiles, 4000 sf homes occupied by 2 people and energy waste in the business sector enabled by a lack of penalties are a few reasons.

Natural gas prices have kept pace with the rise in crude oil prices, even lacking the "logic" that has driven crude prices. Why? Because all energy sources are being mined for extraordinary profit. Nowhere in the world, except those where local logistics are inhibited in one way or another, is there an actual shortage of crude oil products. Remember back in 2005, when prices of crude spiked in response to explosions at a Texas refinery? This was a continuation of the traders' logic that the price rise was connected with limited refining capacity in relation to the demand for oil products. In a true supply-demand relationship, the lowering of refining capacity, either as a result of accidents or in relation to increasing demand, should have had the effect of lowering well-head prices, since there was reduced ability to absorb production. Further reductions should have come from news such as this, this and this. That didn't happen, and it begs the question: why not? The answer to this, I believe, is the explanation for why oil prices have risen to this point, and will rise further yet.

So what is the answer? I think it is cartelization of money on a scale never before contemplated, attempted or achieved in human history. Following the stock market boom of the 90s, during which ordinary people arguably saw a growth in their assets, the smart money was able to pull out before the bust. Going into the recession of 2001, few avenues were available for that money to be re-invested in high-growth areas. The lowering of interest rates provided a new avenue for the smart money. The lower interest rates, which were to have made housing more affordable for homebuyers, were instead manipulated into raising the price of housing(with the complicity of federal regulators, whose job it was precisely to prevent such manipulation), setting the stage for the eventual collapse in housing. Alan Greenspan told CBS' Leslie Stahl that "[w]hile I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late. I didn't really get it until very late in 2005 and 2006." The smart money profited tremendously from this, but knew the bust was inevitable, and set the stage for the new profit avenues: commodities. Crude oil, corn, wheat, water, all the things that people cannot help but consume of necessity.

The price of crude oil has risen, and will continue to rise, because of the sheer greed of the "smart money set" who, in a mimicry of the debauchery that preceded the decline of every great civilization, think of nothing and nobody but themselves. The price of crude has such far reaching effects, from the price of corn and wheat to the ability of the poor of the world to adequately feed their children and themselves to the decline of the middle-class in the developed world, that is has no moral justification whatsoever, and we already know it has no economic justification. A global population is being effectively impoverished and economically enslaved, in the name of free market economics and globalism, benefits that accrue primarily to a miniscule number of super-wealthy.

A new class of global super-rich has been created, who only worship at the altar of money, and have no national, moral or ethical loyalties.