What drives oil prices? Everyone has a theory that suits their ideological niche—Democrats blame lack of regulation, Republicans blame too much regulation, and the rest of us wonder why prices aren’t higher than they are already. Earlier this month, Congress got an earful from a variety of oil experts on both sides of the ideological divide (and on a variety of paychecks), and the upshot is—it’s all of those things, and more.
Really, what can and should politicians do about high gas prices in the U.S.? We’ve had plenty of Congressional hearings, firmly establishing the facts that a) much, but not all of oil’s price can be ascribed to unregulated ‘speculation,’ and b) the larger point is that global demand is going to keep rising. The UN’s International Energy Agency estimated recently that China and India will account for up to 70 percent of new demand from now until 2030, when the IEA projects the need for Asia’s new power-players to import 20 million barrels’ worth of oil a day between the two.
Karl Rove was on Fox News the other day saying that he knew people in the oil industry and they had told him that only a small part of the price of oil’s increase was due to speculation, but really it was about supply and demand. Congressional hearings, on the other hand, say that the so-called “Enron loophole” which allows unregulated trading in energy markets contributes 25-50% of the current record price increases. But all the speculation in the world won’t change the basic fact that global demand keeps growing, which of course is why people are speculating in the first place. It used to be that gold was considered an inflation hedge—nowadays, it’s a better bet to put your money into oil instead. (By the way, small investors, the minimum amount of crude oil you can buy at a time is 1000 barrels, or 42,000 gallons, so start saving those pennies.)
Merely saying “supply and demand” doesn’t cover the whole of it—American gas demand is actually down and supply is actually up, and prices continue to rise, past $4 a gallon at the pump. As we learned in the 1970’s, when our domestic production peaked, the United States no longer controls the price of oil. And because even the crude we pump out of American soil is priced according to the global market, it doesn’t matter if Americans curb their consumption, which is actually what we’ve been doing for the past year. This is a great deal for oil companies with vertical monopolies, because they just pass the high global cost of oil onto consumers without having to buy their own crude on the open market. That’s why, even though the cost of extracting oil is definitely going up, the speculative rise in price lead to record oil company profits.
Now that we created the globalized world, we have to live in it, and that means facing up to the reality that cheap oil is gone. As I wrote almost exactly three years ago, the point about ‘peak oil’ is not that oil will run out, but that it will become increasingly more expensive to extract in terms of both money and energy. And now that crude prices are never going below $100 a barrel, all sorts of ‘unconventional deposits’ are becoming economically (if not environmentally) feasible, such as all that shale oil extraction which is ruining everything it touches near Fort McMurray in Alberta.
Is there a responsible way to stave off $5 gas at the pump come September?
There is, sort of. If you look at the news coverage of crude oil increases, there are always two things cited as contributing factors: growing global demand and political instability threatening supply. It’s no coincidence that an energy-intensive lifestyle and war are two of our major exports. Let’s look at how demand is structured first.
As I’ve mentioned before, one of the major factors in the increase of demand is the rapid industrialization of countries like China and India, whose depressed labor markets have become newly available (thanks to globalization) to make large amounts of stuff for export, which takes even more oil to get to the industrialized countries which used to make the same products. And as I’ve said before, the price of oil will continue to climb as long as Americans drive their SUVs to Wal-Mart.
Break down the chain of events implied by this example—driving an SUV or minivan necessitates a certain amount of refined gasoline, of course, and Wal-Marts tend to be located in suburban towns (made possible by the Federal Highways Act and oil company subsidies), or exurban, smaller communities which are rapidly losing their manufacturing base to factories in China and India. Wal-Mart itself is largely responsible for this phenomenon. A memorable scene from CNBC’s documentary about the world’s largest retailer, “The High Cost of a Low Price” shows the buyers explaining to an entrepreneurial couple who came down to Bentonville to hawk their latest tchatchkeh that there is simply no way they can sell their item at Wal-Mart stores if the insist on manufacturing it in the United States (there are price targets which must be met). Of course, most of the items sold in Wal-Mart are actually made from oil in whole or part, from all the plastic to various industrial solvents and chemical process components. Not to mention the raw oil has to be moved from refining stage to processing stage to factory to consumer, all of which involve the consumption of even more oil as fuel. Even the agricultural products you can buy at a Super Wal-Mart invovle petroleum-based fertilizers and diesel-powered machinery, thanks to the Green Revolution in the 1970’s, which saved the world’s food supply at the cost of installing agriculture’s dependence on plentiful oil (the Rockefeller Foundation, itself built on windfall oil profits, bankrolled that research). Transportation only accounts for two-thirds of our petroleum usage—and only 19.5 of 42 gallons in each barrel of crude end up as regular gasoline; 9.2 gallons become diesel.
China’s exports, for example, have increased tenfold from 1992-2005. There are no available figures (please let me know if you have any) for exactly how much oil is involved in America’s burgeoning trade deficits like the one we’ve been accruing with China, but I can say with certainty that they are a major factor in the rising global demand for oil. It’s no coincidence that the Clintons have a long history with Wal-Mart and that Hillary (a former Wal-Mart board member) became the health-care industry’s darling by stealing Mitt Romney’s corporate health care plan. Whether or not you think the Democrats who were pushing it were betraying their constituency at the time, the promises of globalization (or at least as it was sold to the working class Democratic base) have certainly been exposed as folly. Not only are jobs, but entire industries are leaving, and they aren’t being replaced. And underpinning all of this is a dependence on advances in transportation, which makes cheap labor affordable in the larger scheme of things by letting developing countries export back to developed countries. But some analysts are wondering whether fuel costs are challenging the structure of globalization, which, like everything else the United States has built, relies not only on petroleum, but cheap petroleum.
Globalization is designed to address those market inefficiencies which have made the middle class possible. Let’s start with labor costs: the wages and job security which made America the envy of the world in the post WWII boom years were unsustainable in a globalized world, in two important ways: a) taxes were much, much higher for rich people back then, and b) organized labor and the industrialization required by World War II enjoyed a brief and fruitful affair. Workers got higher wages, health coverage, pension plans, and the promise of a career. To be fair, I don’t think corporations should be handling any of these things, because look how they’ve screwed up wages (stagnant, while productivity has soared), health coverage, pension plans, and job security. The problem, of course, is that the so-called ‘golden straightjacket’ of globalization, the neo-liberal regime imposed on developing countries, is to have the government privatize these functions and leave everything to the market. “When America sneezes,” they used to say, “the rest of the world gets a cold.” Through the World Bank and the IMF, we’ve elevated our Reaganite ‘pro-market’ policies to (what used to be called) a social disease.
Post-war America (and correspondingly, the American-built global marketplace) was built on the assumption that we could rely on extracting cheap domestic oil indefinitely. European drivers pay twice what we pay for gas, so they have smaller cars and avail themselves of government-built public transportation. Which, as we all understand, is totally un-American. We need to have highways and suburbs and three-car families and two hour commutes and cheap plastic knick-knacks because these are God-given rights. That’s why we consume so much oil (and everything else) per capita—it’s not just because we can, it’s a matter of national pride. Recognizing the consequences and costs of our lifestyle, however, is probably more un-American than taking a national rail service to a soccer match. This is the land not only of Manifest Destiny, but of white flight. America doesn’t like to deal with problems directly; we’d rather just get in a fast car and keep moving until we lose them in the rear-view mirror. And for a long time, it worked for many people.
Conservatives seem to think that no matter how much demand grows, we should be able to keep extracting more and more oil from the earth in order to preserve our way of life. Unfortunately, even if we increased our domestic oil production, we’d still need to import large amounts of oil because our production peaked over thirty years ago. Take, for example the folly of drilling for oil in the Arctic National Wildlife Refuge. Any day now, Jon McCain will flip-flop and declare that he is for oil exploration in ANWR, the same way he just came out for off-shore drilling. In many ways the ANWR issue is a bellweather for your concept of America, because allowing companies to go in there today would mean Americans would see the oil start flowing in 2013 and hit a peak of just under 900,000 barrels per day (about 5% of our current daily consumption) somewhere around 2025. The question is, do you want to put America in the position of needing 900,000 more barrels of oil a day in 2025, no matter the cost to the environment?
Of course, the dynamics of demand are only half the story. Global demand has certainly risen greatly in the last ten years, but that isn’t what’s been fueling the sharpest upturns in the price of oil. Demand has been rising arithmetically worldwide, according to the IEA’s web site:
But prices rose exponentially:
This rise in demand is totally fueled by globalization; demand in developed countries is actually shrinking. Supply is up, too:
So if supply is increasing and our consumption is shrinking, why are Americans paying $4 and more at the pump? It’s simple: war is the answer. We export conflict; much as real and projected increases in global demand for oil drive speculation, real and projected disruptions in the flow of oil come to bear on prices as well. This phenomenon is concentrated in three countries: Iran, Iraq, and Nigeria. You’ll notice that the price of crude drops during the beginning of the Iraq war by about $7 during the month of March 2003, when it seemed as though Bush’s plan for $20 gasoline through sheer force of personality (and depleted uranium) might actually work. But soon after it became clear that “Mission Accomplished” was a bit premature, crude began its inexorable climb.
When it comes to Iran, which sits atop the world’s second-largest proven reserves, U.S. policy, though less violent, is just as much responsible for driving up the price of oil. But our embargoing and sabre-rattling are always directly quoted as causes for any jump in the price of oil, even when we do it by proxy. Consider this snippet from earlier this month, when the price of oil sustained its largest single-day increase in history:
“It’s Iran — all Iran,” said Bernard Picchi, a senior managing director at Wall Street Access. “Iran is the bête noire of the Bush administration, the last remaining member of the ‘Axis of Evil’ that has not been militarily or diplomatically neutralized,” Picchi said in emailed comments. Comments from Israel’s transport minister, reportedly a close adviser to Prime Minister Ehud Olmert, that an attack on Iranian nuclear sites looked “unavoidable” has driven buying to a fever pitch, according to Michael Fitzpatrick, an analyst at MF Global. Israeli Transport Minister Shaul Mofaz* was quoted by Yedioth Ahronoth newspaper as saying that if Iran continues with its program for developing nuclear weapons, Israel will attack.
By the way, Shaul Mofaz is actually Persian himself, one of the few ‘Oriental’ Jews in Israel’s power elite.
And Nigeria? The oil companies have been engaged in a “low-intensity conflict” with Nigerians for many years; lately even these multinational corporations’ white-collar Nigerian workers are ready to strike, not to mention the rebels who want their Nigeria’s oil to actually, you know help Nigeria. Last year, Chevron (who, with Shell, represent the western oil interests in Nigeria) were dragged into U.S. court for some of their routine murders of Nigerians in the name of petroleum extraction:
United States (US) District Court Judge in San Francisco, Susan Illston, ruled that Chevron was directly involved in the alleged attacks by acting in consonance with Nigerian government security forces, paving the way for a trial which the company had made spirited attempts to avoid for eight years. The lawsuit was brought against Chevron eight years ago in San Francisco Federal Court by nine Nigerian plaintiffs for alleged deaths and other abuses in the two incidents in 1998 and 1999. The plaintiffs assert claims ranging from torture to wrongful death.
According to information made available to THISDAY, Judge Illston “found evidence that CNL [Chevron Nigeria Limited] personnel were directly involved in the attacks; CNL transported the GSF [Nigerian government security forces], CNL paid the GSF; and CNL knew that GSF were prone to use excessive force.”
Of course, there’s one more component to how our foreign policy has raised the price of oil—the massive debts and global ill-will incurred by Bush’s war-mongering have driven the dollar into a downward spiral. Now, it is entirely possible, that if we stop threatening Iranian democracy, withdraw troops from Iraq, make Chevron and Shell pay for their crimes in Nigeria, enact a real alternative transportation energy policy, start drilling in North Dakota, and rebuild our railway system, we could get through this oil crisis. Or, there may actually be an oil speculation bubble to burst (although I think it’s pretty unburstable, barring some major advance in alternative fuels). Let’s see what Obama actually does in office.