Is the Global Oil Crunch a Myth?

By Ismael Hossein-zadeh, Middle East Online. Posted July 14, 2008.

The popular perception of the recently skyrocketing oil price is that there is an oil shortage in global energy markets. The perceived shortage is generally blamed on the Organization of Petroleum Exporting countries (OPEC) for "insufficient" production, or on countries like China and India for their increased demand for energy, or on both.

This perception is reinforced--indeed, largely shaped--by the Bush administration and its neoconservative handlers who are eager to deflect attention away from war and geopolitical turbulence as driving forces behind the skyrocketing energy prices.

Impressions of an oil shortage are further bolstered by Wall Street and its financial giants that are taking advantage of the insecurity created by war and geopolitical turmoil in oil markets and are making fortunes through manipulative speculation in commodity futures markets.

Perceptions of insufficient oil supply are also heightened by the recently resuscitated theory of the so-called Peak Oil, which maintains that world production of conventional oil will soon reach--if it has not already reached--a maximum, or peak, and decline thereafter, with grave socio-economic consequences.

However, claims of an oil shortage are not supported by facts. Evidence shows that, in reality, there is no discrepancy between production and consumption of oil on a global level. Citing statistical evidence of parity between production and consumption of oil, OPEC President Chakib Khelil recently emphasized that there was no shortage of oil: "As far as fundamentals are concerned I think we have equilibrium between supply and demand. . . . In fact right now we have more supply than demand."

Facts of abundant oil supplies in global markets are now also being acknowledged and reported by mainstream media. For example, Ed Wallace of Business Week recently reported that "that worldwide production of oil has risen 2.5% in the first quarter, while worldwide demand has grown by only 2%. Production is expected to increase by 3.3% in the second quarter, and by as much as 4.1% by the third quarter. The net result is that the US daily buffer for oil production against demand, which was a paltry 1.5 million barrels as recently as 2005, is now up to 3 million barrels in excess capacity today."

Wallace then asks, "So what is going on here? Why would our Energy Secretary say there's a supply and demand problem when none exists? Why would he say that speculators have little or nothing to do with the incredibly high price of oil and gasoline, when it's clear they do? President Bush--a former oilman--gives the ever-growing demand for gasoline as the primary reason prices are so high, yet that notion can be dispelled with one minute of research."

So, if indeed there is no imbalance between production and consumption of oil in global markets, how do we then explain the skyrocketing oil prices?

The answer, in a nutshell, is: war and geopolitical instability in oil markets. Contrary to the claims of the champions of war and militarism, of the Wall Street speculators in energy markets, and of the proponents of Peak Oil, the current oil price shocks are caused largely by the destabilizing wars and political turbulences in the Middle East. These include not only the raging wars in Iraq and Afghanistan, but also the danger of a looming war against Iran that would threaten the flow of oil out of Persian Gulf through the Strait of Hormuz.

Close scrutiny of the soaring oil prices shows that anytime there is a renewed US or Israeli military threat against Iran, fuel prices move up several notches. For example, Agence France-Press (AFP) recently reported, "Crude oil prices went on a record-setting surge Friday as fears of a new Middle East conflict were fanned by comments from a top Israeli official about Iran. New York's main oil futures contract...leapt 10.75 dollars a barrel--its biggest one-day jump ever."

War and political chaos in the Middle East tend to increase energy prices in a number of ways. For one thing, as war plunges the US deep into debt, it depreciates the dollar--thereby appreciating, or inflating, the price of dollar-denominated commodities, especially oil.

Depreciated dollar tends to raise the price of oil (and other commodities) in two major ways. First, since oil is priced in US dollars, oil exporting countries would demand more of the cheaper dollars for the same barrel of oil in order to maintain the purchasing power of their oil. Second, when the dollar falls, oil prices rise because investors are more likely to use their money to buy tangible assets or commodities such as oil and gold that won't lose value.

According to a number of energy experts, between 30- and 40-percent of the recent increases in the price of oil can be attributed to dollar depreciation. One of the simplest ways to calculate this is to compare the price per barrel of oil in dollars and euros over the last five years. "The widening gap between the two [dollar price vs. euro price] indicates that 35 percent of the increase in the price of oil could be attributed to currency [dollar] devaluation."

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Ismael Hossein-zadeh, author of the recently published The Political Economy of US Militarism (Palgrave-Macmillan 2007), teaches economics at Drake University, Des Moines, Iowa.

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