Causes of the current oil price shocks

Economists attending an April energy conference sponsored by Johns Hopkins University were in general agreement that a “slow-motion supply shock amounting now to a 2 million barrel per day aggregate disruption” was the chief cause of the current spike in prices at U.S. and world gas pumps. The Washington meeting was headlined by top economists from the Federal Reserve and Daniel Yergin of the Cambridge Energy Research Association (CERA).

The following factors were identified as the principal sources of actual supply shortages:

• The war in Iraq: Iraq is 900,000 barrels per day below pre-war levels of production.

• Nigeria: Production is down 500,000 barrels per day as a result of the insurgency aimed at curtailing Shell’s control of that country’s vast natural resources.

• Venezuela: Speakers said that production is still 400,000 barrels per day below pre-2002-2003 levels, in part as a result of the CIA-backed employer lockout or “strike” in the oil industry in 2002. (The Venezuelan government, however, says normal production resumed by mid-2003.)

• Gulf of Mexico: Today’s production by U.S. firms is 330,000 barrels per day less than before Hurricanes Katrina and Rita.

So the imperial policies and relationships of the U.S. and British governments and the blatant incompetence of the Bush Department of Homeland Security account for the lion’s share of shortages. Stopping the war in Iraq, supporting instead of suppressing the Nigerian insurgency, and ending the boycotts and hostility to the Venezuelan democratic revolution are the quickest ways to restore oil supplies.

While growing demand from Asian economies is a strong underlying current in oil markets, the sharp increase in Asian consumption that drove the market in previous years is not a similar factor currently, according to CERA. China’s 2004 increase of 16 percent dropped to 1.7 percent in 2005, and is expected to be about 6 percent (400,000 barrels per day) this year. U.S. oil consumption, by comparison, is 10 times the Chinese per capita volume, and growing at nearly 1 percent a year.



Speculative shortages

In addition to real shortages, however, there are related speculative shortages. U.S. threats to Iran (which produces 5 percent of the world’s best grade of crude oil) top the list. Speculators in oil futures have already factored in the effects of a possible Iranian boycott of the West in response to attacks.

EU and U.S. interference in the elections in former Soviet republics led to an actual shutoff of Russia’s principal pipeline to Europe last month. Russia is the world’s second largest producer after Saudi Arabia.



The oil companies

Exxon and other oil companies are gaining tremendous cash flows from the current spike, much of which they are not investing in new refining capacity. While there are serious environmental, technical and public policy obstacles to building new refining plants in the U.S., many observers think the oil giants are withholding investment to deliberately protect short supply, and thus higher prices. They point to very slow or non-existent activities to modernize existing refineries — steps which could significantly boost supply and improve environmental safety. Most expanded capacity in recent years was in the Gulf, or in purchasing “offshore,” i.e. imperial investments which are now also under assault by democratic movements.



The solutions

• Defeat Bush. Take back Congress in November. Clearly there can be no solution from a government as tied to the oil industry as is the Bush administration. This is plain from the increasingly absurd proposals by their political flunkies to drill in Alaska, remove existing environmental protections and launch another catastrophic adventure in Iran.

• Comprehensive and global alternative energy and conservation strategies are critical to world economic stability. There are many promising technologies that the right public investments and private incentives can bring to fruition. Comprehensive is the key. For example, alternative fuels research investments in the past have had little impact as automakers have been permitted to throw fuel efficiency to the wind in their obsession with the SUV market.

Clearly, the first step for any real solution is to break the grip of the oil companies on the U.S. political structure.