The main reason to doubt the current unrest is the reason for the sudden increase in oil prices – aside from what has already been stated above – comes from thinking about the situation more as a second round of stock market manipulation, similar to what had occurred in the lead up to the economic collapse, in 2008. The two constructs that dictate the market price of any commodity – supply and demand as well as fear – are currently being tested in the oil industry; many speculators fear the current unrest with squeeze the supply, which is ‘forcing’ them to increase the price in order to temper demand. This concept seems legitimate if only we, as a population, did not know that the oil industry has a series of buffers already in place to deal with these types of situations: national stockpiles, more amble commercial oil shares, and other governments (Saudi Arabia, Algeria, etc.) prepared to increase their national supplies at the drop of a hat.
It seems that the continued climb of oil prices have been stymied for the time being and many are waiting for the next outbreak in violence to send prices soaring.
First, creating crisis where one does not exist is easy for an industry that guards its information against anyone that it deems would undermine its daily operations. Violence and chaos erupting throughout the international system is nothing new, though for the past 15 years the world has become increasingly peaceful; major conflicts have diminished from 17 to 5 while smaller conflicts went from 33 to 27. If unexpected events occurring in the international system can increase the price of oil, the cost should have been dropping for the past 15 years, rather than increasing; the price per barrel of oil has increased from below $10 in 1999 to well over $100 in 2008. Though conflicts have reduced for nearly two decades, conflicts in oil producing countries have never reduced, making the contemporary situation more expected than openly acknowledged.
Oil producing countries have been in a continual state of conflict since the end of the Cold War; oil-exporting states are sites for over 30% of the world’s civil wars, an increase of 50% since 1992. Oil rich countries tend to be more prone to civil unrest because the wealth gained from this commodity cultivates corruption in a nation’s socio-political and socio-economic sectors, providing a lucrative foundation for individuals interested in rebelling against the ruling authority or reinstituting ethnic grievances. The internal conflicts that plague oil producing nations were expected to escalate with the price of oil and natural gas, which was the reason why, in 2001, the Bush Administration attempted to diversify the sources of oil America would rely on in the future, moving the nation away from depending too much on Middle Eastern and North African nations. The move to diversify America’s oil portfolio makes logical sense, yet the United States will still rely upon economically deprived, undemocratic countries that could easily succumb to internal insurrection or foreign influence or invasion.
Oil-producing countries are twice as susceptible to revolution or internal rebellion as their counterparts, and it tends to occur in three ways: economic malfeasance (creating high unemployment and increased food prices), insurgencies (funded by black market dealings), and separatist movements (igniting violence due to policies of inequality). It is believed that one of these three situations will erupt in Saudi Arabia – high unemployment in country, Bahrain and Yemen in revolution, a southern border campaign against insurgents – will be next on the list, in thus the added oil flow the country has promised the international community will become compromised.
Second, blaming the skyrocketing oil costs on the sudden rise of China, India, Brazil, etc. is not as effective as many in the industry would like it to be. This concept is focused on in James Hamilton’s “Causes and Consequences of the Oil Shock of 2007-08”, in which he asserts that there is a correlation between the abrupt rise in the cost of oil with ensuing recessions. Occurring primarily because the increase in demand was met with an unresponsive supply, it is the rationale as to why the cost of oil spiked in 2008 prior to the recession – the world economy began contracting prior to the collapse of the financial market. Fear is being concocted in the business world in that many believe the same dynamics that forced the price of oil upwards in 2008 is occurring again in a fragile world economy – supply remains stagnate while demand is skyrocketing.
The problem with this theory is that many of these developing countries did not appear as major players in international politics and economics over night; they have been carefully sculpted and molded by the West and its business leaders to become stronger trading partners on the global market economy. Treating their emergence in world affairs and their increasing demand for more natural resources as a ‘shock to the international market system’ is completely asinine.
The oil industry is fighting to find an excuse that will work in explaining why they continue to increase the cost of oil, though most malfeasance is documented and, sadly, quickly ignored. As Jamie Court, President of Consumer Watchdog, has noted:
• Rather than compete with each other to provide cheaper gasoline, oil companies cheat together to withhold needed gasoline supply from the market. Consistently, the companies artificially pull back refinery production of gasoline in order to reduce supply coming in during periods of peak demand so they can increase prices. It’s legal so long as there is no smoky back room where they talk about it, but they don’t need to since industry data about supply flows freely on corporate computer screens. This behavior has been documented by government agencies like the Federal Trade Commission, which found, for example, in an investigation of Midwest gasoline price spikes, that one refiner admitted keeping supply out of a region in need because it would boost prices.
• Oil companies failed to build ample refining capacity to meet demand. Over the last twenty years, America’s demand for gasoline increased 30 percent and refinery capacity at existing refineries increased only 10 percent. No new American refinery has come on line during the last thirty years. Internal memos and documents from the big oil companies show they deliberately shut down refining capacity in order to have a greater command over the market.
• The big oil companies have their own crude oil production operations and control substantial foreign production of crude oil. They profit wildly when the price of crude oil skyrockets, so they have an interest in driving up the price, despite the fact that they blame OPEC for those crude oil increases. The crude oil producers can even drive up the price of crude by restricting gasoline production and trading crude oil among their own subsidiaries to drive up the price paid for crude by others. Traders with connections to the oil companies can also make big bets on the opaque crude oil futures market to drive up the price and also drive up the value of their Exxon shares.
• The crude oil that big integrated oil companies use in their own refineries is mostly bought on long-term contracts or through their own production, so the oil companies don’t pay the world price for crude oil when it’s high. Their raw material costs are much lower than they would like us to believe. So when the companies raise the price of gasoline in tandem with the run-up in crude oil prices, they are making big profits because Exxon’s crude oil unit is charging its own refining unit a higher price for crude than is necessary. The accounting shenanigans result in an overall windfall profit but show the companies’ gasoline refineries making little profit, and “upstream” crude-oil production divisions make the lion’s share.