[Marxism] Dilip Hiro on the oil shock

Louis Proyect lnp3 at panix.com
Wed Jul 16 07:16:34 MDT 2008

The Current Oil Shock
No Relief in Sight
By Dilip Hiro

When will it end, this crushing rise in the price of gasoline, now 
averaging $4.10 a gallon at the pump? The question is uppermost in the 
minds of American motorists as they plan vacations or simply review 
their daily journeys. The short answer is simple as well: "Not soon."

As yet there is no sign of a reversal in oil's upward price thrust, 
which has more than doubled in a year, cresting recently above $146 a 
barrel. The current oil shock, the fourth of its kind in the past 
three-and-a-half decades, and the deadliest so far, shows every sign of 
continuing for a long, long stretch.

The previous oil shocks -- in 1973-74, 1980, and 1990-91 -- stemmed from 
specific interruptions of energy supplies from the Middle East due, 
respectively, to an Arab-Israeli war, the Iranian revolution, and Iraq's 
invasion of Kuwait. Once peace was restored, a post-revolutionary order 
established, or the invader expelled, vital Middle Eastern energy 
supplies returned to normal. The fourth oil shock, however, belongs in a 
different category altogether.

Nothing Like It Before

Unlike in the past, the present price spurt has been caused mainly by 
global demand for energy outstripping available supply. Alarmingly, 
there is no short-term prospect that supply will match demand. For a 
commodity like petroleum that underwrites and permeates every aspect of 
modern life -- from fuel to fertilizers, paints to plastics, resins to 
rubber -- "balance" requires a 5% safety factor on the supply side.

At present, however, spare capacity in the oil industry is less than 2%, 
down from more than 6% in 2002. As a result, the price of oil responds 
instantly to negative news of any sort: a threat against Iran by an 
Israeli cabinet minister, a fire on a Norwegian offshore drilling rig, 
or an attack on an oil facility by armed rebels in Nigeria.

Behind the present price surge, other factors are also at work. Take the 
sub-prime mortgage crisis in the U.S. It flared almost a year ago, 
drastically lowering the market value of the stocks of banks and allied 
companies. The concomitant downturn in other equities led investment 
fund managers and speculators to direct their cash into more productive 
markets, especially commodities such as gold and oil, driving up their 
prices. The continued weakening of the U.S. dollar -- the denomination 
used in oil trading -- has also encouraged investment in commodities as 
a hedge against this depreciating currency.

The earlier oil shocks led non-OPEC (Organization of the Petroleum 
Exporting Countries) nations to accelerate oil exploration and 
extraction to increase supplies. Their collective reserves, however, 
represent but a third of OPEC's 75% of the global total. By the turn of 
the century, these countries had pumped so much crude oil that their 
collective output went into an irreversible decline.

A mere glance at the oil production table of the authoritative BP 
Statistical Review of World Energy -- published annually -- shows 
declines in such non-OPEC countries as Britain, Brunei, Denmark, Mexico, 
Norway, Oman, Trinidad, and Yemen. Over the past decade, oil output in 
the U.S. has declined from 8.27 million barrels per day (bpd) to 6.88 
million bpd.

The exploitation of the much-vaunted tar sands of Canada -- expected to 
cover the global shortfall -- only helped to raise that country's output 
from 3.04 million bpd in 2005 to 3.31 million bpd in 2007, a mere 10% in 
two years.

In the 1990s, overflowing supplies and cheap oil had led to an overall 
decline in oil exploration as well as under-investment in refineries. 
These two factors constitute a major hurdle to hiking the supply of 
petroleum products in the near future.

In addition, new hydrocarbon fields are increasingly found in deep-water 
regions that are arduous to exploit. The paucity of the specialized 
equipment needed to extract oil from such new reserves has created a 
bottleneck in future offshore production. The world's current fleet of 
specialized drill ships is booked until 2013. The price of building such 
a vessel has taken a five-fold jump to $500 million in the last year. 
The cost of crucial materials -- such as steel for rigs and pipelines -- 
has risen sharply. So, too, have salaries for skilled manpower in the 
industry. Little wonder then that while, in 2002, it cost $150,000 a day 
to hire a deep-water rig, it now costs four times as much.


More information about the Marxism mailing list