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High Crude Oil Prices And The Threat Of Market Collapse

Commodities / Crude Oil Feb 11, 2013 - 09:57 AM GMT

By: Andrew_McKillop


The IEA, which is the "oil and energy watchdog agency" of the OECD group of countries still consuming about 50% of world total oil production and importing over 60% of world total export supplies of oil, is now actively promoting high-priced oil. It forecasts year average prices around $175 per barrel by 2017. It also militates for extreme high carbon taxes on all fossil energy, which for oil would mean a new and additional carbon tax for consumers of about $500 per tonne of CO2 emitted, that is $215 per barrel or $5 per US gallon.

This is a transformation of the IEA's main role and policy goals as set by Richard Nixon and Henry Kissinger, when they founded the agency in the 1970s. They wanted oil at $1.50 per barrel and, at the time, actively considered invading and occupying Saudi Arabia to get it. Until the late 1990s, the IEA militated for the cheapest-possible oil price. This has now totally changed.


The IEA's reports and studies say it "responds to member state government policy" in the energy sector, and whatever the OECD governments may say in public about oil prices, for example that they are high and could cause inflation - they all want and need high priced oil. Today, the quest of "restoring inflation", or competitively devaluing national currencies is either an openly admitted goal, or clear underlying goal of entities like the US Fed, European Central Bank, and national governing parties of major OECD countries - for example Japan's governing LDP.

High oil prices fit that strategy like a glove. One reason is highly contrarian or anti-logical: when oil prices are high, like today, loading new government taxes onto fuel station forecourt prices is easier. The new taxes are "lost" in the big triple digit numbers on the forecourt panels giving today's price in cents-per-litre. Throughout the economy, according to New Economy newspeak, high oil prices help keep inflation from morphing into outright deflation.

Big Government wants high oil prices - and the entire financial, banking, brokering and trading "industry" wants high oil prices. The ultimate example is Goldman Sachs Group Inc.

In 2008, according to 'Forbes' magazine, Goldman Sachs probably 'goosed' or pushed oil prices by about $30 per barrel above anything set by "supply-and-demand fundamentals", to reach their highest ever or highest so far: about $147 per barrel, in July 2008. Study of Goldman Sachs 'investor advice' for oil market players (called 'investors') shows masterful double think and disinformation. At present in late 2012/early 2013 Goldman Sachs is actively promoting the notion that oil prices should fall: this does not fool market players and manipulators. Nymex and other major oil market prices rose 'appreciably' in January 2013. Trading groups and holdings that go against the tide, a 2012 example was MF Global, go to the wall.

The elite quest to 'save the planet' by mitigating or struggling against global warming directly benefits the alternate and renewable energy sector: all promoters of any type of Green Energy, and related electric cars and products or services related to the sustainable economy, also want high oil prices. Shai Agassi of Better Place, Carlos Ghosn of Renault-Nissan, and Sir Richard Branson of Virgin Megaflop green ventures have all promoted the idea of oil prices soon rising to $250 per barrel, floating their "alternate electric transport" assets on a raft of easy cash and investor support.

With no surprise, Big Oil wants high priced oil. In the case of the US, the drive to develop shale oil and make the USA the world'd biggest oil producer by or before 2020 requires oil prices of around $70 per barrel to grease the drills and keep the process going. The near-total collapse of US domestic natural gas prices, caused by over-production on the back of the shale gas boom, makes it even more vital to keep oil prices up, to maintain earning for major oil-and-gas integrated corporations and absorb their losses or reduced earnings from underpriced gas: Big Energy needs high oil prices.

The nuclear lobby, looking back to its now heavily historical period of its greatest success, in the 1973-1983 decade following the oil shocks of 1973 and 1979, very actively seeks high oil prices - despite oil fired power production now being an historical curiosity in the OECD countries - to relaunch its flagging asset bubble.

The supreme irony, and proof that high oil prices are above all a financial phenomenon, comes from study of recent and ongoing reports and statements from the OPEC Secretariat, oil ministers of leading members of the cartel, and Russian oil deciders. Both Saudi Arabia and Russia - the world's two biggest producers and exporters - claim that oil prices are "too high" and the current market price levels are "not justified". Translated, this means the oil exporters' justifiable fear that oil is being priced up and out of range of mass consumers - and that oil exporters only receive a fraction of any "market driven" rise in oil prices.


Fatih Birol, Chief economist of the IEA and Chief editor of the IEA's flagship annual energy report, the World Energy Outlook, has for several years promoted the elite-fashionable "sustainable economy theme". He claims, in each recent annual edition of the WEO that the IEA has proof that the world is failing to put the global energy system "onto a more sustainable path".

This especially concerns what is a subject that lost most public opinion support but is still an elite-fashionable obsession: global warming. Holding CO2 concentrations in the atmosphere to a limit of 450 ppm (parts per million) is a rock-sold theme of the new-look IEA, and this requires oil prices above $175 per barrel by 2017, according to the IEA, to which final user carbon taxes of $500 per tonne of CO2 emitted will be added, before other players in the energy supply chain get their profit take. Logically - in the real world - high oil prices should and would shift energy consumers to coal and gas, wherever they can substitute overpriced oil. As we know, and IEA data shows this, coal consumption is increasing the most rapidly of all fossil fuels since 2005 and coal is the highest CO2 emitter! This however in no way preventes the IEA from touting the need for high priced oil.

 We can note that each recent annual edition of the WEO states the IEA is convinced it is either impossible, or at best extremely unlikely we can limit the growth of CO2 in the atmosphere to 450 ppm by about 2045. If we wanted to do that, and tried, we would still not be able to do it. Again this has no impact on the IEA's conviction that oil prices must rise.

Freshly re-elected Barack Obama, and vice president Biden lost no time in saying they are personally convinced global warming from human CO2 emissions is real and a grave problem. This is scarcely concealed coded language for a call to impose new energy taxes - with the real goal being an attempt at stemming the relentless growth of US Federal debt. Quick ways to raise tax revenues has refocused elite thinking towards the attractive ease of levying new energy taxes "to save the climate".  In the US case, this would garner a hoped-for $100 billion in its first year of operation.


Most important of all, far outclassing the governing elites' desire for high priced oil, the global finance industry both wants and needs high priced oil. This is for the simplest of reasons: it is a classic and previously unnderemphasised support for creating large tradable assets. Long gone are the 1998 days when England's 'The Economist" magazine could brightly announce that it foresaw oil prices averaging "about $5 per barrel" in the 2000-2010 decade. The finance industry has made a 'seamless transition' to high priced oil.

The degree and intensity of 'financialization' or "financiarization' of the economy is shown by the impact of this process on major oil and energy corporations like Exxon Mobil, BP, Shell, Total or Chevron. These are now financiarized entities whose entire capital worth or company value can change by several percent in a single day's trading of their shares on equity markets and their debt on bond markets. Concerning the nuclear sector, the intensity of financiarization is much more extreme: major and rightly-named 'players' in the nuclear business like France's EDF and Areva, or the USA's Duke Energy, are now essentially financial entities with massive debt loads needing constant inflows of fresh capital to be kept from collapse.

The potential, and the risk of all or any of these players being "wiped out" by a major financial market turndown is extremely high.

These new ex-industrial, financial-majority entities have rapidly integrated with the banker-broker-trader group of leading market operators, in all senses of the word "operator". Goldman Sachs is the key example, and with allied market manipulating entities is now able to decide the state of play on world commodity markets, as well as financial markets, but itself and like all other peer group players needs the constant development and launch of new asset bubbles. Apart from sovereign debt, which is the biggest asset bubble of all and has "gone critical" since 2008, all other potential and possible assets for creating a mushroom growth process of nominal value, followed by collapse, are constantly under study and then launched. This marks a return to 'classic' asset bubbles and market panics of the past.

Fundamentally, this major shift in the global economy which joins financial deindustrialization to the physical deindustrialization of the economy in the formerly rich OECD countries, shows the total triumph of capital rent and rising certainty of market collapse.


Previous historical outbreaks and occurrences of the capital rent process superceding and replacing the 'normal' economic rent process, were always followed by market collapse. The two largest historical precedents were the 1873-85 long depression and 1929-36 great depression, both of them followed by international war - the 1873 market collapse being initially followed by "the scramble for Africa" by European powers, before the 1914-18 European war among the same powers.

In this context and process it is no surprise that oil has become a major pillar of the financiarized bubble economy, taking its place with housing, rentals and property, and likely soon to include food and agro assets, as "underlying assets' for the bubble process. For average consumers and citizens the results are only negative: energy prices, housing prices, and soon food prices can only rise and will rise.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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