Press Action ::: Oil Prices and the Bush Fear Factor

Sunday, May 23, 2004

Oil Prices and the Bush Fear Factor

By Mark Hand

It’s not the law of supply and demand that’s driving up the price of crude oil in global markets. Instead, it’s the martial law of George Bush and his neo-colonial administrators in Iraq that’s the likely culprit for the market speculation that has sent oil prices skyward.

Uncertainty surrounding the effects of the U.S. military occupation of Iraq has rattled oil and petroleum product commodity markets. The specter of disruptions in oil production and export capability in the region, particularly in Saudi Arabia, has played an important role, according to analysts, in driving crude oil prices to record levels in the past few weeks.

Demand for oil and petroleum products in the United States has increased only slightly over year-ago levels, due primarily to growth in the U.S. economy, according to analysts. Higher oil consumption rates in China also are reportedly contributing to the price run-up.

But it’s the psychological impact of an aggressive U.S. foreign policy that perhaps has had the greatest influence on recent oil price behavior. During a May 18 press briefing in Washington, U.S. Energy Secretary Spencer Abraham referred to a “fear factor” in oil markets related to conditions in Iraq. “Some of the [price increase] is psychological,” Abraham said.

Given the intense instability in the Middle East, traders are factoring in the possibility that saboteurs could target major oil industry infrastructure in Saudi Arabia, the region’s largest producer and exporter of oil. Earlier this month, attackers entered an oil refinery in Saudi Arabia co-owned by Exxon Mobil and Saudi Basic Industries and opened fire, killing six workers, including two Americans.

Analysts fear that saboteurs may try to target Saudi Arabia’s three primary oil export terminals — Ras Tanura (6 million bbl/d capacity; the world’s largest offshore oil loading facility) and Ras al-Ju’aymah (3 million bbl/d) on the Persian Gulf, and Yanbu (as high as 5 million bbl/d) on the Red Sea — thereby severely curtailing oil shipments to Asia, the United States and other top markets for Saudi oil as well as dramatically slowing global economic growth.

Democratic presidential candidate Dennis Kucinich is one of the few politicians to directly connect the U.S. occupation of Iraq with the surge in oil prices. “If we weren’t at war, American consumers wouldn’t be paying more than $2 a gallon for gasoline,” Kucinich said on May 15. “The war, the occupation, and a foreign policy that creates fear, uncertainty and instability throughout the Middle East have created concern in the world market that the violence will continue to spread and affect the supply of oil.”

While Kucinich expresses concern about the effect of high oil prices on consumers and the windfall for U.S. oil companies, some observers believe steadily climbing oil and gas prices could produce important societal benefits in the long run. “North Americans complain about fuel costs,” writes William Rees, an ecological economist and professor at the University of British Columbia. “But to avoid a possibly unprecedented human crisis in coming decades, they should be urging their governments to allow the price of oil and natural gas to rise even more.”

During the past 15 years, North American policymakers have been moving away from their previous efforts toward energy efficiency. “Wealthy and middle-class North Americans live in ever-larger energy-inefficient houses and vehicles, and so are squandering in a few decades a nonrenewable resource that took tens of millions of years to accumulate,” Rees writes.

Governments have known for years about the scarcity of fossil fuels but have “sacrificed the public interest to benefit the energy and automotive industries,” he says. “We must begin hiking energy prices now to signal the real scarcity to come.”

Higher fuel prices will lead to investment in alternative energy technologies that are needed to smooth the transition to a post-petroleum age. “If we don’t act soon, the remaining life expectancy of industrial society … may be less than 40 years,” he says.

Oil producing nations, oil companies and influential public policymakers are likely to work hard to keep the world, especially the highly industrialized nations, addicted to oil. Saudi Arabia and other members of the Organization of Petroleum Exporting Countries recognize that it is not in their interest for oil prices to remain at their current record levels.

On May 21, for example, Saudi Arabia indicated that OPEC would likely increase its daily oil output by more than 2 million barrels a day. Saudi Arabia has long sought to keep oil prices within a range of about $22 to $28 a barrel on the rationale that an excessively high price is likely to damage global growth and force consumers to switch to alternative energy supplies.

Oil traders, however, are waiting to see what effects the record high prices will have on demand and whether consumers will begin to respond with price-induced conservation. If the price run-up has little or no effect on consumption levels, prices could climb even higher.

“If traders see the world has not ended, and that there was nothing magical about $40 that derails economic growth or results in any extra supply or inventory, then they will start getting comfortable with prices at these levels,” Paul Horsnell of Barclays Capital bank in London said in a recent report. “The psychology of the market might change dramatically were prices to stay above $40 for a week or two. Perceptions of the normal range could very swiftly be recalibrated upwards.”

Mark Hand is editor of Press Action.

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