Oil Hysteria Driving Price More Than OPEC Supply, Global Demand
By Steve Schippert | May 19, 2008
America's greatest strength in wartime has long been its economic and industrial might. Record oil prices are damaging this capacity. Yet the cause for the sustained spike in oil prices has less to do with increased global demand or fluctuations in supply than most acknowledge. Rather, an irrational market panic is by far the greatest variable in the economic equation. Nevertheless, we continue to look to address the problem by cajoling or even intimidating the suppliers. Regardless of what one thinks of OPEC states, their supply is neither the primary cause nor the principal cure to what ails us.
The UK's Telegraph reports on the latest regarding OPEC's refusal to increase crude production. With President Bush's visit to Saudi Arabia sparking the news cycle, this is last week's news. But within this article - surely the thousandth on the subject with similar content - is an economic gold nugget from an unlikely source: OPEC.
Opec members blame market speculators and geo-political factors for pushing up the oil price, not a shortage of supply.
And that is absolutely 100% truth. Supply and demand are the fundamental arbiters of the price of goods. But the human elements of irrationality and panic set the equation askew. We would do well to recognize and acknowledge this cog in the system.
Have a look at this chart from WTRG.com which plots crude oil prices since 1970. It shows a stable price for nearly two years after the 9/11 attacks around $25 per barrel. The chart ends with January 2007 prices below $60 per barrel. Today's record price is over $130 per barrel.
Has Asian growth accounted for a 500% increase in demand? Hardly. Has the supply dropped by 500%? No. Have both factors combined for a 500% increase metric? Not even close.
What gives? The answer is precisely what OPEC says: Frantic speculation on tomorrow's supply, compounded daily, and geo-political events that have driven this hysterical perception.
So convinced are our markets today that tomorrow's supply is going to evaporate, we place a crisis value on today's barrel. Tomorrow, we are surely even closer to fossil fuel doom and thus that day's barrel will be even more critical than the day before. Lather, rinse, repeat. $132 per barrel crude prices are returned from the calculus. Yet, it's basic math dictated less by true supply and demand and much more on the hysterical perceptions of the same.
We have become oil hypochondriacs. We are so convinced that we have cancer, it has inevitably appeared on our psychosomatic charts. So assured are we that doom awaits in perpetuity that we drive our own listing ship fearing that it will list port side any moment now.
It's an amazing phenomenon to behold. OPEC members adore the windfall breezes. Our enemies - chiefly Iran - are at times kept economically afloat by little else domestically. Others, such as presumed ally Saudi Arabia, are simply enriched at a breathtaking clip.
With Saudi Arabia's raw, unrefined product being sold at 5 times its going rate of just a few short years ago, our influence with them is reduced reciprocally. When President Bush visited the Kingdom of Saudi Arabia last week, is there anyone who truly envisioned anything but a resounding 'no' from them when asked to please increase output? What do we have that is as valuable in trade as our own windfall hysteria?
We still don't seem to recognize our own perceptions as part of the diagnosis. While President Bush chose the once-proven method of courting the Saudis, presidential hopeful Hillary Clinton chose to threaten them and vowed to "go right at OPEC" if she is elected president. Clinton said of the OPEC influence on oil prices, "That’s not a market. That’s a monopoly." There's a fundamental flaw to this thinking; it's their oil, not the world's complete with common rights to access. More importantly, and even more fundamentally, she too misdiagnoses the nature of the problem, which is our own out of control perceptions and panicked speculation. Whether we court or threaten the world's top crude oil suppliers, this is not the medicine to treat the proper disease.
We lend far too much credence to the impact OPEC has on the amount of money we are apparently willing to pay for their resource. It is not as if supply and demand have fluctuated commensurate with a 500% increase in market prices.
But if our hypochondriac diagnosis is cancer, the cure seems to have been determined to be taking up smoking. The ailment is here, not there. If the fear is the crippling effect of oil prices on our economy, and our chosen redress is to increase supply, why do we trek across the globe for relief shipments rather than tap into our own resources here at home? Why do we seek to control or influence others and increase our access to what is theirs without any effort whatsoever to further harvest what is ours, be it in Alaska or off our coastal shores?
Russia is staking underwater claims in the Arctic around the North Pole. China is drilling just off the Florida Keys. The prospect of Chinese slant drilling at the edge of our maritime territory is both bold on their part and embarrassing on ours. With Chinese rigs potentially at the edge of international waters drilling down at an angle to extract from beneath our territorial waters what we refuse to harvest, we may well have settled on smoking to cure our cancer, but just what it is that we are smoking is far from clear.
At any rate, even forgoing OPEC courtship or OPEC threats, accessing our own reserves at home merely addresses supply. And it should be clear that supply is not the cause for the unprecedented - and likely enduring - spike in crude oil prices. Nor is demand. Whether Alaskan oil or Arabian oil, most of the going rate for either remains largely driven by our own market hysteria. Until we can recognize and address that, we will remain in this aspect our own worst enemy, eroding unnecessarily our greatest wartime asset going back through World War II - an unrivaled economic and industrial powerhouse capacity.
There are very valid concerns about future supply, just as there are very valid concerns about increasing global demand. And we can and should address our own accessible supplies as well as usage conservation and alternative energy development. Yet none of these are short-term endeavors nor does any one of them address the causation most responsible for the spike in market oil prices: 'Crude' hypochondria.