Oil Speculation and Under-Recoveries

Published on September 27, 2008

Whatever happens with oil speculation, the big oil companies are always at the winning end. As oil prices go up, so do the profits of oil companies. How then can they claim for under-recoveries?

BY BENJIE OLIVEROS
ANALYSIS
Bulatlat

After going down steadily after reaching a peak of $147 per barrel in July, oil prices are threatening to rise up again. World oil prices have already gone down to around $90 per barrel when news of the bankruptcy of Lehman Brothers, the purchase of Merrill Lynch, and the bail out of AIG broke out. This caused the volatility of oil prices once again. The announcement of Bush’s $700 billion bailout plan triggered a reduction then an increase in oil prices.

Oil contracts for October delivery, in electronic trading on the New York Mercantile Exchange in Singapore, surged to $130 a barrel before settling down to $120.92 on Monday September 22. Contracts for November delivery of oil, however, went down to $107.41 a barrel before settling at $109.37 during trading last September 23. Were there expectations of a storm, an attack on oil wells in Nigeria, or a war on Iran that would disrupt supplies? Is a surge in demand in China or the US being expected? No.

An analyst said that investors are looking for a “safe haven” in oil after the series of bankruptcies indicating the extent of the financial crisis. It was also said that uncertainties on the effects of the $700 billion bailout plan on the US economy – worsening the US government deficit, fall in the value of the dollar, among others – also triggered investments in oil futures. If this is not a manifestation of the effects of speculative investments in the oil futures market then what is?

As a “by the way”, analysts also cited the decision of the Organization of Petroleum Exporting Countries (OPEC) to cut production and the effects of Hurricane Ike and Gustav during early September for “having helped” spark increases in oil prices.

Oil traders doubling as analysts have consistently denied that speculation is pushing oil prices up, and for obvious reasons. Often cited for the oil price spikes were geopolitical tensions such as in Iran and Nigeria, anticipation of increases in demand, and the “Peak Oil” theory. Promoters of the Peak Oil theory, which asserts that world oil production and reserves are going down and in danger of being depleted in the near future thereby triggering volatility in oil prices had their heyday till July when oil prices reached its peak at $147 per barrel. Sounding like doomsayers, they predicted that oil prices would reach $200 per barrel while laughing their way to the bank; a closer look at the proponents of this theory such as a T. Boone Pickens, a former oil producer and current chair of BP Capital Management, which invests and trades in oil futures, reveals that they profit from oil price spikes. Even when oil prices started going down, they still insisted that it would go up to $200 per barrel. When oil prices went down to around $90 per barrel, they became conspicuously silent.

A June 2006 US Senate report has concluded that around 25 to 30 percent in the $60 per barrel price of oil then was due to speculation. More recently, F. William Engdahl, an Associate for the Center for Research on Globalization and author of A Century of War: Anglo-American Oil Politics and the New World Order, concluded in an article published at the website of Global Research May 2008 that an astonishing 60 percent of the price of oil is due to speculation.

Undoubtedly, investors in oil futures would have wanted and profited from a continuous increase in oil prices. That is why they kept on pushing oil prices up. But real demand, which fell because oil became too expensive, caught up with them. By then, the big investment banks that were able to sell on time have gained enormous profits through the price differences while those caught holding the bag (highly priced oil futures contracts) when prices fell may have experienced losses.

What about the oil companies?

Whatever happens with oil speculation, the big oil companies are always at the winning end. As oil prices go up, so do the profits of oil companies. Whenever oil prices go way beyond the cost of production plus the average rate of profit because of speculation, oil companies are able to gobble up super profits. In August 2005, one analyst estimated that the $60 per barrel price of oil should only be $25 per barrel without speculation. That means oil companies earned an extra $35 per barrel in profits. Using the same computation, Engdahl estimated that with the prevailing $115 per barrel price of oil in May 2008, $50 to $60 was due to speculation. Thus, by selling at $115 per barrel, oil companies earned additional profits of from 77 to 100 percent.

It is then not surprising that six oil companies – Exxon Mobil, Royal Dutch Shell, BP, Chevron, Total, ConocoPhillips- are among the top 10 corporations of Fortune Magazine’s Global 500. But that is only in terms of revenues. In terms of profits, oil companies occupy the top 2, the 4th, 7th and 8th positions. Other profitable companies included General Electric, HSBC Holdings, the Russian energy firm Gazprom, JP Morgan, and Royal Bank of Scotland. With the fall of investment banks, oil companies would surely be the ones who are left standing.

The big three local oil companies are mere subsidiaries of the oil giants. Caltex is the local subsidiary of Chevron Texaco; Royal Dutch Shell is the mother company of Shell Philippines; Aramco owns 40 percent of Petron. Local subsidiaries source or import oil from their mother companies, and their transactions could be treated as intra-corporate transfers. They do not have to source their supply of oil from the spot and futures markets. It is then a wonder why they say that they sacrificed their profits – and thus have to claim for under-recoveries- with the spike in world crude prices during the first half of the year when they increased pump prices every week, and their mother companies need not base their pass- on price to their local subsidiaries on the speculation-boosted price in the world market.

If oil companies were not so greedy, they should have based their pass-on price on the actual cost of production, freight and marketing costs plus the average rate of profit. Their claim that they could not roll back local pump prices immediately at the price level reflective of current world crude prices is the height of callousness. It is also a wonder why small players like SeaOil could offer lower prices and reduce local pump prices faster when they have to import their supply of petroleum products.

However, the small players could not survive without establishing partnerships with oil industry giants. They serve as marketing arm of the big oil giants. For example SeaOil has a partnership with Paramins for its lubricants, and Paramins is owned by Exxon Mobil, which in turn, entered into a joint venture with Shell Additives. On the other hand, Chevron Additives bought a product line of Exxon Chemicals.

The oil giants control the whole industry from exploration, drilling, production, to refinement, marketing, and distribution of all petroleum products. Everything about oil starts and ends with them. How can they lose?

The greed of oil companies has been fueled further with the Downstream Oil Industry Deregulation Act of 1996. With the deregulation of the oil industry, they are able to increase prices at will when world crude prices go up and delay the reduction of pump prices when world prices go down. And the government could not do anything about it. But of course, the Arroyo government could not be expected to take the side of the Filipino people and force oil companies to roll back pump prices. It likewise profits with the spike in oil prices with the Value-Added Tax on petroleum products: the higher the pump price of oil, the bigger is its collections. Only the Filipino people could force its hand to do so. (Bulatlat)