E-DAY: THE COLLAPSE OF THE OIL LIE

The rising price of oil cannot be explained by demand from China, terrorist strikes, limited output or speculators

By Artur P. Schmidt

[This article originally published in the German-English cyber journal Telepolis October 14, 2004 is translated from the German on the World Wide Web, http://www.telepolis.de/deutsch/special/zen/18566/1.html.]




Crude oil is the most important supplier of energy on our planet. 40 percent of the energy used by humans is gained from fossil sources of energy. The price of oil has climbed to ever-new heights in the last weeks. Demand from China, terrorist attacks, limited output and speculators are cited as reasons. However these explanations hardly explain the intense increase. If one considers the worldwide ecological development of the last years, the continuation of the past consumption trend of the “blue planet” inevitably heads for a climatic catastrophe. Oil is much too cheap at a price of $50.

THE OIL MONOPOLY

Securing the resource base is always central when world powers wage wars. One of the reasons for the American attack on Iraq was securing the oil fields in the Middle East for the American economy. Iraq has the second-largest oil reserves of the world and is the only possible opponent of Saudi Arabia.

Output and its control are crucial in the oil monopoly. Thus Saudi Arabia can vary output very quickly and determine the oil price in the scope of OPEC in a nearly single-handed effort. Therefore America has a great interest in overthrowing the system in Saudi Arabia since a coup de-etat would have disastrous effects on the oil price.

For a long time the oil market has not functioned according to the laws of the market but according to the laws of the monopoly game in which the players sit in Riad, Washington and Houston. This game only functions as long as production increases. When demand exceeds supply, the system can fall out of control. The “peak” is the harbinger of a market that builds up cybernetically. What happens with the system when the barrel price in the next year increases to over $120?

High oil prices allow inflation to rise. In the past, this effect was cushioned by the dramatic drop in prices in the IT-industry. The two overlapping effects of inflation and deflation lead inevitably to great price increases when either the inflationary tendencies in raw materials become too strong or the drop in prices in the UT-industry enters the saturation phase. Both seem to be occurring. A new oil shock may soon shake the economy. In the course of this shock, the heavily indebted US consumer will be presented with the bill while certain groups of investors become richer and richer.

THE NEW POWER OF THE HEDGE FUND

Every year the oil giants post double-digit profits in the billions by selling fossil sources of energy. These profits are driven by the increasing demand for oil. An increase of 60 percent is forecast for 2025.

Now and then hedge fund speculators are suspected of forcing up the price unnecessarily. The goal of the hedge fund is to realize profits in both rising and falling markets. Hedge fund managers can catapult prices or let them fall. That oil prices climb daily to new records even though oil producing countries are massively driving us their production capacities and producing more oil than demand is alarming.

The explanations for the massive price incre4ase like problems with the Russian oil conglomerate Yuko, attacks on pipelines in Iraq, tornados, limited capacities of refineries etc. are hardly convincing. While billion-dollar conglomerates in the past had a strong power position in the oil market, this is true today for speculators.

According to statistics of the Commodity Futures Trading Commission (CFTC), more hedge funds have been playing alone in the oil monopoly in the past half-year than ever. The doubled share of speculators control almost half of the oil worldwide today. Working with borrowed money and leverage effects, these speculators can often enhance their profit chances. Thus the hedge funds BP Capital Energy Commodity Fund domiciled in Dallas grew 300% in 2004 with profits of $1.3 billion. Since most speculators apply the same analysis systems and charting programs, hedge funds follow a herd instinct intensifying positive and negative feedback in the markets. As a result, the volatilities and risks grow for those who do not rightly anticipate the market.

ON THE WAY TO E-DAY

Worldwide demand for oil increases 3% per year on average while the yields from existing reserves are declining. Thus expensive sources must be opened up. Experts see a new minimum price level for oil from $35 to $45 per barrel. In cases of crises, the oil price could climb to $100 in the short-term.

Energy crises that could also be termed E-days are pre-programmed in the system. On E-day (energy day), the airports will be empty because flying will be too expensive. The supermarkets will also be strikingly empty because the transporters of goods can no longer afford the high energy prices. Do you think this cannot happen?

Fossil sources of energy have a limited resource base. This limitation could provoke a mass worldwide panic comparable with the stock market crash of 1029. Oil formed America more than the Internet in the past. Without oil, the American economy would collapse. Oil is promoted as the vital lubricant of capitalism. Without oil, mobility, open hospitals, moving trucks and trains end. Over 25,000 airplanes take off and land daily at the airports [1]. Millions of air-conditioners drive the American energy need to dizzy heights. On average, every food in North America travels 1300 miles before it lands on the plate of the consumer. More than 850 million cars or utility vehicles are on the road worldwide. As long as there is enough oil worldwide, this wastefulness-mania does not seem to be a problem Domino effects and chain reactions are inevitable when oil suddenly becomes scarce. Then people could regard an oil price of $160 as cheap. Problems are inescapable when production declines in the next years.

DECLINING OIL PRODUCTION

In the last 5 years, the world burned 27 billion barrels per year. However only 3 billion barrels of new sources of oil were discovered. As a consequence of this development, production will strongly decline in the next decades.

Dr. Marion King Hubbert made a special discovery. Oil fields change while oil is pumped out. After years of production, extracting the remaining oil quantities becomes ever more expensive. Thus the costs rise. A higher oil price is nearly pre-programmed with higher production costs when the whole business depends on how much oil is in reserve.

Hubbard predicted the oil-peak of the US for 1970 and was laughed at then. Since the oil firms had no interest in these prognoses, geologists adjusted and predicted the peak for 1990 or later. Nevertheless he was right. The US reached the critical stage of oil production in 1971. One oil well after another in Texas and Louisiana began to run dry. America’s local oil production turned into a downward movement and has not recovered up to today. Within only 3 years, the oil prices exploded and American oil imports tripled. The power of OPEC began increasing at that time. Oil was a geopolitical factor more than ever,

Hubbard made international forecasts. The peak in oil production approached in many countries, Libya in 1970, Iran in 1974, Rumania in 1976, Brunei in 1979, Peru in 1982, Cameroon in 1985, the former Soviet Union in 1987 and Indonesia in 1997. The peak of oil production has been almost reached for another 16 large oil-producing countries.

HOW GREAT ARE THE SAUDI OIL RESERVES?

Saudi Arabia’s special secret is that this country will reach the zenith in the near future. It is hardly astonishing that more shocks will come to the markets like the shock of the oil multinational Shell that set its oil reserves too high by 4.5 billion barrels.

When Enron disintegrated, only $60 billion was destroyed. Enron’s miscalculation amounted to $200 billion. This could be the peak of the iceberg if one looks at the situation in Saudi Arabia. Saudi Arabia claims there is enough oil and will first reach its high point in 2011. However the truth as to the Ghawar oil field, once Saudi Arabia’s greatest oil field, is concealed. In 1948, this field had oil reserves of 97 billion barrels of oil. In the early 1970s, Exxon, Chevron, Texaco and Mobil still estimated these reserves at 60 billion barrels.

55 billion barrels were consumed. Only 5 billion barrels are left if one does the mathematics correctly. This certainly does not mean another 50 years of oil reserves as propagated. The worldwide need for three weeks could be covered with the remaining potential of the Ghawar oil field. Therefore the crucial question is: Are the Saudis saying the truth about their reserves? If not, the oil price will know only one direction: upwards. What about the rest of OPEC? Is there data on oil reserves also false?

2006 AS THE PIVOTAL YEAR

In 1986 OPEC established a new rule for its members where maximum oil export is coupled to the reserves. Within a few weeks, the reserves of most OPEC-countries were corrected upwards. These numerical manipulations were carried out although no barrel of new oil was found. To the regret of consumers, oil that does not exist cannot be burned.

Since the oil age began in 1959, the world has burned approximately 950 billion barrels of oil, roughly the same amount as existing reserves. This has often been emphasized. However if one takes together all the data of peak production from all the oil-exporting countries, the peak of worldwide oil production lies in 2006 though it could come a year earlier. Hubbert predicted a flat curve at the climax of worldwide oil production that actually occurred in the last years.

In 1993 there were 700,000 cars in China. Now there are 7 million. If China consumes only as much oil as Mexico, oil consumption in the land of the middle will quadruple in the next years. This means that China will need as much oil as the US which demands 30% of worldwide oil consumption. Thus a lasting increase in the oil price is pre-programmed given the fact that the chance of finding mammoth oil fields in the scale of 90 billion barrels is almost zero.

BLACKOUTS ARE INEVITABLE

In the last 20 years, no new massive oil field was discovered. The largest worldwide oil fields that are between 30 and 100 years old are beginning to slowly dry. When the peak is surpassed, the gap will grow between increasing energy demand and declining production per year around 5%. Only 50% of the necessary oil will be available in 8 years in 2012. The consequences will be dramatic if the large industrial nations do not successfully convert to alternative forms of energy like liquid gas.

What will happen with an energy network like the degenerate system of the US if a large multitude of energy production plants are missing? A large number of blackouts seems inevitable like the blackouts in August 2003 when the whole east coast was without electricity. The Bush administration is aware of the fact that the energy situation in the US could become critical. The oil barons from Texas are hardly interested in the threat of a global energy crisis for 6 billion people worldwide. If a crisis occurs, this will strike the poorest countries most intensely.

Firstly, a vast amount of oil will be necessary to realize alternatives to oil. Secondly, a total conversion of the infrastructures now completely based on oil in the form of cars, trucks, streets, boats, harbors, airplanes and production plants will be required. All plastic materials, pesticides and fertilizers are gained from fossil fuels. The US dollar is promoted today as the petro-dollar and will also collapse in the case of a collapse of the oil market. The theory of the petro-dollar means that the US currency is involved in the conflict in the Middle East, not only oil. A struggle for power around the oil business in dollars rages behind the oil background. This fact is crucial for the heavily indebted US. Still the present American debt economy cannot survive without economic growth and the fuel oil. Business-debts, state-debts and consumer-debts are all at record levels. The American economy may face a mega-crash if exploding oil prices force American consumers to their knees.



[1] http://www.bts.gov/press_releases/2004/bts024_04/html/bts024_04.html

[2] http://www.hubberpeak.com/Dewinter/