UPDATE: September 20,2011:
Continuing my effort to understand oil and its place in global politics and global economics I have come to a very different understanding than I had when I frist wrote this piece. I have come to understand that the real issue on the price side of oil is that it is driven by the derivatives bubble’s distortion of the commodities markets and that we have to stop feeding the derivatives beast. The Fed could do that right now
The provisions of Dodd-Frank that sought important reforms in the commodities markets to realignprice with end user demand, to effectively the “price fixing” effect sof speculation were completely disemboweled and other important provisions delayed with a hope by wall street of eventually repealing Dodd-Frank altogether.
I hope to be writing a new post soon on the derivatives bubble but wanted to acknowldege here that I now see a buyers cartel as not effective until the commodities markets world wide are once again linked to real costs of production and real end user demand.
Also, since writing this post many months ago, I have been influenced by the work of Energy for One World, by the reality of post peak oil, and the immense challenge of our global transition to more sustainable energy. In general that takes me completely away from any strategy that is based on competition and control and towards a more collaborative stratgey for managing existing reserves equitabky and wisely through the transition to sustainable energy.
Cove Meadow Sep 11, 2011
My blog here at posterous is my own search for truth..not about influencing or persuading anyone else. Over the past few months I have been doing research to understand why the U.S. was willing to take the risks it did in the Gulf with BP, why as we were reeling from the Wall St Bail out we loaned $2billion to Petrobras for offshore oil explorations in Brazil, why we subsidize oil companies at $10 billion a year. And I think I am beginning to get it. Of course we all want an emphasis on alternative energy, we want to reduce our reliance on oil but in the mean time, the price of oil , controlled by OPEC, is not going to go down and hi prices hit the poorest hardest.So even as we all work towards decreasing our dependence on oil and looking to alterenate renewable energy resources, we must also find a way to bring oil prices down.
My search to understand the truth about U.S. policy, the truth about Libya, the truth about oil, the crown jewel of the plutonomy..has lead me to the conclusion that no one country can have any meaningful effect on the price of oil and gas at home, the effect of oil prices on consumer goods and services here at home. The U.S. consumes 25% of the world’s daily oil supply and yet it is able to supply only 35% of its own demand through domestic oil. OPEC controls 78% of the world’s oil reserves, Saudi Arabia alone 56% of the world’s reserves. By simple math, collectively the world’s biggest users of oil, China, the U.S. the EU, own considerably less than 22% of the world’s oil reserves even though Canada owns the second largest supply of oil after Saudi Arabia. It seems obvious that no one country has enough power on its own through supply or demand to have any effect at all on OPEC supply and pricing decisions.
OPEC operates to keep the global price of oil as high as possible by keeping supply closely honed to demand. http://www.investopedia.com/articles/economics/08/gas-price-emails.asp No amount of oil production by non-OPEC producers will shift price downward. Only reduced global demand shifts price downward. With China’s demand alone growing at 7.5% annually, this isn’t likely to happen. OPEC should be able to maintain oil prices at current prices for the immediate term. When the U.S. dollar returns to a natural market level instead of theartifically suppressed level intentionally maintained at the moment there would be some effect as OPEC oil is priced in U.S. dollars but it wouldn’t fundamentally change OPEC’s control on oil prices.
But what if China, the U.S., EU and Canada formed a buyer’s collective to purchase oil as a collective on a lowest bidder basis or preferred country basis? Would purchases in priority of price or country effect a significant shift? What if the biggest consumers of oil first exhausted all available non-OPEC oil available before using or buying any OPEC oil? What if the buyer co-op also collectively worked and invested to explore and develop non OPEC reserves? What if major consumer countries like the U.S. shifted it s policy on oil subsidies to encourage the plutonomy out of its focus and investment in OPEC oil?
On the supply side Canada is key as they control the second largest oil reserve in the world after Saudi Arabia. They are presently a significant supplier of non-OPEC oil to the U.S…but also to China..the other key to shifting OPEC control. The U.S. might also become more key if it can figure out a safeway to undertake deep water drilling in the Gulf. Is it possible that the reserves there are significant enough together with Canada’s known reserves to change the supply side equation and OPEC’s control of that? Brazil is also exploring deep water resrves and the U.S. quite understandably has supported that with $2billion in loans and guarantees to PTEROBRAS through the IMF.
Canada’s dollar is 80% determined by its commodities..mostly by its oil. Operating independently it has no interest in increasing supply unless it can also maintain stability on price. Could that stability be provided through an international buyer’s co-operative that guaranteed Canada a significantly larger share of the world’s market demand than it has now and the price of that was negotiated in a way that maintained stability? What if as part of the scheme, the big demand members of the Buyer’s co-op sweetened the pot by shifting its oil subsidies in a way that brought more investment and technology to Canada to help develop its tricky to drill Sand Oil Reserves? What if the U.S. and other big users of oil shifted its policies to encourage assets and investments away from OPEC oil towards non-OPEC oil? Both the U.S. and Canada have many “homeland companies” deeply invested in OPEC oil . Can OPEC deliver its oil to the world without the technology and capacity of the these foreign oil interests? If all the buyers could find a way to shift that technology and capacity towards non-OPEC oil wouldn’t that force OPEC to be more accountable to the world in its policies on supply and price?
China is key on the demand side. It is already a top consumer of oil worlrd wide but more importantly it’s demand for oil is increasing at an alarming 7.5% annually. China is a key buyer not just of OPEC oil but also of Canadian oil. A U.S. E.U. buyer’s coalition would not be effective on its own. Both Canada and China are key.
I am only raising the question about the possible effect of a buyer’s co-op in shifting control away from OPEC. Are we really irrevocably locked in to OPEC control or is there a path out of that? It won’t be easy as all of the major oil demand countries also have significant and powerful private corporate assets and investments deeply tied to OPEC. So even if further analysis indicated a shift is possible through an international buyers collective, it will be very difficult to entice US Canadian EU and Chinese oil interests out of OPEC and toward more speculative and challenging non-OPEC resrves but surely done as a collective that shift is more possible.
I will be adding moré links into this post over the next few days in support of the statements made above but meanwhile, in no particular order, here are some links anyone interested might use to get more background and form their own conclusions.
AntiOPEC Buyer’s Caretl was official policy under Nixon Ford Carter http://zfacts.com/p/994.html
Buyer’s Cartel Might work, especially if supplemented with a surcharge on foreign oil http://papers.ssrn.com/sol3/papers.cfm?abstract_id=869120
Ralph Nader & others suggest that in addition to a buyer’s cartel a full frontal assualt on OPEC and on artificially high oil prices would be to increase margin requirements on the New York Mercantile exchange http://www.counterpunch.org/nader04292006.html
Facts and stats on oil http://www.investopedia.com/articles/economics/08/crude-and-gas-prices.asp
How supply and demand work to keep the price of oil continually going up. http://www.investopedia.com/articles/economics/08/gas-price-emails.asp
Ineffectiveness of U.S. Subsidies in controlling price and supply at home http://www.nytimes.com/2010/07/04/business/04bptax.html
Energy & fuel costs are hitting poor and working folk the hardest.. http://www.bls.gov/news.release/cpi.nr0.htm
How oil is Bought And Sold..Saudi Oil Exchange http://namcworldwide.com/crudeoil/
Oil Price,Supply & Demand Forecasts http://www.cges.co.uk/
Since writing this blog this morning I discovered two earlier indeoendent suggestions for a buyer’s caretl..one an indian blogger http://naval-langa.sulekha.com/blog/post/2008/02/rising-oil-prices-there-is-a-remedy.htm and one by about some work by a university of chicago economist http://www.slate.com/id/2131024/
A commenter on the indian site suggests that the U.S. has strong disincentives to join such a cartel and I am wondering if this might be why a global buyer’s cartel has not been explored.
. uses 18 million barrels of oil a day importing 10 million barrels only 16% of which comes from OPEC
Lindsay Newland Bowker
Cove Meadow April 12, 2011