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Oil
Firms Earn Superprofits via Speculation
The
current situation in the world oil market should be an argument for the
strict regulation of the downstream oil industry. However, the Macapagal-Arroyo
administration still insists on giving oil deregulation a chance, much to
the detriment of Filipino consumers particularly the poor.
BY
ARNOLD PADILLA
IBON Features
Posted by Bulatlat
With
the unprecedented levels that world oil prices have reached in the last
few months, it would seem that an actual shortage (i.e., unmet demand due
to lack of supply) in oil now exists.
However,
an analysis of the current oil market shows that there is more than enough
crude oil to supply the global requirement of around 80 million barrels
per day.
Nevertheless, the trends show that world oil prices will not stabilize
until the end of the year or even beyond.
Consequently,
pump prices at the local market will further increase in the coming
months. According to Petron Corporation – one of the country’s three
oil giants - gasoline prices may breach the P30 ($0.53, based on an
exchange rate of P56.445 for every U.S. dollar) per liter mark if Dubai
crude would climb to more than $40 per barrel.
As a result of oil deregulation, all the Department of Energy (DoE) can do
is haggle with oil companies to implement price increases on a staggered
basis.
Intense speculation
While there is no actual shortage in supply, intense speculation in the
global market continues to push oil prices up. Political anxieties in
major crude oil producing countries like Iraq, Nigeria, and Venezuela plus
the supposed lack of spare capacity and seasonal increase in demand due to
the coming winter season have raised the risk of tight supply and have
attracted aggressive speculators.
The Reuters wire agency reported that the oil industry is now massively
drawing hedge funds due to volatility. It cited an analyst’s forecast
that U.S. crude oil futures prices could break the $60 per barrel mark by
the end of 2004.
Under a deregulated environment, Filipino consumers are left without a
choice but to bear the brunt of the increases in domestic pump prices
caused by speculation and wild price hikes in the global oil market.
Meanwhile, speculators and the giant oil companies rake in billion of
dollars in profits as prices continue to soar.
How do speculators push oil prices up? Some analysts say that oil prices
are determined by the supply-demand balance. Thus, by speculating on
future supply and demand situation, speculators are able to affect prices.
For transnational oil companies which can twist the supply-demand balance
because of their commanding position in the market, speculation simply
means more opportunities to make superprofits. How? Let us examine how
global crude oil is priced.
Benchmarks
Crude oil traded around the world use three major benchmark prices: Brent,
West Texas Intermediate (WTI), and Dubai.
Brent is produced in the North Sea within the territorial waters of the
United Kingdom. It serves as a benchmark for about 40-50 million barrels
of crude oil produced or sold daily in Europe, Africa, and Middle East.
Meanwhile, WTI is a blend of crude oil produced in Texas, New Mexico,
Oklahoma and Kansas. It is the benchmark for around 12-15 million barrels
of crude oil produced or sold each day in the Western Hemisphere.
Finally, Dubai is produced in Dubai and Oman. It is the benchmark for
about 10-15 million barrels per day of crude oil. Generally, crude oil
produced in the Middle East and purchased in Asia is priced off Dubai.
Comparing their monthly average in January and October (1-12 only), Brent
has increased its spot price by 56 percent; WTI by 51 percent; and Dubai
by 32 percent. (See Table)
Crude
oil prices, 2004
(In
US dollars per barrel)
|
Month
|
Brent
|
WTI
|
Dubai
|
January
|
31.02
|
34.29
|
28.87
|
February
|
30.68
|
34.73
|
28.61
|
March
|
33.23
|
36.71
|
30.87
|
April
|
33.15
|
36.69
|
31.68
|
May
|
37.57
|
40.24
|
34.74
|
June
|
35.30
|
38.00
|
33.43
|
July
|
38.27
|
40.79
|
34.65
|
August
|
42.05
|
44.90
|
38.55
|
September
|
43.29
|
45.90
|
35.55
|
October
|
48.34
|
51.88
|
38.03
|
Source:
Department of Energy/Platt's
|
Note
that their actual production is small relative to global production.
Brent, for instance, only accounts for less than 1 percent of world crude
oil production yet it determines the price of more than 60 percent of
internationally-traded crude oil.
This
serves the interests of giant oil companies. They only need to manipulate
a small market to fix the price of oil they sell in the global market.
Term contracts
Crude oil is traded through term contracts, spot markets, and futures
markets. Actual trade (i.e., “physical” oil is bought and delivered)
happens in term contracts and spot market transactions. Futures markets,
on the other hand, involve “paper” oil (i.e., there is no actual
delivery of oil) where participants speculate on future prices to profit.
At least 67 percent of physical crude oil is traded through term contracts
which cover multiple transactions between a buyer and a supplier over a
specified time. These contracts stipulate the volumes to be delivered for
the duration of the agreement and fix the method for calculating the price
of the oil.
Transactions among the different units of the same company (i.e., giant
transnational oil corporations) fall under the term contracts.
Crude oil purchased under a term contract is supposed to be tied to the
spot price of the specified benchmark (i.e. Brent, WTI, or Dubai) at the
time the seller loads the crude oil into a cargo ship for transport to the
purchaser.
Spot markets
A crude oil spot market, meanwhile, is an informal network of buyers and
suppliers. Spot market transactions involve agreements to buy or sell one
shipment of crude oil at a price negotiated at the time of the agreement.
These transactions are priced at the time the crude oil is loaded at the
terminal for delivery.
The spot prices of Brent, WTI, and Dubai serve as indicators for all of
the crude oil bought and sold on the spot market, which accounts for about
33 percent of global crude oil trade. Spot prices theoretically indicate
current supply-demand balance.
However, since the world’s biggest oil companies are both the producers
and buyers, thereby allowing them to distort the supply-demand balance,
spot prices merely reflect the prices with which these powerful
corporations want to sell their products.
Spot
prices are way too high than actual production costs. IBON estimates show,
for instance, that Dubai spot prices are more than $20 a barrel higher
than exploration and production costs.
Furthermore, the production, transport, and storage infrastructure that
affect benchmark spot prices are controlled by giant oil companies thus
making spot prices a doubtful reflection of the supply-demand balance. For
example, Royal Dutch Shell and British Petroleum control 80 percent of the
tank storage capacity of an important crude oil storage hub in the US that
influences the price of the WTI.
Futures markets
Spot prices are also guided by reference to futures prices quoted on the
New York Mercantile Exchange (NYMEX) for WTI and International Petroleum
Exchange (IPE) in London for Brent. Futures prices refer to the price of
oil traded in the futures market, which involves the purchase and sale of
contracts for the future delivery of oil. Players in the futures markets
include the oil companies and other businesses like financial institutions
and investment funds.
As stated earlier, transactions in these markets do not really intend to
deliver physical volumes of crude oil. Giant securities firms like Morgan
Stanley, Merrill Lynch, Goldman Sachs, and Lehman Brothers; transnational
banks like Citigroup, HSBC, BNP Paribas, and Deutsche Bank; and other
Fortune Global 500 firms that do not have anything to do directly with the
oil industry engage in NYMEX and IPE futures markets not to deliver oil
but to earn enormous profits through buying and selling oil contracts
(i.e., speculation).
Current speculation in the oil futures market is characterized by a
growing presence of hedge funds. This phenomenon has nothing to do with
actual supply-demand balance in oil but due to external factors. Hedge
funds now look for more profitable avenues due to heavy losses in the
financial markets. The volatility in the oil market provides good
opportunities for hedge funds to offset such losses.
For oil industry players, futures markets supposedly allow them to spread
the risk of price volatility. A futures contract between an oil producer
and an oil refiner resolves the concern of the former of low crude oil
prices and the concern of the latter of high crude oil prices in the
future. In other words, a futures contract somehow protects them from
adverse price movements.
This assumes that the firm which produces and sells crude oil and the firm
that buys crude oil to refine it are separate entities. This is not the
case for giant oil companies, which control all the aspects of the
industry – from extraction to retailing. In other words, they do not
need a futures market to protect them from adverse price movements because
they can control the price.
Major oil firms can manipulate the transaction cost of oil as it is
transferred from their own exploration/production units to their own
storage tanker units to their own refinery units and to their own
retailing units. Thus, they benefit from high oil prices caused by a
speculative futures market because it further artificially bloats their
profits.
Protecting the Filipino consumers
It is true that the Philippine government could not control the activities
of the speculators and the giant oil corporations. But government can
intervene at least in the local oil industry to protect the Filipino
consumers. Unfortunately, government waived its authority to regulate the
activities of the oil companies when it deregulated the downstream oil
industry in 1996.
The detrimental effects of speculation and the manipulation of big oil
firms on global prices are arguments against government’s deregulation
policy. Deregulation presupposes that world prices are competitively
determined by independent market forces. It has overlooked the role of
giant oil corporations in dictating the prices and the impact of
speculation on prices. Bulatlat
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