Don't blame Katrina alone for high oil prices
by Maurizio d'Orlando
South East Asia and the Far East are paying the price of insufficient secondary refining capacity and demand rigidity in light distillate fuels. But politics and financial speculation are also putting pressure on the price of crude.

Milan (AsiaNews) – The economic consequences of hurricane Katrina will be felt far beyond the southern coast of the United States where it struck last Monday— the whole world, in particular South East Asia and the Far East, will be affected, this according to many commentators and media outlets, who attribute recent hikes in crude oil prices at the New York Mercantile Exchange (NYMEX) to fears about Katrina's impact on US oil installations—wells, platforms, and refineries—which are located in the affected region.

The region is particularly important because it produces much of the world's capacity in light derivatives such as gasoline and virgin naphtha.

Pressures on this segment of the oil market —light derivatives used in road transportation and petrochemical production—determine much of the overall demand and explain price rises, especially in Asia.

Alternative sources of energy such as coal, nuclear and hydro largely generate electrical power, but transportation and petrochemicals as well as air travel require oil distillate fuels and not much else.

The effects if Hurricane Katrina on South East Asia and the Far East will be particularly severe because the economic growth of these two regions has meant greater energy use.

As compelling as this analysis might be, it certainly is not something new. Last year, AsiaNews had pointed out the risks of insufficient secondary refining capacity and demand rigidity in light distillates. Never the less, whilst such factors might explain short term crude oil hikes, they are less convincing as an explanation for medium and long term trends.

The main reason for this is that insufficient secondary refining capacity and continued demand for light distillate fuels will necessarily lead to higher crude production to obtain the same light distillate fuel output. This is likely to lead to an excess in fuel oil residue from primary refining with a consequent relative drop in prices.

This would mean that oil price rises would not be uniform across the board since heavy crude oils would be penalised compared to light crude from oil-producing regions like West and North Africa.

Fears set off by price levels at NYMEX should thus be taken with a grain of salt since repercussions on economic growth would vary from country to country according to their respective reliance on distillate fuel oil as opposed to residual fuel oil. Unfortunately, for many Asian countries this is of little consolation.

According to German Economy and Labour Minister Wolfgang Clement, capacity problems and speculation are behind higher oil prices. In a press conference, Mr Clement, a member of the German Social Democratic Party, quoted a study conducted by his ministry according to which one quarter of the current price (US$ 18 out US$ 70) can be attributed to speculation; hence, his call for greater transparency in the oil business. To counter the current trend, he has called on the US to increase capacity and has appealed to energy companies to increase oil exploration and develop alternative fuels. In his view, when everything is said and done, high oil prices are hurting economic growth around the world and must be dealt with in the US because that is where the causes are.

The German minister's explanation is partly correct. For a long time, paper transactions in oil at the NYMEX have far exceeded actual numbers. Supply and demand have counted less in determining price levels than expected levels set by hedge funds managers. Minister Clement's contention that speculation is playing an important role in oil pricing is confirmed.

But far from being a recent phenomenon, the historical records shows that speculation was live and well in Antiquity. In ancient Assyria, Egypt, or Rome, the authorities had to impose price controls on raw material or primary commodities like grains whose price was under strong speculative pressures.

Compared to the past however, today's speculation is characterised by greater volumes of capital transactions. It is estimated that in many Western countries, more specifically in the US, the amount of real and virtual capital, including the value of share derivatives, securities, insurance coverage and similar instruments is ten times the GDP.

This situation shows how patently absurd our economic system has become since money as such does not exist—it is not a commodity like any other but a means to measure exchange of real goods. It is pathological for real and virtual money to be worth ten times the value of real goods and services.

With such a financial bubble hanging over our heads, growth must get faster in all sectors and in all countries. In doing so, our societies have succumbed to what has been called global "monetarisation".

For the financial bubble not to burst and sweep away the entire system, it has to be allowed to burst in some sectors. A few years ago, the bubble of the 'new economy' burst—the value of shares in IT companies collapsed. Now, the real estate bubble seems to be ready for some bursting of its own. But it might be beat the oil and raw materials bubble. The value of the latter might be going up at present but in a few years it might collapse, too.

Still, Clement's finger pointing at speculation says little. Etymologically, to speculate means observing external phenomena (from the Latin speculari, to examine; from specere, to look) and then acting on the acquired knowledge. This is what anyone would expect from any good money manager. Instead, the aforementioned financial bubble is just inflating prices and quotations.

What has been said so far about the financialisation of the economy and society as whole applies in the same or similar terms to any one raw material or economic sector.

This is a fundamental issue that has many political and ethical implications, but which cannot explain why investors have opted for oil and not something else.

The unexpected demand for oil from China and India and the thirst for distillate fuels might explain oil prices at US$ 50-52 but not US$ 70. Even Iraq cannot be the cause for the additional US$ 18-20 since Iraqi oil exports have remained more or less at expected levels.

Only if Saudi Arabia and Iran, the world's two major oil exporters, were involved in some catastrophic scenario could higher prices be justified.

Even AsiaNews a year ago wrote that the price of crude oil might rise to US$ 60-90 but only if these two countries were affected by some major crisis. Even then, when the price of a barrel of oil was around US$ 30, such a prediction was chancy.

For the record, let us not forget that in June 2004, when a barrel reached US$ 40, Mr Clement expected prices to drop to around US$ 28 and stay there.

What is more, the German Minister might simply be playing politics when he says that it is necessary to break the back of financial and political speculation.

In the last German elections, his leftwing governing coalition beat the centre-right opposition by a mere 8,500 vote by promising to keep Germany out of any looming US-led intervention in Iraq.

Currently, the outgoing Schröder government is poised to lose the September 18 elections and might be trying to go for broke playing the neutrality card that is so dear to the German electorate.

With government leaders openly suggesting that Israel might attack Iran's nuclear installations, the centre-right coalition led by Christian Democratic Angela Merkel might be left holding the bag left by the Israelis and the Americans. The future will tell who was right.

As for us, we won't shy away from taking chances and renew our predictions for crude oil prices which might, in case of a major Persian Gulf crisis, go as high as US$ 100-120.

In any event, blaming Katrina for the current price levels of oil is even chancier, if not outright foolish.

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