Middle East uprisings wreaking havoc with energy supply

Worldview
Tuesday, March 1, 2011


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As any one who has pulled up to a gas pump knows, the unrest in the Middle East has translated to a rise in fuel prices. There are worries that an extended price hike could kick-start another global recession. Antonia Juhasz, director of the Energy Program at Global Exchange, helps us sort out the reasons for the energy market’s fluctuation. She’s author of The Tyranny of Oil: the World’s Most Powerful Industry, and What We Must Do To Stop It. Her new book, out next month, is Black Tide: The Devastating Impact of the Gulf Oil Spill.

Interview Transcript:

Host, Jerome McDonnell: As anyone who’s pulled up at a gas station knows, the uprising in Libya has translated into a rise in gas prices, and there’s worries that an extended price hike could kick start another global recession. Antonia Juhasz is Director of the Energy Program at Global Exchange; she’s author of The Tyranny of Oil: the World’s Most Powerful Industry and What We Must do to Stop It. Her new book out next month is Black Tide: the Devastating Impact of the Gulf Oil Spill. Juhasz explains why pump prices go up even though Libya isn’t a huge factor in the world oil supply.

Antonia Juhasz: Well there’s two phenomenas going on: one at the gas pump is something called rockets and feathers, and it’s a phenomenon that most people are used to. The minute the price of oil goes up, the price of gas spikes immediately at the pump, well before the actual impact of the increase in the price of oil has affected refineries or gasoline stations. And then when the price of oil goes down, the price of gas slowly flutters back down, much slower than the decline in the price of oil.

There’s two factors going on: one is the primary determinate for the price of gasoline is certainly the price of oil. But we have ever fewer refineries owned by an ever-shrinking number of oil companies, that also control the transportation of that product and the selling of it at the gas station, and they have a really tight control over price of gas. So right now we’re experiencing no change whatsoever in supply of oil, no change whatsoever in supply of gasoline—there’s plenty of gasoline—but everybody is reading about the increase in the price of oil in the market and that helps justify an immediate run-up in the price of gasoline at the pump.

The price of gasoline will be sustained high as a real reflection in the change of the price of oil, because it looks like the price of oil is going to stay high as well. The change in the price of oil has nothing to do, again, with the supply of oil in the world right now, which has only declined a very small amount out of Libya. It has everything to do with speculators taking advantage of the unrest and worried about the longer-term impact of the unrest.

McDonnell: Is the way that people talk about that is the market is building in insurance against further problems in the Middle East. “If there’s instability in Saudi Arabia, that’s what the market’s worried about, and it’s okay to pay a little more for it now.”

Antonia Juhasz: Two sides to that. One is, the price of oil was going up already. The predictions that it was going to be $100 a barrel were already there, well before the changes taking place in the Middle East. The reason for that was because nothing has changed in terms of the underlying structure of the unregulated speculative market that led to the run-up in 2008. Basically, the price of oil began its rise in 2000. A very important thing happened in 2000: trades and oil futures became almost thoroughly unregulated. New exchanges were set up outside of the realm of regulators. As soon as that happened trade moved to the unregulated markets and the price of oil began its dramatic rise. The only thing that stopped the price of oil from rising was the anticipated outcome, which was a global economic collapse that sent everything crashing. None of the rules have changed, so really the market’s just sort of getting back to its state of unregulated normal, which is the price is being driven back up.

Now, there is a real potential concern that there could be instability of supply in the short term of oil. There could potentially be long-term instability of supply, but nothing we’re seeing out of the Middle East, none of the new reformers that seem to be poised to take over in the governments in the Middle East have said anything about eliminating the production of oil. There’s every reason to believe that we might have some short-term instability in terms of difficult transitions, but that they’re all committed to continuing to supply us with oil. I think what we’re seeing more than anything, honestly, is speculators taking advantage at the moment.

McDonnell: One of the things that seemed to calm the market a little bit was the Saudis stepping up and saying, “Don’t worry. We’re going to pump more oil.” And then a lot of people said, “Well, you’re going to pump oil that’s dirtier than the Libyan oil,” and there’s folks who think that the Saudis really don’t have that much more capacity to pump oil. How do you feel about the Saudis word on this?

Antonia Juhasz: First of all, the price of oil went to $100 a barrel, the front price in Europe, after the Saudis made that announcement. So really the days of OPEC having control over price, or being able to determine price, are gone. The speculators run the show right now. But the Saudis certainly have the capacity. There is concern that they don’t have as much oil reserves as they have said they have in the past. We have no way of finding that out, so we don’t know what their reserves are. We do know that their daily productive capacity is significantly higher than what they’re currently pumping; they could definitely put more supply into the market. They don’t need to because we’re not having a supply problem right now, which is why they haven’t increased supply. It wouldn’t matter if they put more supply into the market because right now we still have excess supply. Quantity of oil, at the moment, just simply isn’t the issue.

And then this question of how light or clean the Saudi’s oil is. The Saudis are the second largest producers of oil in the world. We all gobble up Saudi oil. It’s ridiculous to say that it’s not the type of oil that we would like to see in the market. We all use it, it’s the second largest product out there after Russia—it’s good oil; we just don’t need [more Saudi oil] right now.

McDonnell: You’re listening to Worldview from WBEZ. I’m Jerome McDonnell speaking with Antonia Juhasz. She is Director of the Energy Program at Global Exchange, and the author of The Tyranny of Oil and a new book coming out next month Black Tide: the Devastating Impact of the Gulf Oil Spill.

Did you read the Wiki Leaks cables about Saudi Arabia and the idea that even U.S. diplomats seem to think the Saudis maybe cannot keep a lid on oil prices? Maybe don’t have the reserves they say they do? If the highest levels of the U.S government are worried about this, should we all be?

Antonia Juhasz: This is an issue that has been of concern, well, for fifty years. We don’t know how much oil Saudi Arabia has; we don’t have access to their production; we don’t have access to their capacity; and this is a problem in many countries, not just Saudi Arabia. Of course it’s a larger concern in Saudi Arabia because they are, as I said, the world’s second largest producer of oil and we are very dependent on their reserves. There’s no way of solving this equation unless the Saudis let more independent geologists in to look at their reserves, and I don’t see that happening any time soon.
What this tells us is unknowns in many countries around the world, about the size of their actual reserves, is just further evidence of our need to move away from this product altogether. We don’t know how much is out there. We don’t know how much is left. We do know that it’s a very volatile resource, dependent on volatile regions, and we know that the oil industry will push barriers that many believe it shouldn’t, such as in the Gulf, to go get what is left of this resource, and it’s just all further evidence that it’s a really good idea to get as quickly off of it as we can.

McDonnell: Do you think the U.S did an adequate job at doing that from the last oil spike? Did that wake people up? The United States said, “GM, go build a bunch of cars that are better and we’re going to do better in the future. We’re going to set some standards.” Are we alert?

Antonia Juhasz: I think the American consumer has demonstrated very clearly that we want more fuel-efficient vehicles, we want more options, and we don’t want to be as reliant on oil and gas-guzzling cars as we have been. It looks like the spike, that the largest point of demand for gasoline in the United States, may be 2007. The demand for gasoline declined of course because of the economic collapse, but then even as consumers were getting more money into their pockets to spend, demand has not significantly increased. It seems that the reason for that is that there is an increased awareness of the downsides of our gasoline and oil dependency, and a real demand that we change course. I think the Obama administration was elected, one of the reasons, to help us move away from oil, to move towards alternatives, to eliminate tax breaks and subsidies to the oil industry, to try and take that money and put into other places. The administration hasn’t worked hard enough and pushed hard enough for public transportation and real access to consumers to alternatives. But I think that the American consumer is there and is demanding it, and is demanding of our political leaders that they give it to us.

McDonnell: It seems like every time there’s a spike, this cycle of rhetoric returns. We see in the newspapers that the U.S. just granted its first permissions to do deepwater drilling in the Gulf again, and there’s a lot of pressure to give a lot more leeway to folks who want to drill in the Gulf again and they site the Middle East crisis. They go right at it and say, “Look. We’re going to have instability. We’re going to need to drill everywhere and this is it.”

Antonia Juhasz: Yeah, it’s very unfortunate. So, right now we’re producing more oil in the United States today than we were producing last year at this time. We are not suffering from a shortage of oil supply. In fact, U.S. producers of oil and U.S producers of gasoline are exporting more oil and gas than they have ever exported before: they are reaching new highs. They don’t have a market here, so they’re selling it somewhere else for more money—both oil and gas. So drilling here says nothing about oil or gas supply here. It only means more oil in the hands of Big Oil and more gasoline in the hands of the exact same company.

McDonnell: Why do we do that? Why do we sell it elsewhere? Why does it cost more elsewhere?

Antonia Juhasz: Well, they’re just selling to where they can get the best price. We don’t put any controls on the exports of gas or oil; it’s not something that we have chosen thus far to do as a nation. We could very easily say that it’s not a product that we’ll export or products…But as I said, the U.S consumer is not consuming more gasoline, but we’re producing more. So the companies want to sell it at a higher price here and at a higher price elsewhere, and so they’re restricting supply and making sure that they can sell at the price that they want.

Now, offshore production in the Gulf – the reason why we had the BP disaster wasn’t because BP is necessarily a rogue oil company. Let’s hope they’re not because they’re still the largest producer of oil in the Gulf of Mexico and one of the largest producers in the entire United States. They were working hand-in-hand with Transocean, the largest operator of offshore rigs in the Gulf of Mexico, the company that all of the other companies work with. All of the companies that work in the Gulf had no idea, they all worked with BP, how to deal with the BP oil spill. They were all moving around in the dark trying to figure out how to apply shallow-water technologies to a deepwater disaster. The reason why the deepwater disaster happened was because the companies moved deeper than they could, faster than they could. They’re not ready for going as deep as they are, but we’re allowing them to push ever deeper while oil is still at the bottom of the Gulf of Mexico, while the disaster continues with dispersants and oil, and no lessons have really been learned: no fundamental policies have been changed; no new legislation has been passed—just some fixes at the edges—and it makes me, as someone who’s spent a lot of time looking at deepwater drilling, very very concerned with what the future could hold in the Gulf and could hold all around the world, moreover, because this push to go deeper isn’t just in the U.S. Gulf of Mexico, it’s all around the world.

McDonnell: If you could wave a magic wand and fix some of the things we’ve been talking about, what would you do? I mean, is there some way to get speculators out of the oil and gas market and quit driving up our prices? Is there some way to get the U.S. to keep its oil at home and stop importing so much oil or drilling in deepwater in the Gulf?

Antonia Juhasz: Well, there’s many things we can do. We can take oil futures from a product that is unregulated to one which is regulated very simply: the primary exchange royal futures are exchanged is the IntercontinentalExchange. Its oil futures contracts are not regulated. Let’s regulate them. Let’s say that, just like the New York Mercantile Exchange is regulated by the Commodity Futures Trading Commission, so too should all oil futures contracts, where ever they take, be regulated by regulatory agencies.

Also, let’s strengthen those agencies. The Commodity Futures Trading Commission has some really great and even new rules that have been put in place in the last year; it’s not enforcing them. We don’t actually give our regulators money, staff, and oversight to make sure that they are implementing the regulations that we have. And there’s definitely many around the United States and around the world that question whether oil is a commodity that should even be traded in futures markets. Is there a reason, beyond limited hedges, that we should really be playing with this commodity, which really any time oil gets to $100 a barrel, which this is now the third time, leads to global recession. We have a globe that is hardwired to this resource. Should we really be playing with it for profit in this way?

The other thing that we can do is start really, truly investing in moving ourselves away from [oil] and [more rapidly to] alternatives, and taking seriously the costs of where we choose to produce, and if it’s worth it. Is it worth a 500 million barrel oil spill in the Gulf of Mexico to get that deepwater oil? Is it worth the environmental and human rights consequences of drilling in the tar sands? And if it’s not, then we need to aggressively regulate the industry where it operates and move towards meaningful alternatives. The will is there, we just need the way and the policy that will help us get there.
I think there are places that need to simply be ruled out of bounds. We just can’t do it safely, it’s not worth it, and I think drilling offshore in the Gulf of Mexico and offshore of the United States is one of those areas.

McDonnell: If we’re at this place where everything – the price of oil goes up over $100 a barrel, we jump into a recession and we’re not regulating it, do you have confidence when Ben Burnanky* gets up there and says, “You know, everything’s fine as long as this doesn’t go for an extended, a few months, a few weeks. As long as it’s not an extended period, everything is going to be fine.”

Antonia Juhasz: Yeah, I don’t have a lot of confidence in that given that the European Union just said today that they expect oil to stay at least $100 a barrel for 2011. So we do appear to be in the place where oil’s going to stay at $100 a barrel. It may very well go higher, again, it’s very important to point out that Brent* oil in the North Sea went to $120 a barrel last month. We’re in, again, in a troubling area just where we were again in 2008 and none of the fundamentals have changed.

I think there’s two things we have to do. The price of oil should be high. The price of gasoline should be high. They need to reflect the full externalities of those products—political cost, social cost, environmental cost—we need to put that into the price. But we should be capturing that money associated with the increased price and investing it heavily in everything we need to do to get away from these products. Mass public transportation—what a beautiful jobs program we could have in the Unites States to build, just like we did with the highway program, let’s do it for public transportation, and really make it possible through public policy for people to get rid of their cars, which takes 70% of all of our oil and gasoline products in the United States; our cars, let’s get rid of them and implement public policy to make that possible. And let’s pay for it by capturing what should be a high price of gas and should be a high price of oil and taking that money out of the hands of hedge funds and oil companies and banks and putting it into government so that we can make the transition away from oil and gas.

McDonnell: Antonia Juhasz is Director of the Energy Program at Global Exchange*; she’s author of The Tyranny of Oil and her new book out next month is Black Tide: the Devastating Impact of the Gulf Oil Spill.

Thanks a lot for joining us and talking about the price of oil.

Antonia Juhasz: Thanks for having me.