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The Truth About the Oil Crisis

The Truth About the Oil Crisis

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This article appears on the December 23, 2004 issue of Executive Alert, Official Publication of the Philippine LaRouche Society

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The Truth About the Oil Crisis 

by Carlos Valdes III

Despite previous and consistent assurances from the President, the Finance Department , NEDA, the National Treasury, the Central Bank, and DBM, that our economy and finances remain stable, and in fact growing…many are shocked by the recent announcement from the highest office of the land, that “The country is in the midst of a fiscal crisis.”
A week after the announcement, major dailies headlined statements by government officials claiming that the economy was in better shape than previously thought. Economists from the private sector and academe rallied to paint a rosier-than-rosy picture of the crisis, afraid of the consequences were the crisis more real than imagined.

Representative Joey Salceda, chief economist of Congress admitted candidly on TV, that even with the most generous of forecasts, the debt cannot possibly be repaid.
The futility of our situation shakes the very fiber of our integrity as a nation-state, as the appointed financial expert helplessly recommends that the President declares a “State of emergency, due to a Fiscal Crisis.” The implications of this possibility are most disturbing, to say the least.
Did the President and her Cabinet Secretaries deliberately lie to the people regarding the true state of the country’s financial affairs? Or were they all professionally negligent and ignorant about the prevailing situation, thereby betraying their utter lack of understanding and competence; unequal to the task at hand?
These questions must repeatedly be asked of those occupying most critical positions, whose decisions and recommendations may mean starvation and death to many impoverished Filipinos.
Oil Deregulation

Of particular concern is the “oil crisis” as announced by the Energy Secretary Perez. Secretary Perez has declared that ‘world market forces, which are beyond his control’ have pushed oil prices to reach historical highs…and since the oil industry in the Philippines is de-regulated, fuel prices will inevitably rise, (another item beyond his control).
This, as opposed to the propaganda that was willingly or unwillingly swallowed by our leaders at that time—that deregulation would lead to increased competition, and therefore guarantee lower prices.
I visited the DOE website and read their PEP or Philippine Energy Plan for the next 10 years. This is what I found: “It must be emphasized that deregulation does not guarantee lower prices but ‘fair’ prices. Domestic oil prices are increasing because world market prices are increasing.” Now, the experts would have you believe that there is a world oil shortage because of the terrible situation in the Middle East (of whose doing is still up for debate to this day). They say: it is because of the situation in the Arab Nations, that prices will inevitably go up, since the conflict there puts into question the ability to produce and deliver the much-needed crude oil supplies to the world. (Doesn’t help if your ‘smart bombs’ hit oil fields and factories by mistakes, of course.)
As the saying goes, some fools will insist on buying the Brooklyn Bridge, no matter how many times you tell them it’s already been sold. The same is true with the story that there is an oil shortage.

1. The truth: No oil shortage exists.
Figures from the Paris-based International Energy Agency (IEA), the central collection point for world oil information, show that for the second quarter of 2004, world oil supplies were in the range of 82.3 million barrels a day (mbd), with consumption lower, in the range of 81.0 mbd. In fact, the world was in surplus during the first 90 days of year 2004, during the very period that world oil prices leapt by $7 per barrel.

GRAPH NO.1

The data from the Paris-based International Energy Agency (IEA) shows that there was no shortage of oil in the world for the 2nd quarter of year 2004 (see also graph no.2) and that oil price hike has nothing to do with supply and demand. But why is it that the price of oil has been escalating? This report tells you why.

2. There is no relationship between the price of oil and the amount of oil being produced.

GRAPH NO.2

GRAPH NO.3

This graph from IEA shows the escalation of the oil prices in the world market. This only means that there is no relationship between the price of oil and the amount of oil being produced.

Over the past several decades, oil production has increased slowly and predictably. Since 1992, production has grown by approximately 15%. Though not shown, world oil consumption has also grown gradually and predictably. Only if production had dropped significantly, or consumption had risen steeply, should the world oil price have jumped up. Neither of these two changes has happened.
How, then, should one explain the activity of the past dozen years, in which the oil price swung wildly up and down, regardless of rising production levels?
The answer is financial speculation, a devious collusion between the leading banks and financial institutions and the oil companies.
Today, the oil prices are more than 50% above its 1992 level. The key to the ability of the financiers behind the oil cartel to manipulate prices in the oil market, is the shift which occurred during the oil crises of 1974 and 1979, in which long-term contracts–frequently for 24 or 36 months–at stable prices were replaced with the spot market and then the futures markets.
Futures Markets: Speculators Paradise

The oil spot market was created in 1969 by the Lazard/Rothschild-allied Philipp Brothers, then the world’s largest metals trader. Philipp Brothers, largely in the person of their top trader Marc Rich, began by selling small quantities of Iranian crude oil to independent refiners.
The oil shocks of 1973 and 1979, which were orchestrated by the financier oligarchy under the cover of the OPEC oil embargo and the fall of the Shah in Iran, resulted in a shift in oil pricing away from long-term contracts toward the Rotterdam-based spot market.
By “spot” is meant, that one buys the oil at a market only 24-48 hours before one takes physical (spot) delivery, as opposed to buying it 12 or more months in advance. In effect, the spot market inserted a financial middleman into the oil patch income stream in much the same way that deregulation would later do for electricity.
Today, the oil price is largely set in the futures markets. The two principal locales which dominate oil futures trading are the London-based International Petroleum Exchange (IPE), established in 1980, and the New York Mercantile Exchange (NYMEX), which is more than a century old, but also first started trading oil futures in 1983.
Traders call futures contracts “paper oil”: the contracts are a paper claim against oil, which is far in excess of the volume of oil produced and actually delivered at oil terminals on behalf of those contracts.
The traders transact a large volume of derivatives bets. Speculators purchase on the IPE and NYMEX exchanges, futures contracts; each single contract is a bet on 1,000 barrels of oil. More than 100 million of these oil derivatives contracts were traded on these exchanges in 2003, representing 100 billion barrels of oil. In a year 2000 study, Executive Intelligence Review (www.larouchepub.com) showed that on the IPE, for every 570 “paper barrels of oil”–that is futures derivatives covering 570 barrels–traded each year, there was only one underlying physical barrel of oil. The 570 paper oil contracts pull the price of the underlying barrel of oil, manipulating the oil price. If the speculators bet long–that the price will rise–the mountain of bets pulls up the underlying price.
But worse, there is a second layer of leverage. At the London IPE, the speculator can buy a futures contract on a margin of 3.8%. That is, were the speculator to buy a single futures contract, representing 1,000 barrels of oil at, say, an oil price of $40 per barrel, then the contract represents $40,000. However, the speculator pays only $1,520 for the premium of the contract–or 3.8% of the $40,000–which gives him control over the contract.
Through an investment of $1,520, the speculator controls 1,000 barrels of oil. A small group of speculators, through leverage, control the world oil price. A NYMEX document, “How the Exchange Works,” boasts that it has nothing to do with oil production. “Yet the buying and selling on the Exchange occurs amid the winding streets of the oldest section of New York, with nary an oil well or copper mine in sight. In fact, many thousands of transactions conducted on the Exchange each day are accomplished without the participants ever seeing a gallon of heating oil.”
Consider the IPE, which was created in 1980. Today, the IPE is run by a Knight of the British Empire and former Royal Dutch/Shell official, Sir Robert Reid, and has a board which includes Lord Fraser of Carmyllie, representatives of Goldman Sachs, Morgan Stanley, BNP Paribas, Credit Lyonnais, and French oil giant Total.
Efforts to Drive Up Oil Price

The Oil Cartel is also employing two other tactics to push up the oil price.
1. Limiting production capacity
The oil cartel has reduced U.S. oil refining capacity to below the level of 1980. The U.S. knew perfectly well that the demand for refined oil products, such as gasoline and jet fuel, would rise during the 1990s and the first decade of the 21 st Century. It was criminal to reduce capacity, but reduced capacity pushes up the price. During the past few years, the Saudis offered to invest in constructing new oil refining capacity in America, but the offer was rebuffed.
The June 1 Financial Times reports that because of restricted capacity, the largest U.S. oil refinery companies–Valero, Premcor, Tesoro, and Ashland–are making more than $10 for each barrel of oil that they refine.
2. Consolidating cartel control
The oil companies’ have plunged into a predatory gobbling up of each other, which has also caused the oil price to rise. There is a striking relationship between oil prices and major oil company mergers. In August 1998, with oil hovering in the $12 a barrel range, British Petroleum bought Amoco, one of the top U.S oil companies, with large holdings of domestic oil and natural gas. In late November 1998, two more giant mergers were announced: Exxon bought Mobil, and France’s Total bought Petrofina. These three mergers, along with the October 2000 takeover by Chevron of Texaco, significantly consolidated the oil cartel.
The Seven Sisters have been reduced to five: Royal Dutch/Shell, BP (British Petroleum), ExxonMobil, ChevronTexaco and Total (which also gobbled up Elf Aquataine). During this crisis, the stocks of major oil companies have jumped up.
The massive oil futures speculation, buttressed by the deliberate reduction in U.S. oil-refining capacity, and the long-term effect of merging of the oil companies, pushed the price of U.S. light crude oil for July delivery to a record closing price of $42.33 on the NYMEX June 2, before the price fell back somewhat. By this process, the wealthy oligarchical families that own the oil cartel, and related banking houses, have tightened their grip on world energy supplies, and realized enormous profits, some of which loot has been deployed to prop up the bankrupt world financial system.
So if Deregulation has not brought prices down, why are we still insisting on a deregulated environment?
The answer is, in a nutshell:
The oligarchical families controlling the global oil cartel want your money, and will stop at nothing to get it. If you believe they will be fair to you, just look at what they did to California. Their global financial casino is collapsing, and they intend to maintain their power after its crash, through control over the essentials of life, such as food, energy, telecommunications, and other key infrastructure and commodity elements. Privatization and deregulation are looting mechanisms intended to bolster the oligarchs’ bankrupt financial bubble, and to give them control of a post-crash world.
Electricity Deregulation

The case of the 2000 California brownouts is the best example: People were promised lower prices and more electricity, but what they got was vastly increased prices and a dramatic drop in supply, causing blackouts when demand was at only two-thirds of previous peak usage. Unable to hide the damage they did in California, the deregulation proponents have attempted to portray what happened there, as something California did wrong, not something wrong with deregulation.
But still, the experts insisted deregulation works when properly implemented, they insist, pointing at other US states as the proof. However, deregulation has or is in the process of failing in Pennsylvania and Massachusetts, and other states.
The energy pirates like Enron simply cannot compete on price with regulated utilities when it comes to providing electricity, and in fact require significantly higher prices in order to make money. That is why, as a part of deregulation, the regulated utilities are being broken apart; stability is being dismantled so that chaos and volatility can reign, and prices soar. The electricity markets are being remade in the image of the financial markets.
While deregulation is a failure from the standpoint of providing the consumer with lower prices, it is a huge success from the standpoint of the pirates and their oligarchic controllers. To them, deregulation is doing precisely what it was intended to do: spinning off huge profits which fund their worldwide asset grab, and the global restructuring not only of the electricity sector, but of the world economy, weakening nations and bolstering the empire.
The headquarters for this global power grab is not Texas, but the City of London and Wall Street. After a pilot project in Chile in 1987, energy deregulation made its debut in Britain in 1989, under Prime Minister Margaret Thatcher. Britain began privatizing its national electricity system, selling off state-owned electric utilities to private companies, and opening its doors to domestic and “foreign” competition (we put foreign in quotes, because the British have a habit of using British-controlled, but foreign-domiciled, companies in such circumstances).
One of the first of these foreign companies to enter the British market was Enron, which had been formed four years earlier through a merger between Omaha’s InterNorth and Houston Natural Gas. (Today, Thatcher’s Secretary of State for Energy, Lord Wakeham, sits on the board of Enron.)
By 1997, seven of Britain’s 12 regional electric utilities were controlled by U.S. firms. Those utilities included American Electric Power, Calenergy, Central & South West Corp., Cinergy, Dominion Resources, GPU, PacifiCorp, Public Service of Colorado, and Southern Co. Many of these companies, not surprisingly, were once part of the old J.P. Morgan electricity cartel. Morgan, in turn, was a U.S. agent for British capital.
By 1997, the U.S. companies also moved heavily into the independent power-producing market in Britain. Notable in this regard were Enron, AES (the Prince Philip-connected firm which is now the single largest generator of electricity in Ibero-America), and Mission Energy, an unregulated subsidiary of Edison International, the parent of Southern California Edison.
The Commonwealth nation of Australia was also opened up, to British and U.S. companies. Among the U.S. companies active in Australia by 1997 were CMS Energy, Edison International, Entergy, GPU, Northern States Power, PG&E, PacifiCorp, Texas Utilities, and Utilicorp United.
The pirates also moved into India, via Enron’s Dabhol power plant in the state of Maharashtra, engaging in activities that induced a former official of the World Bank to characterize the company as “the East India Company of the Twenty-First Century,” a reference to the British Empire’s infamous opium- and slave-running imperial overlord.
One of the characteristics of the pirates’ move into a country (and U.S. states, as well), is that the privatization and deregulation bills are rammed through in a rush, giving lawmakers little time to debate the particulars of the bills upon which they are being asked to vote.
An example of how this works was recently documented by the LaRouche Society of the Philippines, which is fighting to stop the pirates from privatizing the National Power Company and deregulating the national electricity system. Among the promises made by the backers of the bill, was that it would cut electricity rates 27%. Just like the oil deregulation act.
Today these U.S.-domiciled energy pirates are active in nearly 50 countries, from Europe and Africa to Asia. The highest density of presence, as measured in terms of the number of companies active in energy generation or transportation, is in Britain and the Commonwealth nations of Australia and India, followed by China and the Ibero-American nations of Brazil, Argentina, Bolivia, Chile, Colombia, El Salvador, and Mexico.
The target list of the electricity pirates can be seen from looking at a map of national generating. The United States, with 24% of global electricity generating capacity as of 1999, is the juiciest target in the world, followed by China with 9%, Japan with 7%, and Russia with 6%. India, with 3%, and Brazil, with 2%, are immediate targets.
Free Market

Now, deregulation is just part of the mantra of the “Free Market”. Or Free trade. I will not go into too much detail on this, since the effects of the so-called free market are evident here and around the world. Suffice to say that ever since the onslaught of Globalization—which is just another word for Free Trade–economies of the third world nations declined in unprecedented rates.
But, why, then, despite all of these obvious results, are nations still duped into accepting privatization and deregulation as policy?
To find the answer to that question, one must look at the issue from a higher perspective. The truth is that the economy has already been destroyed, by three decades of deindustrialization and financial speculation. Knowing that their bubble would ultimately collapse, the oligarchs and their servants have been consolidating their control over food, energy, telecommunications, precious metals, strategic minerals, and other essentials of life.
What they are now doing, is looking for a way to survive the consequences of their own folly—and ours, for letting them get away with it—by setting up looting operations for the post-crash world. That, ultimately, is the nature of deregulation.
Solutions

These factors constitute a clear and present danger not just to the nation, but to {all} nations.
Though it is convenient for this so-called “technocrats” to abdicate their responsibility by saying “that is the system…it is beyond our control.” Our people’s minimum expectation of them is not an admission of incapacity…but a vigorous denunciation of a process which threatens their very existence…a life befitting human beings.
It is incumbent, therefore, upon our leadership to immediately take the following steps:
A) To declare that the Oil Crisis is a Global Oil Crisis, affecting the lives of all inhabitants of our planet…and as such, requires collective response from all incumbent leaders of the world.
B) To propose that Oil, being a commodity, critical to the continuation of human life, be de-listed as a commodity traded in the futures market, thereby escaping the clutches of unscrupulous people and institutions.
C) To initiate immediate steps to establish bi-lateral contract agreements with petroleum producing countries of not less than 12 months’ government scheduled deliveries, at reasonable, fixed-prices.
D) To design a comprehensive energy development program, focused on the most cost-efficient systems, for the purpose of freeing our country from complete dependence on imported energy sources.
The urgency of the matter is quite obvious. Let us, as citizens of the Philippines, prove that we shall reject all notions of exploitation and oppression as our duty to promote the general welfare.
The crisis, which we now face as a nation, requires understanding of the problems through diligent study, and concomitant courage to do what is right, for the Filipino people, a legacy for our children, and their children’s children.

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