Inside the World of Oil Price Manipulation

By: Clif Droke | Fri, Mar 11, 2005
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"This is as good as we have ever seen it, and it's going to get better."
-- CEO of a major energy concern, speaking to CNBC last month when the company posted record profits of nearly $2 billion -- nearly triple the year before.

There are a number of observations that could be made from the above comment from the energy executive. What strikes me about it most, however, is the sheer arrogance it contains. All across the oil and gas sector, companies are boasting of record earnings and cash flow as the price of petroleum has bounded to record highs. One would think that at some point "enough is enough" and that the country's financial controllers would step in to attenuate the sky-rocketing fuel costs. Yet energy executives such as the one quoted here are so confident that profits from rising fuel prices will continue they are even boasting about it to the public. If ever you needed proof that the oil interest have the country by the throat, this is it!

The above statement bring to mind an experience I had about 10 years ago as a financial reporter. I was assigned the task of interviewing an executive at a major propane and fuel oil company. As I sat in his opulent office, tape recorder and notebook in hand, I'll never forget when I asked him what his take on the company's profits and fuel price outlook was for the foreseeable future. In an air of total nonchalance bordering on smugness he replied, "The sky's the limit." I could tell that this was not the standard corporate optimism that executives are supposed to convey -- he really believed what he said. How right he was!

Because of the incredible dominance and control the major energy companies have over America, the mainstream press is more often than not in their control. In order to justify the rising cost of petroleum products, we are fed the line that "oil reserves are running low" or that the world's coal mines are virtually depleted.

Then there are the New York Times Bestsellers whose titles proclaim "Out of Gas" (by David Goodstein) and "Beyond Oil" and "The Impending World Oil Shortage" (by Kenneth Deffeyes), "End of Oil: On the Edge of a Perilous New World" (by Paul Roberts), and "The Coming Oil Crisis" (by Colin Campbell), not to mention a plethora of lesser titles in the spirit of "peak oil" propaganda.

Since most Americans are not tuned into the alternative press or other independent news sources, they tend to believe what they hear. Thus, the energy concerns get away with manipulating the price of oil and related commodities despite no real fundamental basis for it. Yes friends, despite the fact that it is politically unacceptable, this is an accusation of a concerted manipulation campaign.

A book has recently been published detailing the indisputable fact that the world's fuel reserves are far greater than the oil companies let on. Entitled "The Bottomless Well" (by Peter Huber and Mark Mills -- the former a doctor of mechanical engineering from MIT along with a Harvard University law degree, the latter an owner of several patents in the field of fiber optics), the book explains "why we will never run out of energy." The authors argue that "unimaginably large" deposits of raw fuel exist from oil and natural gas to coal, with no risk of running short anytime soon. (When time permits I plan on giving a full review of this book in a future commentary).

In his McGowan Newsletter of August 17, 2004, Dave McGowan examined in depth the subject of oil price manipulation by the oil concerns. He wrote: "On June 21, [2004] the Los Angeles Times ran a story...The article concerned the Shell oil refinery in Bakersfield, California scheduled to be shut down on October 1 -- despite the fact that the state of California (and the nation as a whole) is already woefully lacking in refinery capacity.

"Now why do you suppose that Shell would want to close a perfectly good oil refinery? It can't be because there is no market for the goods produced there, since that obviously isn't the case. And it isn't due to a lack of raw materials, since the refinery sits, as the Times noted, atop ‘prolific oil fields.' The Scotsman recently explained just how prolific those fields are: The best estimates in 1942 indicated that the Kern River field in California had just 54 million barrels of remaining oil. By 1986, the field had produced 736 million barrels, and estimates put the remaining reserves at 970 million barrels.

"Of course, just because there is a strong demand for a product, and a ready source of raw materials with which to produce that product, does not mean that any corporate entity is obligated to bring that product to market. In the corporate world, the only thing that ever matters is the ‘bottom line,' because corporations exist for one purpose only: to generate profits."

Good point.

In a previous commentary on the oil futures market I made reference to "contrived shortages." A reader and Internet friend sent in these comments regarding oil price manipulation: "...even the Saudi oil Minister has expressed his astonishment at the rampant speculation in New York, perhaps to deflect the natural inclination of humans to seek out a scapegoat when they get [angry]. A bunch of nameless, faceless speculative funds are a much more difficult target to focus one's ire upon than a convenient cartel of perceived anti-American oil rich Arabs..."

He continues, "Why on earth would the oil producing countries want to sabotage the world economy? The only thing that would accomplish is to make their own countries poorer and less stable than they already are, a counter-intuitive move if there ever was one....No, most of the oil producers know there's a limit to the milk a cow can give but, apparently, the New York elitist spec funds have an absolute unlimited capacity for creating crisis where none exist, which couples nicely with their equally bottomless tankard of greed...why do the media never talk about that?"

Good question.

Probably the best observation of the tendency of cartels to manipulate prices was made by Adam Smith in his seminal work, "The Wealth of Nations". Smith observed: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices..." He laments, "It is impossible indeed to prevent such [contrivances]..."

For now, the oil price manipulation continues as the American consumer is held hostage by the insatiable greed of a handful of energy executives who boast "the sky's the limit" and "it's going to get better." For them, that is!


 

Clif Droke

Author: Clif Droke

Clif Droke
ClifDroke.com

Clif Droke is the editor of the two times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy. The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment. He is also the author of numerous books, including most recently "The Stock Market Cycles." For more information visit www.clifdroke.com

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