ENERGY PRICE: ‘OIL AND THE NEW RENTIERS’

Andrew McKillop
21st Century Wire

WHY ARE OIL PRICES SO HIGH?

Any body who wants a snapshot of how extreme high oil prices are at present only has to look at market prices for oil, gas and coal expressed in barrel equivalent prices, that is the price for 1 barrel equivalent of energy, about 1600 kWh. Oil prices on world markets are close to $100 per barrel for the US benchmark WTI blend, and nearly $115 a barrel for the European and Asian benchmark Brent blend.

Taking the US energy market, rapidly transiting from energy scarcity to energy abundance due to shale gas and shale oil output growth, natural gas prices on the Nymex market struggle to exceed $20 per barrel equivalent. Coal prices for the USA’s literal Sunset Industry of coal mining and extraction are now as low as $8 per barrel equivalent. Looking at the world’s very fast growing wind and solar power industries, although these are still relatively high capital cost, their “fuel” cost is strictly zero dollars per barrel equivalent. Each additional kiloWatt of solar and windpower comes cheaper than the previous.

So why are oil prices so high?

The old style answer was OPEC and Russia, the world’s biggest oil exporters, but those days of “the exporters” driving up prices, or supposedly driving up prices are long gone. This however has a close link with the real cause of why oil prices are so high – and could go higher before they crash. The two word term of oil economists for explaining why OPEC and Russia could “exert a stranglehold” both on oil importers and oil prices, was “oil rent”.

This concept which includes the idea of hard-to-substitute and limited supply, can even be applied to the unreal world of carbon pricing. Although very unlikely, if a carbon price was implemented worldwide, the cost of using substitutes for conventional oil, such as shale oil, tarsand oil, synthetic diesel fuel from coal or natural gas, or the biofuels from cleared forest and wetlands will increase even more than the cost of using conventional oil. So “ordinary oil” would increase further in cost. The “oil rent” would remain or would increase.

THE NEW RENTIERS

One reason oil prices are so high at present, and can increase, is because OPEC states and Russia are more than prepared to cut their production, and in the case of OPEC are already doing it, because their “netback” on oil exports is either stagnant or declining – but oil market prices are increasing. Their netback is declining for the simplest of all possible reasons: world demand for oil exports is growing very, very slowly: the IEA forecast is below 1% growth for 2013, and possibly zero. For certain markets such as the US and Europe taking over 60 percent of world oil exports, their demand is falling. The decline is rapid in the case of the US, as its domestic oil production increases at the fastest rate in more than 35 years and domestic oil demand flatlines since its most-recent high point of 2007, already 6 years back in time. European oil demand has declined every year since 2006.

Oil market brokers, bankers, traders and operators are however totally uninterested in these “supply/demand fundamentals” because they are a side issue, for them.

These are the “new rentiers” who operate an oil pricing system only able to deliver high prices. For OPEC and Russia, monitoring daily oil price moves on the Nymex, London’s ICE, Singapore’s IPE, or Tokyo’s Tocom the situation is starkly clear: the new rentiers get an awful lot more netback out of a $1 rise in the barrel, than they do. The percentage split varies, but at this time the new rentiers are running an oil price system – or racket – where they get at least 70 percent out of any daily rise in prices. In plenty of cases, plenty of deals, for example concerning the refining downstream and oil transport by
pipeline or rail, a $1 rise in the barrel price can bring 90 percent of the gains it generates, to the “new renties”, and a slim 10 percent for the oil producers whether they are OPEC, Russia or home-based.

This is a dramatic but “stealth-secret” turnaround in market psychology, market operation and market goals from the early years of this century, around 2000-2005. Before about 2005, the bankers, brokers and traders “investing” in, or operating oil market futures trading on major markets acted to keep prices down. They were “downside oriented”. Since then, they have shifted to “upside oriented”, most dramatically in 2008, when they were able to lever Nymex oil prices to very nearly $150 per barrel.

In the fallout from the 2008-2009 credit crunch, deprived of credit themselves, oil market fixers and operators savagely pushed down prices – but by 2010 they were back into “upside mode”. Today, as oil market trading in January 2013 has clearly shown, they are looking for prices above $120 a barrel.

RUNAWAY TRADING

John Law: crashed the markets in France.

This could be alright if the disc and the music stopped there, but the new rentiers – like the oldest of all in the history of market trading – cannot stop. The reference event and very first “modern type” market crash was the 1721 Paris stock exchange collapse, brought down by the Mississippi Company operated by Scotsman John Law on behalf of French monarchy. The Company crashed, after showing on-paper gains in “value” of more than 1100 percent in 1 year. At the height of the bubble, the French monarchy was able to offload all its debt, with Company shares it issued and exchanged against investors’ cash - with the investors headed by the monarchy’s former creditors!

Why the group of new nobles, new advisers and new court hangers-on of child King Louis and his Regent or stand-in acting King had amassed such huge outstanding dues against the throne was mainly because of new “rent situations”. The monarchy not only borrowed cash, but let concessions or “rents” to its backers, enabling them to tax and levy tolls and dues of all kinds – replacing or diluting the income and revenue take for the monarchy, the nobles, the clergy and “traditional rentiers”. Soon, the situation got out of hand, and a Ponzi-type or Bernie Madoff-type paper asset scam was needed.

The 1721 Paris stock market crash was a close to 100 percent wipeout, but both 1929 and 1987 were stock market crashes able to wipe out well over 60 percent of all nominal, paper, tradable “value” in a few days. Also, due to the simply vast level of “stock market capitalization” today, a few percent slide in average stock and commodity values, which now run together almost seamlessly, wipes out several trillion dollars of “nominal value”. The new rentiers cannot take even these smaller levels of losses for more than a short period of time, as we can clearly see from stock and commodity market performance,
that is manipulation, in January 2013. The market is now “locked on to growth”.

Oil prices can therefore easily go on growing. To be sure and certain however, they will then crash in a violent “traditional” way -the only question is the timing and the triggers.

Author Andrew McKillop is a former expert in policy and programming with the European Commission in Brussels. He writes and consults about the impact of oil prices on the economy and currently advises the ECOHABITAT sustainable housing and property development project near the French, Belgium and Luxemburg borders.