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Home >> Opinion
UPDATED: 09:49, September 07, 2004
Ten specious fallacies on current world's high oil prices
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  • The world is facing a high-oil-price era, in which the oil price per barrel will never be as low as a book.
  • With little say in fixing the international oil prices, China faces a relatively unsafe situation in terms of oil supply.
  • Energy, especially oil shortage, has been a known subject over the years, so high price is only a matter of time. The current high oil prices just vindicate this point. As the oil competition is turning more and more heated, the oil prices shoot up as well, pushing a new round of "transfer" of global resources and wealth and forcing renewed understanding of the oil and the high prices.

    However, people's views on a certain phenomenon may often turn to the phenomenon itself. The anxiety, tension and panic induced by the oil prices permeate between the markets and the governments, which in return makes it harder for people to understand the international oil market itself. In other words, the view about the high prices is now specious.

    Fallacy No. 1: No oil price rise any more

    The oil price, waving around US$ 40 per barrel since 2004, and topped US$ 50 in August, and then dropped continually these days. Some people may take a relief from this. The waves of oil price mirrors a monetary phenomenon, that is, the US$40-per-barreal price actually equals the US$ 28 in 1990 and US$ 18 in 1980, which allows unpredictable room for increase. The world is facing a high-oil-price era, in which oil will never be as cheap as a book.

    While oil price can be settled, the drought is irresistible. With the depletion of oil resources, there will never be any cheap oil. Many scientists and engineers in the world project that the outputs of oil and natural gas will peak one after another in the first two decades of the 21st century, which means the present oil price is not overestimated but underestimated. The prediction by French Institute of Petroleum in August is that the oil price will linger between US$ 30 to 80 per barrel.

    The future oil price rise will not be gradual but high jumps in price may come often, which will not seriously affect the poorest countries who after all have not money to buy resources, neither the richest ones, who can buy a barrel of oil at a price of US$ 100. However, the rest, especially those relatively larger developing countries, will suffer severely

    Fallacy No. 2: People's worry is caused by oil price staying high

    What worries people most may still be the uncertainty of oil price, which will push it to sprint to another peak. Most heavyweight experts made wrong predictions on the price of crude oil in 2004. Those who predicted "stable and lower-turning for oil price" will be stunned, or at least feeling so now.

    Iraq has not resume its oil production, let alone to enter the international market; non-OPEC (Organization of Petroleum Exporting Countries) countries such as Russia still have limited potential in output growth. All these tell a tendency known to all: various sides are all intending to keep the oil price at a high level for a long time. As for the uncertainty, the best exponent is Iraq: the US-led war against Iraq was interpreted by the economists as the "beneficial" to the world economy, because of uncertainty chased away, it is an indisputable fact that the world economy will revive thereof.

    The field of oil features uncertainty. Under heated contention, the structure of the oil market in the next five to ten years cannot be prophesied. Who will become the major oil supplier in the global market, the Middle East, Caspian Sea, Africa, or Russia? No one knows. Whatever the answer is, it surely has much bearing on the oil sources of the United States, Japan, India, China, and the oil battle among them.

    Fallacy No. 3: Diversity of oil import means de-Middle East strategy

    The "free-from-Middle East strategy" is sheer cheating. Although Washington has formulated ever since the 1970s plans of less dependence on Arab oil and seeking energy sources from outside the Middle East, it does not bring any results and change the situation of the world's oil supply either. In the entire Middle East, what the United States coverts most is Iraq's oil because it takes US$ 2, the lowest exploration cost in the world for each barrel of oil, due to layer extremely close to the ground there.

    Let's see some statistics in the report entitled "Energy Resource Development of the Middle East" delivered by the International Institute for Strategic Studies in Washington early this year. In 1978, the proven crude oil reserves in the world reached 648.3 billion barrels, among which 405.7 billion, or 63 percent, were in the Middle East and North Africa. In 1988, the global reserves reached 917.8 billion, and 608.1 of which, or 66 percent, were from those regions. In 1998, 716.2 billion barrels accounting for 68 percent of the total 1,052.9 billion barrels were there. By the end of 2002, while the world reserves decreased to 1, 047.7 billion barrels, that in the Middle East and North Africa even reached to 7 28.3 billion barrel, accounting for 70 percent of the whole. The conclusion drawn in the report was that the Middle East situation would affect the world's energy balance between supply and demand.

    Various data indicate that in the next twenty years, unless substantial changes in the demand of world's energy resources, the Middle East will still dominate the international oil market.

    Fallacy No. 4: Oil producers are center for fixing international oil price

    After the fourth Middle East war broke out in October 1973, the oil producers, mainly the OPEC countries, took a series of measures including resuming the right in oil pricing, raising price, cutting output, embargo and nationalization, which not only guaranteed their due income, but also for the first time dealt a heavy blow to the Western developed countries with oil as weapons, and ignited the economic crisis in the capitalist world during 1973 and 1974. Since then, the oil setup changed as the developed countries such as the United States, Japan and those in Europe paid more and more attention to controlling the oil sources.

    Practice of the developed countries is a combination of politics and economy: oil capital streaming in the path cleared by political and economic touches. Expanding oil demand worldwide makes the pricing in the international oil market an important means to control the oil strategies. Although the price is generally settled in the international crude oil futures market according to the supply and demand, the powerful financial markets in the United States and European countries, particularly the superior US currency, determined that dollar is the pricing unit in the international crude oil futures market.

    Meanwhile, the United States retarded in exploiting domestic resources and imported hugely as the world's first oil buyer. This situation laid a foundation for it to control the scale of oil need and set price. Japan has made it a strategy to seek a Japan-dominated transporting-reserve-pricing oil security system and maximum independence on other countries.

    As to China, with no say in international oil pricing, it will face relatively severer insecurity.

    Fallacy No. 5: The world won't be caught unprepared by expensive oil

    As one of the satisfied scholars seeing no harsh impact by the high oil price, economic professor James Hamilton at the University of California, San Diego, held that the world has progressed in precaution price waves and is ushering in the new era.

    What he neglected is: it was just because of the world's robustly resurrecting economy that pulled up the oil price, not the reverse way. Due to the retardation of oil price rise, the high price and its ripple effects will more and more jeopardize the world's economy, which, with no adjustment, will turn to turmoil.

    Sooner or later, a new round of energy crisis will change the international oil structure. Oil in pipelines is likely to change the whole world.

    Fallacy No. 6: China a pusher behind

    Well at ease in their "catching-up" strategies, developing countries will surely go panic and suffer payment losses. Take China for example, this round of price hike proved again that China has been zigzagging in its external energy path, an exponent of which is the extremely uncertain oil market now.

    Five years ago, the international oil price skyrocketed when China bought in a large amount; three years ago, it dropped as China cut its import. One year ago, the Iraq war led to price premium, and later, the reasonable price expected was finally swallowed by the prodigious need in energy aroused by the world's reviving economy.

    At that time, international oil giants targeted on China, an expanding economy seeking oil suppliers and preparing to build oil reserve bases. As a strategic buyer, China will mind the price. It is characteristic in the international oil price that the price of futures determines that of goods. China lacks necessary oil futures and market practice, therefore, as international oil speculators see it, has to be trapped in building up strategic reserve at a high price.

    China is an absolute victim of high oil price. What it will profit from the uncertainties in the international oil market is lessons to be drawn on and independence to be achieved.

    Fallacy No. 7: Russia's counts only on oil for resurgence

    Russia benefits from global oil contention: the daily oil output in July jumped from 6 million to 9.3 million barrels, a record since the post-Soviet Union period. Russian President Putin is now reshaping the nation's oil industry, consolidating the government's control over it, which can be on a par with the top producer Saudi Arabia. Russia also intends to recreate its image as a weighty power on the international stage.

    However, Russia needs to take care not to be wrong footed by the huge profit in its development. Obsession will lead to unworthy deformation.

    Fallacy No. 8: US-led war was not for oil

    The US-led war on Iraq was laughably interpreted as defending the Western freedom and democracy. However, it was for the oil there. Just like Dr. Kissinger once said, oil is too important to be left to the Arabians.

    It is a long-term national policy of the United States to control the Middle East for the sake of the global dominance. The White House once discussed the feasibility of sending forces "to protect the oil countries in the Middle East" upon the oil crisis in 1974 and 1975. As "Iran Revolution" broke out in 1979, President Carter uttered in the State of the Union Address in January 1980, that any country intending to control the oil in the Middle East will be regarded as infringing upon the interest of the United States, who will take all measures, including force, to protect it. In 1990, Cheney, then Secretary of Defense, said, the root why Iraq was not allowed to swallow Kuwait, was that the 20 percent of the world's proven oil reserves were not hoped to be left to Saddam, who is hostile to the United States.

    The US policy is based on an important assumption: the one who controls the oil in the Middle East grips the economic throat of the United States.

    Fallacy No. 9: oil price is purely an economic matter

    The question is essential that powers want to control oil, and control is of politics.

    In terms of economy, the United States controls the oil thus enhancing the "oil dollar" position. Presently, US dollar has kept dropping, which will potentially make the oil producers consider pricing with Euro. Actually OPEC members have now shown such an inclination, which is probably a bad news to the United States. If so, the oil importers will absorb Euro to deal with balance of international payments. This means that dollar shares, debts and direct investment will be abandoned, and the exchange rate of US dollar will drop a lot, thus lead to chain crises such as dollar depreciation and US economic recession. The saying of the collapse of capitalist "fortress" is not exaggerating.

    Politically, US strategy is to open, enter and finally completely occupy the oil market, with strength or in a military way. This is a kind of predatory and exclusive view on oil security. Reality indicates impossibility of monopolizing. Economic globalization has been the trend of world's development and oil market cannot be freed from the mainstream. The world's resources can be rationally distributed and used only through cooperation between the sellers and buyers, among the competitors, and interests of various sides have to be met through mutual acceptance, merging and overall balance.

    Fallacy No. 10: Strategic oil reserves not equals oil reserves for war

    Oil contention will turn more and more fierce as needs are growing and so is the price. In this sense, strategic oil reserves are to some extent oil reserves for war.

    Not long before, Washington Post carried an article by a US energy expert. The world is at the frontier of a new type of war, in which countries owning adequate energy resources versus the other are those, with inadequate resources, more and more willing to seek from outside. He also predicted that the war for the last rich oil and gas resources is likely to be the main topic of the geopolitics in the 21st century.

    For China, it is not the danger but the unawareness of the danger that is dreadful. The present understanding of the high oil price may be this kind of danger. The structure of the international oil market shows, China's searching for oil will not be easy so we must train ourselves to survive the squeeze to stand out among contenders.

    This article relayed from China Youth Daily is translated by People's Daily Online

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