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Home >> Opinion
UPDATED: 16:35, September 18, 2006
US controls price of crude oil
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Who is controlling the price of crude oil? The British Petroleum Company (BP), OPEC and Russia are all under suspicion, but there is really only one entity controlling the market.

Within one month, the futures contracts of both West Texas Intermediate (WTI) and Brent dropped by more than US$10 and the October contract for WTI decreased 17.5 percent between August 8 and September 11.

In fact, the news did not impact the market much. Besides a couple of news items from BP, there was a 'new discovery' at an oil field in the Gulf of Mexico in the US. The Iranian issue remains unresolved and the hurricane season has not yet passed. However, the price of crude oil has fallen substantially. Who is manipulating it?

The US government was suspicious about whether BP was manipulating the price so it had the Commodity Futures Trading Commission (CFTC) investigate the company. Since the news that BP's oil field in Prudhoe Bay, Alaska, was closing due to pipe damage was released, the price of oil has declined. Last week, before BP announced plans to resume oil production in Prudhoe Bay and oil prices began to rebound, the cost had dropped by more than $10. This is sufficient to suspect BP of price tampering. However, if BP has controlled the hundred-billion-dollar crude oil market for such a long time, its status is a bit too high. BP's news did affect the price of oil, but only temporarily.

Although OPEC has a share greater than 40 percent in the global crude oil market, it is not strong enough to control the price. Particularly in the current circumstances, OPEC can only push the price up, not lower it, because its daily surplus is less than two million barrels. This is insufficient to lower prices; however, if it wishes to raises prices, it can restrict its output. At present all OPEC members are eager to make more money, and will not reduce the yield. This is the reason OPEC cannot depress the oil price.

Russia has the ability to control the price of oil rather than govern it.

One of the latest reasons for the drop in oil price is the increase in inventory. According to the Energy Information Administration (EIA), the US oil inventory increased unexpectedly during peak oil-consumption seasons, but the oil output of OPEC did not augment. The oil output in Russia, a crude oil supplier, climbed constantly in the wake of continual oil price hikes. According to the news from Moscow on September 4, the oil yield in August was 41.27 million tons, the highest on record. The average daily yield was 9.72 million barrels, a 2.8 percent rise from the same period last year. The yield in July was 40.8 million tons with a daily output of 9.61 million barrels, a 2.2 percent increase from last year. Russia has exceeded Saudi Arabia to become the largest oil producer in the world. In the first eight months of this year, the crude oil yield in Russia was 318.15 million tons, 2.5 percent more than the previous year. However, all Russia can do is fine tune the price.

In fact, only the US can control the price of oil. This May, when the Bush administration gave the order to suspend its strategic oil inventory, the price of oil fell under the control of the government. According to the author's statistics and analysis, the US strategic oil inventory keeps positive correlation with the price of WTI stable with a correlation coefficient of 0.87. In the author's opinion, the purpose of suspending the oil inventory is to control oil prices. Furthermore, in July, when the price of crude oil price reached a new high, the US government claimed it would use its strategic oil inventory to restrain the price if necessary. After that, oil prices began to fall. Why does the US want to curb the price of crude oil this year?

A higher oil price may slow economic development. The US is the largest oil consumer in the world, and relies on imports for 50 percent of what it uses. The sustained high price prompted complaints from ordinary consumers. The US' economic growth rate in the second quarter was far lower than the first this year, and the high price of oil is one reason for that.

The high price of oil has greatly strengthened the economy of Russia, which is a threat to the US. When the oil price is high, Russia's output and export of crude oil grows unchecked, resulting in constant reinforcement of the Russian economy. As of August 18, Russia's gold and foreign exchange reserves amounted to US$275 billion, the third largest stockpile in the world behind China and Japan. Russia now intends to establish a petroleum futures exchange using the ruble. Russia has a 15.2 and 25.8 percent share in the international oil export market and natural gas export market respectively. Once the exchange is set up, it will not only challenge the pricing power of the WTI, but affect the US dollar, which the US is obviously anxious to avoid. The collapse of the USSR was unrelated to the ongoing decline of oil prices (at the time oil prices were very low, but the US asked OPEC not to slow oil production), but today the continuous rise of oil prices makes Russia powerful. The US does not want this trend to continue.

For the US, high oil prices are not conducive to settling the Iranian issue. Iran's only advantage in negotiation is its petroleum, so a higher oil price is more favorable to Iran. Before imposing sanctions on Iran, the US must consider the impact on oil prices if Iran was to terminate exports of crude oil and close the Hormuz Strait.

With midterm elections approaching, the Bush administration will be wary of making any unpopular decisions. High oil prices would undoubtedly cause the public to complain, an unfavorable situation at election time.

For these reasons, the US government has intentionally curbed the price of oil since May. At the outset, the US stopped increasing its strategic oil inventory. After the price of oil climbed in July, the US released 7.5 million barrels from their inventory within a week. After the price growth mid-July, the US government claimed that, if necessary, it would eventually release its strategic oil inventory to decrease the price of oil.

By People's Daily Online

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