By Michael C. Feltham
I was very interested indeed to read Arthur Shaw's powerful article on precisely why the World is presently being held to ransom by oil prices and this chimes I must say, with my own conclusions. Speculation brought about by a combination of fear, of loss of capital value and the scramble for hedges and of course, our old bitter enemy, greed.
It is an undeniable fact that global crude oil production is always in lockstep with demand: thus the nonsense about "Shortages" due to rapidly increasing demand from IDCs (Industrialised Developing Countries) such as India and China is exploitative eyewash!
As I have written previously on Axis, the panic price rises, widely telegraphed around the globe by a subservient, never questioning and sycophantic media, all relate to the Spot Price and not the ongoing supply contracts struck between the majors and the major oil producers.
At this point, it is perhaps worth a small digression. Back in the late 80s, the ex Saudi oil minister and ex Chairman of OPEC for 25 years, Sheikh Yamani, teamed up with Greek billionaire shipowner and trader John Latsis to trade oil "Spots". In less than one year together they had made in excess of $1 billion. Latsis, as a "Thank You", bought the motor yacht Christina (originally the property of Aristotle Onasis), had the vessel totally refurbed and presented her to Yamani! At a cost of $13 odd million,
A mere bagatelle, if you've made a billion!
The story however is indicative of the vast profits swilling around in the Oil and Gaz biz for those in the know.
In any case, many majors enjoy exploration deals and once set they pay royalties only, not a per barrel price.
Additionally, oil producers can and do offer significant sweeteners to majors: such as free credit.
A ULCC (Ultra Large Crude Carrier) loads upwards of 500,000 tonnes: VLCC (Very large Crude Carrier) loads around 300,000 tonnes.
Obviously, crude weight depends on grade (Light, Medium, Heavy) however a reasonable yardstick is circa 7-8 barrels per tonne.
If a median view be taken, then a ULCC carries say 3,500,000 barrels of crude with a value (Major's lifting price!), of say $ 220,000,000 per cargo. If the voyage time is 21 days, then the money value of the credit is say 5% X21/365ths = $ 654,452!
The other way majors screw the consumer is basing their price hikes on the spot market: and applying these instantly.
Despite the fact that they have a vast quantity of crude and product at sea; in tankage; in refining; in pipelines and in service station tankage and best of all, as liftings are scheduled well in advance, already contracted at far lower prices for forward lifting, as their contracts specify.
In any case, it's the majors who mainly supply the Spot Market!
Going back to Robert's kind comments*, as I wrote on Axis of Logic in 2005, (The Beginning of the End?), if Hurricane Rita had have hit Galveston, it could have decimated 20% of total US refining capacity as well as knocked out critical lifting and storage logistics. No other US port complexes could replace Galveston, overnight.
This one freak of nature could have tripped the feared Ultimate Domino Effect, as Paul Volcker has warned so often.
The SOR is only so big!
*Footnote (Comment by Axis columnist, Robert Thompson)
My good friend Michael Feltham has commented on my suggestion that the USA held ample supplies of fossil fuels, that "The USA now could not support its huge abuse and consumption of oil from indigenous reserves". He goes on the tell me that there is a lack of refining capacity and add "The oil majors were not prepared to invest any of their obscene wealth in building new conforming plant and elected instead to import as many oil producers set up their own refinery sites to maximise their local profits". He blames the current crisis on "greed", but adds that the oil companies in the USA "cannot now lift sufficient local oil and gas to meet the - perhaps falsely inflated - consumption demand." After refering to the "insanity" of the situation, he ends that "US profligate consumption is now I believe a matter of moral turpitude which is why they have never accepted Kyoto." I alone am responsible for adding the emphasis to the word "now". - RT
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