Friday, February 24, 2012

Oil: Weapon Of Mass Destruction?

Rising oil supply, shrinking gasoline demand? Who cares, the oil price is rising anyway ( Oil consumption in the United States – about two-thirds of which goes toward gasoline – has fallen 9 percent since 2005, but the gasoline price is at the highest point ever for this season of the year  (.businessweek).

There are 2 culprits for that:

1. There is a powerful group who benefits a lot from rising oil prices and manipulates the market. For instance Goldman Sachs is banging the oil price drum for years ( The influential bank continuously predicts higher & rising oil prices, because they earn billions of dollars with commodity trades. In 2008 Goldman Sachs predicted an oil price rise to $200 and many speculators followed, one of the reasons that the oil price climbed to $147 in summer 2008 -even though the recession had already started. Other banks share this game for the same reasons.

The banks have powerful accomplices: Hedge funds, pension funds and other huge speculators who bet billions of dollar on rising commodity prices. They continuously spread rumors about alleged supply disruptions and create a permanent climate of anxiety. The oil speculators get a lot of support from  mainstream media like Bloomberg, who spread these rumors because they earn a lot by catering to banks and funds with news.

Many other (small) speculators follow these "big cats" and also invest money into oil futures, ETFs and other derivates. All these speculative purchases drive the oil price further up. Therefore the predictions and rumors become self-fulfilling prophecies.

 2. The most important part of the speculation and rumors are the continuous claims that conflicts in or with the Middle-Eastern region could lead to severe supply disruptions. For years the perpetual Iran conflict rules the headlines and makes oil more expensive because Teheran could stop its oil deliveries or close the Strait of Hormuz, an important artery for the flow of oil from Middle-East.

The Iran nuke hype reminds me more and more of the "Iraq weapons of mass destruction scare". The winners of this conflict are Goldman Sachs, many hedge funds and - Iran. The rising oil price flushes more money into the cash boxes of Teheran and finances their expensive nuclear program.

"For as long as the oil price continues to rise, Iran is likely to compensate for its reduced sales volume by charging a higher price, and cannot be expected to make any concessions in the nuclear dispute in the near future,” analysts at Commerzbank commented this week.

If the oil price continues its rise it could endanger the global economy. Consumers will have to spend more at the gas pump and might spend less money for other things. Companies will be hampered by rising energy costs. Prof. James Hamilton claims that in 2008 the oil price hike turned the slowdown into a recession (

We can already spot some destruction for demand in the markets for oil. People use cars which are more energy efficient and drive less. The chances are high that the oil price bubble will burst in the coming months. In 2008 the oil price crashed about 70% to around $40.

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