Royal Dutch Shell Plc  .com Rotating Header Image

Oil: A tale of two cartels

Economic Times Business
26 Apr 2010, 0632 hrs IST,Sandip Sen,
Last week the price of oil once again breached the 18-month barrier to touch $87, sparking fears of another oil price spike, widely anticipated since the Davos face off between Europe’s oil majors and the Saudis early this year.

The price spurt of oil followed the US energy department’s decision to raise stock by an additional two million tonnes creating record stockpiles of 356.2 MT, a 7% rise in US inventory over the five-year average stocks. The build-up was due to International Energy Agency’s consumption forecast of 86.6 million barrels, up by 1.8% from last year. The IEA’s revised estimates was possibly due to a sharp 28% jump in imports of oil by China in January, a reaction to “peak oil” fears set off at Davos.

Tony Hayward, group chief executive of British Petroleum, made heads turn at the World Economic Forum in Davos, forecasting a “supply challenge” for the energy industry, which would have to increase output to 100mbd — a new peak for oil from the current capacities of 83-84 mbd. He was strongly backed by Mr Peter Voser, CEO of Royal Dutch Shell, who added to the scare stating that the industry would have to find up to $27 trillion to fund the investment in oil over the next 20 years.

Group Europe’s claim was promptly refuted by Khalid al Falih, Saudi Aramco’s chairman and chief executive. Dismissing claims of a shortage, the head of the largest oil producing corporation in the world said, that a third of his capacity was currently idle, and ready to add four mbd on demand.

He hit out at the price volatility and “misleading” rhetoric, that the world was weaning itself off fossil fuels, saying this did not give producers confidence to keep investing in production. “We don’t believe in peak oil” , he told reporters later, dismissive of Europe’s stark concerns.

Ever since the year 2000, oil prices have been volatile under the influence of two power groups, the producer’s cartel the Opec and the trading cartel the ICE. The ICE cartel includes Europe’s oil majors BP, Shell and Total and the big banks — Goldman Sachs, Morgan Stanley, Society General and Deutsche Bank. Though the Opec cartel still controls 55% of the world’s production , and the ICE cartel less than 15%, the price volatility has been dictated by the trading cartel.

This has been due to the strategic control of the supply chain feeding Europe and the online trading and swapping of future contracts of Brent Oil (North Sea) and WTI (Texas) largely controlled by this cartel and actively traded at the ICE Commodity Exchange in London.

OECD stocks during the last 10 years have risen from 840 million barrels to 1,020 million barrels, due to this volatility, despite a 5% drop in consumption. Over 80 million barrels of oil are being hoarded in super tankers around the world today, as per Frontline which owns the largest tanker fleet worldwide.

Morgan Stanley, the largest stockist of oil today, along with Goldman Sachs, BP, Shell and Total own pipelines, offshore storage and terminal stocking facilities in middle east, Africa, Europe, and the US that are used to soak up excess oil stocks and quickly dump back the same to create a market volatility.

Termed famously as the London Loophole , by Senator Feinstein, each barrel of oil is reportedly swapped 20 to 30 times at the ICE Exchange through high-speed computers before hitting the retail trade at substantially higher prices.

The numbers at ICE are mind-boggling as a result of this round trip swapping, with $7 trillion transacted in CDS contracts during the last quarter, as per their website. The Opec oil, having much larger physical volumes, but not active at the exchange, merely follows the Brent Oil price trends at the futures market, in a classic case of the ‘tail wagging the dog’.

Europe’s oil majors build speculative pressure on the commodity markets with the help of hedge funds, commodity speculators and banks. According to a recent Mackenzie report, Europe’s falling oil output at North Sea has been one of the reasons of this intense speculative activity around Brent Oil. In the year 2009 only eight oil and gasfields in North Sea with a total of 140 million barrels were commissioned against 600 million barrels ‘new oil finds’ for previous years.

Group Europe’s scare mongering on peak oil at Davos is possibly a part of a strategy to raise prices to compensate for the volume losses. China and the US stockpiling early, will ensure that their consumers are hit last, should prices move above the $100 mark.

(The author is an international business consultant)

(Ever since the year 2000, oil prices have been volatile under the influence of two power groups, the producer’s cartel, the Opec and the trading cartel, the ICE Though the Opec cartel still controls 55% of the world’s production, and the ICE cartel less than 15%, price volatility has been dictated by the trading cartel China and the US stockpiling early, will ensure that their consumers are hit last, should prices move above the $100 mark.)

This website and sisters,,,, and, are owned by John Donovan. There is also a Wikipedia segment.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Comment Rules

  • Please show respect to the opinions of others no matter how seemingly far-fetched.
  • Abusive, foul language, and/or divisive comments may be deleted without notice.
  • Each blog member is allowed limited comments, as displayed above the comment box.
  • Comments must be limited to the number of words displayed above the comment box.
  • Please limit one comment after any comment posted per post.