The Spark

“The emancipation of the working class will only be achieved by the working class itself.” — Karl Marx

Skyrocketing Oil Prices:
The Planet Held Hostage by the "Majors' and the Speculators

Oct 14, 2005

The following article has been largely excerpted and translated from an article first appearing in the October issue of Lutte de Classe, #91, the political journal of Lutte Ouvrière, the French Trotskyist organization.

The price of crude oil has tripled since 2003 and, since 1999, even quadrupled. Every commentator seems to take it for granted that these high crude oil prices are here to stay – and, along with them, the two-digit price hikes for gasoline, heating oil, natural gas and the electricity that is produced by petroleum or natural gas.

Bush, in one of his regular radio addresses, recommended that the U.S. population learn to "economize" on the use of energy. In effect, he repeated the advice that Carter gave in 1977, when he demanded that Americans "make sacrifices, and change our way of life.... we will have to balance our demand for energy, with the supply of our resources, which are disappearing rapidly."

The whole affair today is a repeat of the two "oil shocks' of the 1970"s: in 1973-74, when the price of crude oil quadrupled and then again in 1979-82, when it quadrupled again. Those two oil shocks were the first major manifestations, along with the crisis of the dollar, of the long world-wide economic depression, from which we have never recovered.

The Earlier "Oil Shocks"

The first "oil shock" coincided with the beginning of a difficult period for the capitalist economy. It was the end of the so-called "postwar boom," two-and-a-half decades during which the world economy had experienced relatively sustained growth based on re-building from the destruction brought about by World War II.

Since World War II, the oil companies had sold oil at an average of $15 a barrel, which was way above their production costs. Nonetheless, it was considered cheap. So long as the economy – and therefore the demand for oil – was constantly expanding, this price level allowed the "majors' to make huge profits while allowing the rest of the world's capitalist classes to rebuild their industrial infrastructure (and their profits) in the aftermath of the war. Keeping the price of oil low allowed the "majors' to compete favorably with other sources of energy, particularly with coal, and to make high profits, thanks to the high volumes sold.

The demand for oil grew every year, encouraged by the low prices. And the big oil companies made sure there was more than enough oil on the markets to meet the demand. This surplus of oil served another purpose: it gave the oil companies a way to pressure any particular oil-producing country (i.e., we have so much oil we can do without you). For more than 30 years, the "majors' thus secured profit margins of 300% or more, especially on the oil produced in the Middle East.

However in 1973, watching the world's economy sinking into crisis, the oil companies pushed through the first brutal increase in prices, attempting in advance to make up for their shrinking markets and thus shrinking profits. They certainly had the means to do it. The "majors' held a monopoly in oil. Once called the "seven sisters," these few big companies held the world's supply of oil in their hands, directly controlling the refining and distribution of oil and indirectly controlling the exploitation of oil reserves, through the weight they exerted on the oil-producing countries. Rapidly pushing up the price of oil, the capitalists in the oil sector may have been trying to protect themselves from the gathering economic crisis, but this only made the crisis worse. All sectors of the economy had to pay a heavier oil bill. Heavy industry and transportation, the biggest consumers of energy, were particularly hard hit.

With the slowdown of the economy and the erosion of the international currency, that is, the dollar, inflation grew rapidly. In France it reached 20% and then stayed at 10% for years. In the U.S., by 1980, it had reached almost 14%. The purchasing power of wages shrank. In 1973-1974, for the first time since the end of the war, production fell; this was repeated in 1979-82, the period coinciding with the second "oil shock." In the developed countries, mass unemployment returned as a permanent feature of the economy, helping to reduce the working class' share of the wealth, leaving more for the propertied classes. Across-the-board price increases, stemming from the increase in oil prices, lowered the standard of living of workers in the developed countries. In the poor countries, the majority of which need to import their oil, the increase in oil prices hit the laboring masses brutally. The economy of these countries was already fragile, plundered by imperialism. It was then literally strangled. To ensure at least some supplies of energy, be it only to survive, the poor countries had to go into debt to the banks, thus putting a noose around their necks, which is still strangling the people of these countries, thirty years later.

Well-Orchestrated Lies

It was a violent blow. As oil prices skyrocketed, governments everywhere orchestrated campaigns to get people to accept as inevitable the worsening situation.

Western governments explained that the world had only enough oil reserves to last for another three decades; thus, oil was bound to become more expensive as it became more scarce. The media presented so-called experts who repeated over and over again that the world was going to run out of oil. It was enough to make the skyrocketing prices seem as though they had been fated by nature.

As oil prices rose precipitously starting in 1973, the rich countries' governments, looking for a scapegoat, blamed the oil producing countries and more specifically OPEC, the organization set up by the main Third World oil-producing countries. OPEC was supposedly "holding the world hostage."

All of this was nothing but a smokescreen of lies, behind which were hidden the activities of the oil companies.

For decades, the oil-producing countries had had no say over the price of oil, which was decided by the companies alone. The countries that produced the oil got only crumbs from the oil revenue. The few politicians who, like Mossadegh in Iran, dared touch the interests of the big oil companies paid a dear price, losing their positions or even their lives. So why, all of a sudden, would the big oil companies allow the producing countries to set prices as they liked?

And why, for example, in the early 1980s, when the oil-producing countries began to find themselves in dire straits due to their indebtedness and tried to push for another increase in oil prices, did they fail? The Western media ignored this; it would have amounted to an admission that the first two "oil shocks' had been agreed upon, if not initiated by the "majors."

The fact is, that in 1973, the big oil companies had changed their strategy, increasing prices themselves, or encouraging the oil-producing countries to demand price increases.

It's true of course that this produced a big increase in revenues for the oil producing countries, or more exactly for their kings, emirs, or dictator-presidents.

However the "fabulous fortunes' which were allegedly built by the oil producing countries following the "oil shocks," belong to the realm of fantasy. To put it more accurately, the frequent references to these alleged fortunes were designed to fudge the real issues. It was commonly said in the late 1970s, that the oil producing countries had piled up enough dollars to challenge the financial power of the rich countries. In fact, most of the 47 billion dollars invested by the oil producing countries in Western countries was invested in government bonds, particularly U.S. Treasury bonds. The rest was pulled into the flow of capital circulating on financial markets or was invested in real estate or in Western companies' stock. But the oil producing countries were certainly never in a position – nor did they even try" to challenge the West's financial domination.

The populations of the oil-producing countries never benefitted from this bonanza at all. Of course, there is a handful of tiny emirates where the population is so tiny that their feudal rulers were able to distribute a few crumbs without denting their own incomes. But even in these emirates – not to mention some of the larger oil producing countries like Saudi Arabia" large numbers of very low-paid over-exploited immigrant workers were brought in, forming a large part, if not the majority, of the working class. And in many of the large oil-producing countries, like Nigeria, Gabon, Angola, etc., the standard of living of the population is just as low as in some of the poorest Third World countries.

Who was calling the shots in these price increases? It was clearly shown in 1974 when U.S. Secretary of State Henry Kissinger demanded that a minimum price level should be set in world oil markets. This was aimed at ensuring that North American wells whose production had been abandoned by U.S. companies, because they were not competitive, could be exploited profitably again. It also guaranteed that the 500 billion dollars that had been invested in promising new sources of energy would generate an adequate profit. The minimum price level demanded by Kissinger was a gift given by the U.S. state to the biggest oil companies in the world. Kissinger's statement was itself an admission that the world's main power had not been kept in check by OPEC!

The Big Oil Companies "Invest" in Each Other

Thanks to the higher oil prices produced by the first "oil shock," the "majors' were able to fill their coffers. But they also began to explore areas which had not been profitable enough before, such as the North Sea and Alaska. Oil rigs were built to pump oil from parts of the sea far deeper than in the Gulf of Mexico, particularly off the coasts of Africa. The companies also bought up other sources of energy, such as oil sands and bituminous coal. In the U.S., Exxon, Gulf Oil and the Getty group took over a big slice of the nuclear power industry.

The "majors," backed up by the rich countries' state apparatus, made the population of the whole planet pay for these investments. However, given the general sluggishness of the world economy, the "majors' were no more eager to invest than were the rest of the world's capitalists.

Real investment stagnated. Over the last decade, in fact, most of the so-called "investment" made by the "majors' was devoted to acquiring smaller companies, or to mega-mergers between the "majors' themselves. Thus Exxon and Mobil merged, as did BP and Amoco. And today's Total was formed from Total, Petrofina and Elf. The "majors' may have added existing facilities and markets to their portfolios, but they didn't invest in any new production and usually cut jobs in the bargain. No new refinery has been built in the U.S. for nearly 30 years. It's much more profitable to keep production at a minimum!

So what happened to the hundreds of billions of dollars they made over all these years? Most of it went to their stockholders, in the form of dividends or in the cash they paid out to buy back their own shares of stock at generous prices. ExxonMobil, for example, bought back 13 billion dollars worth of its shares in 2005, following a 9.95 billion dollar buy-back in 2004, plus nearly seven billion dollars paid out in dividends in both 2004 and 2005. For the past 22 years, ExxonMobil has averaged a 4.8% increase from one year to the next in the size of the dividend it paid out to stockholders.

Profiteering and Organized Scarcity

In order to maintain their fabulous profits and, if possible, to increase them, the "majors' had to keep the price of oil and of all its derivatives high. To this end, ever since the return of the capitalist crisis, they have managed their supplies of oil so as to limit the amount appearing on the market. There's nothing very new in this. Ever since the days of the first oil magnates, the big oil companies have always kept a straitjacket around the oil markets, sometimes by acting as a cartel and fixing prices, sometimes by getting the rich countries' states to do it on their behalf. The aim of this organized scarcity was always to protect their profits and the income of their shareholders from the so-called "free market," which the capitalist class and their politicians are always so eager to salute.

Nonetheless, the "majors' did bring new oil fields into production during the last three decades. But they made sure never to have an over-supply of oil, which would have threatened their profits. Their main purpose was simply to diversify their sources of supply. The legacy of the period between the two world wars had left them with the Middle East as their main supplier. And the region proved to be chronically unstable despite, or because of, the abject regimes supported by imperialism in most of the region.

Nonetheless, according to the International Energy Agency, the "majors' considered it worthwhile to venture outside the Middle East only when production costs were less than $10 a barrel – and this at a time when oil prices were in the $22 to $28 a barrel range. Needless to say, with the price today nearing $70 a barrel, their profit margins have become enormous!

In their effort to diversify their sources of oil, the "majors' struck it lucky: the collapse of the USSR, the world's second largest oil producer, opened up a vast new field for them. They were not able to take over as much of the Russian oil industry as they probably would have liked; the Russian state today still directly controls a third of its oil industry. But the "majors' were able to sign options on a lot of the former Soviet oil and gas resources, taking advantage of the greed and corruption of the ruling circles in the Russian state, as well as in Azerbaijan, Kazakhstan, Turkmenistan, etc.

Blood and Oil

By the 1970s – in many cases, long before – most of the larger oil-producing countries had nationalized their oil industries. From then on, the "majors' operated by signing production-sharing agreements with the national oil companies, which formally they did not control. To a limited extent, the regimes of these countries were able to play off one "major" against another in order to win better terms. It became somewhat more difficult for the "majors' to force a "regime change" whenever the rulers did not prove flexible enough to their liking. Still, the majors did continue to shape the political set-up of the poorest among the oil-producing countries, as was shown, for example, in Nigeria by the brutal repression of the Ogoni rebellion against the destruction of their livelihoods by Shell; or, in Congo-Brazzaville, by the confrontation between armed factions backed by rival "majors."

For forty years, the big oil companies may have abandoned certain parts of the oil industry. But they still have a virtual monopoly over the essential parts of the oil industry: refining and distribution. Together with the diversification of the sources of supply, this gives them the power to impose what they want on the oil producing countries, but also on the most powerful states. The states of the imperialist countries bow to the interests of the oil companies. Sometimes the people leading those states are people who made their career in the field, as U.S. Vice-president Dick Cheney did. We know that oil interests demanded their share of the plunder of Iraq, even before U.S. and British soldiers went there to get it for them from the ruins of Baghdad and the corpses of the Iraqis whose blood continues to flow in the pipe lines of the area.

"Energy Saving" and Hypocrisy

A lot of government hot air has been produced over the years about the need to "save energy," sometimes even claiming that this was the best way to contain the greed of the "majors."

In reality, the main beneficiaries of these so-called "green campaigns' are the companies given state subsidies and tax incentives to improve their energy efficiency or develop "alternative energies' – including the oil companies.

Since there was a potential market and the possibility of massive subsidies, the capitalists began to explore "alternative" or "renewable" energies. In the U.S. and in Europe, the big companies – in oil, in large construction and in engineering – began to invest in wind turbines when the states of the different countries began to offer big subsidies for research.

Nonetheless, despite the more or less official campaigns about the imminent end to the planet's oil resources, there never was any serious attempt to develop other sources of energy that might have been substituted for oil without carrying its disadvantages. There wasn't even a serious attempt to encourage the use of small cars rather than gas-guzzlers like SUVs and four-wheel-drives, let alone to develop cheap public transportation, which could have freed people from the need to use a car. No doubt, no government was prepared to upset the big car companies.

Oil still supplies half the energy which is consumed on earth because, for more than a century, capitalist society has developed its industry, its transportation systems and its cities by relying on oil, which is easy to extract, transport, transform and store. It's a product which can be very easy to control and very profitable for those who do.

An oil-based economy like the present one carries an enormous social cost: pollution of all sorts, economic and social waste, destruction of the environment, aberrations in the organization of the lives of billions of human beings and criminal irresponsibility typical of the whole capitalist system. The actions of the "majors' obey but one law: profits, if not oil, must flow.

In any case, the issue is not the exhaustion of the planet's oil reserves. Thirty years ago, "experts' predicted that these reserves would have been exhausted by now. These predictions proved to be nonsense. Today, more "experts' have revised them, claiming now that the "end of the world as we know it" will arrive about 2030-40.

This story is pure fiction, or rather sheer swindle. When the oil industry speaks about the reserves of oil, they refer only to the known ones that they consider worth exploiting. The amount of reserves therefore is relative, depending on what the oil companies consider profitable for them, and for them alone.

During the last thirty years new reserves have been discovered. Some have been exploited in places that are among the most inaccessible on earth, such as the depths of the oceans. Gasoline has begun to be extracted from "non-conventional oil": the very heavy oil from the Orenoque basin in Venezuela, or the bituminous oil seeps and the Athabascan tar sands from Alberta Canada. Technical progress changed the amount of reserves, sometimes overnight. At the beginning of 2003, the Oil and Gas Journal (which yearly publishes data about the world's reserves) created quite a stir when it began to count Canadian tar sands. Canadian reserves thus jumped from almost nothing, 5 billion barrels, to 180 billion barrels, that is 20% of the oil used by the country! Geologists and engineers knew for a long time how to extract oil from those sedimentary rocks. What was decisive in pursuing it was the price of oil, which increased a lot, making the exploitation of those sediments attractive for the shareholders of the oil companies.

A Third "Oil Shock"

Three decades have passed since the first two "oil shocks," and nothing basic has changed in the policy of the oil companies. Once again, oil prices have skyrocketed.

Financial speculation has played an important role in pushing up prices today. Starting in 2003, a wave of speculation rode through the oil futures markets, NYMEX in New York and ICE in London. Everything becomes a pretext for the speculators: a refinery on fire, a terrorist attack in Saudi Arabia, good economic figures in China, tensions in the Middle East, hurricanes in the Southern U.S.

For more than two years, large masses of capital in search of quick and easy profits have flocked into these markets, buying and selling futures contracts – i.e. "paper-barrels' of oil, which have no material existence. Not a problem, since the aim of the speculators is not to acquire or to sell oil, but to turn a profit, thanks to the ups and downs in the prices of oil contracts.

In and of itself, such a speculative wave means that speculators are convinced prices will continue to go up and that they can make a profit by gambling on a future price increase. During the first two "oil shocks," the "majors' encouraged such "optimism." Today, they still play a role in feeding speculation: every "major" employs hundreds of traders to speculate on these markets. Shell, for example, has 240 traders of its own.

But there are other factors behind the speculators' "optimism." The world oil market is worth around 2.65 trillion dollars a year. Once all the costs of producing the oil are deducted, what remains is a net "surplus' of around 2.13 trillion dollars, only slightly less than Britain's entire GDP. Of course, there are many capitalists who feed on this surplus: the "majors' and their shareholders, of course; but also big construction companies like Halliburton; big investment banks, like Goldman Sachs, which help push prices up when they predict $105 a barrel; brokers and traders on the oil markets; owners of old tankers; oil hedge funds; the ruling strata in the oil producing countries, etc.

It's estimated that the oil industry should be investing about 250 billion dollars a year. However, over the last ten years, the oil companies invested only 100 to 120 billion dollars a year. Thus the "markets' know that if the oil industry is going to finance investment, after decades of under-investment, it's going to demand big price increases. To be more precise, an increase in oil prices is the best way for the oil companies to attract new capital – which, however, they may or may not then invest in new production. Continuing their organized scarcity policy, as far as productive investment is concerned, they may just inject this enormous new mass of money into the financial channels of the world economy. In any case, the speculators know that they can bet on an increase in the price of oil because it is in the interest of the oil companies to maintain high prices.

Until recently, the leaders of the rich countries did not seem too worried by the increase in oil prices. But the level reached this year has caused some of them to express worries about a possible impact on "economic growth" – meaning, mainly, on capitalist profit in the midst of an economic situation already far from healthy. In September, the G7 meeting of finance ministers devoted most of their discussions to the oil issue.

In the rich countries, this price increase has already affected the standard of living of the working class and not just from the higher cost of gasoline, heat and electricity, but also from the higher cost of many other products, either because they contain oil derivatives or simply because they need to be transported and refrigerated. Contrary to what other companies pretend, they are not paying the higher price of oil; consumers are. This price has been directly passed on to them by the capitalists.

But the most dramatic consequences of oil price increases are hitting the two-thirds of the world's population who live in the poor countries. Even before the latest speculative bubble burst out, the price increases had already damaged the standard of living of the working population of the poor countries. This fostered demonstrations and riots, in the Comores, and in African and Asian countries. The public finances of a country like Guinea-Bissau, although situated on the Gulf of Guinea, which is the new El Dorado for the oil companies, were in bad shape even before the price increases. In ordinary times, the least increase in the oil price results in the stoppage of the only power plant of the country, which runs on oil. As the speculators and shareholders of the oil companies pushed oil prices into the stratosphere, how much more catastrophic was the damage to the population.

In 2005, more than 100 billion dollars in profits (compared to 84 billion the previous year) were registered by the five biggest oil companies in the world: ExxonMobil, Royal Dutch Shell, BP, Total and Chevron. ExxonMobil, the largest company in the world on the stock exchange, cashed in 25 billion dollars in profit in 2004 and forecast almost 32 billion for 2005! Never before has a single industrial sector recorded such profits.

The price of North Sea crude oil increased by 49% in London during the first five months of 2005 and the price of the barrel bypassed $70 in New York. The "majors' announced a 30% average increase in their income for the first quarter of 2005, while the costs of extracting, transporting, refining and marketing the oil have changed very little. The oil companies subject the whole world's population to extortion, which is one of the features of the present crisis in the capitalist economy. Catastrophic for the planet as well as for humanity, this crisis presents the very image of a system guided only by the chase after profit.