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OIL: Hoarding Helps Pump Up Prices, Say Analysts

Emad Mekay

WASHINGTON, Sep 2 2004 (IPS) - Oil hoarding by countries like India and China, mimicking a long-standing U.S. practice, could be contributing to the recent hike in crude oil prices, say experts here.

Oil prices have risen 15 dollars in the past six weeks, nearly hitting 50 dollars last week. On Thursday, the price of Brent crude oil rose 1.28 dollars to 42.75 dollars.

The Organisation of Petroleum Exporting Countries (OPEC) the world’s main oil cartel, now produces almost 30 million barrels a day, enough, it says, so that prices should actually be 22-30 dollars a barrel.

“So where is oil disappearing into? It appears to be a hoarding phenomenon, and we think it has to run its course, almost like a flu, and when it does pass, prices should gravitate much lower, somewhere down towards 30 dollars a barrel,” said Michael Rothman, senior energy market specialist in the Global Securities Research and Economics Department at investment bank Merrill Lynch.

“But of course, we’re nowhere near that. We’re 15 (dollars) north of that,” he added.

The U.S. Energy Information Administration (EIA) said Wednesday world crude production is churning at about 99 percent of full capacity.

“Any industry in which production is running at 99 percent of capacity to meet demand is likely to experience price pressure,” said the EIA in its weekly review of the oil market.

Analysts say despite that production, oil prices are unlikely to fall to 30 dollars, especially as China and India follow the U.S. lead in hoarding oil. Alarmed by turmoil in Iraq and other Middle Eastern “hot spots,” and recently in Venezuela, and fearing a supply shortfall, these countries are creating a false demand, they conclude.

“People think there is going to be a (short) supply,” Rothman said. “They go out and they start trying to accumulate this oil, and effectively what it does is put pressure on available goods – in this case, available oil.”

“The fact is that there is a good argument for building up inventories when markets are very tight and inventories globally at a rather low level,” said Jerry Taylor, director of natural resource studies at the Washington-based Cato Institute.

“Any sensible investor is going to give a close look at that sort of opportunity because it is a wise insurance policy, as it were.”

Two of the countries said to be large buyers of oil for precautionary reasons are India and China, the latter with an economy running at about double the expected growth rate.

“Demand in China is absolutely phenomenal,” said Jamal Qurashi of FPC energy in Washington, adding that a huge increase in car ownership in the country of more than a billion people, combined with frequent power cuts – prompting higher gas purchases – and guzzling industries, has put oil at a premium.

In India, refiners appear to have bought about 25 million barrels of crude for purely precautionary reasons in June alone, according to Merrill Lynch.

“But this volume of oil – not quite but almost a million barrels a day for precautionary reasons – for lack of any other word, is a type of hoarding,” Rothman said.

“China appears to be doing the same thing as well, and the volume is fairly significant. And it’s created a vicious cycle of sorts where people are producing oil in OPEC almost at full tilt,” he added.

Exact data on the two countries are not available from the two bodies that closely monitor oil production and consumption – OPEC and the Organisation for Economic Co-operation and Development (OCED).

The OCED was created in 1974 as a counterweight to OPEC after the oil embargo by Arab nations during the 1973 Arab-Israel war.

Hoarding in India and China is happening also in western countries, particularly the United States, in the name of security. “What India and China are doing is no different than what we (the United States) have done for years and years with the Strategic Petroleum Reserves,” said Steve Kretzmann, an independent energy analyst.

“They’ve decided to take that kind of approach that successive U.S. administrations have had for years and years. And frankly, given what’s happening with the price of oil and the low level of crude right now, it’s probably a prudent move on their part.”

OECD countries are sitting on 1.43 billion barrels of crude and refined products, in 13 countries. One-half of the reserves sit in the United States; the next two largest volumes are in Japan and Germany. Ten other countries hold the rest, about 12-13 percent of the total.

The amount of crude oil that could be released on a coordinated basis from the OECD reserves is around 9.6 million barrels a day, slightly more than the production of the world’s largest oil supplier, Saudi Arabia.

Most of the U.S. hoarding goes to the Strategic Petroleum Reserve in the Gulf Coast in Texas and Louisiana, currently at around 660 million barrels or equivalent to more than two months of imports. It was created after the 1973 oil embargo to counter supply disruptions.

Despite the pressure on prices, the administration of President George W Bush has said it has no plans to either halt the flow of oil into the reserve, whose target capacity is 700 million barrels, or to draw on it in an attempt to dampen record-high gasoline prices at home.

Bush’ competitor in the November presidential election, Democrat John Kerry, has criticised that decision, and says if elected he will implement a reserves policy to minimise the impact on consumers in times of exceptionally tight supply.

But while experts agree that hoarding is playing a role in pushing up oil prices, some downplay that effect.

“Oil prices are to some degree driven by inventory activities,” said Taylor. “It’s unclear though because they are unannounced and any information that may suggest such a thing is somewhat uncertain à certainly it might explain a couple of dollars in the price. But it is not going to do more than that.”

He also questioned the direct effect of the United States boosting its reserves. “It has a role because it certainly contributes to demand when we are putting oil in that reserve that otherwise would be available to consumers. But on the other hand, my sense is its effect on the price of oil is small.”