It should be pretty clear after the Iraq incident that United States is playing the oil game all over again but in a different way now. And this is the desperate gamble of a country whose economy is neck deep in trouble.
Now what’s the OIL Game
Oil is internationally traded in New York and London and denominated in USD only. Oil prices are no longer controlled by OPEC (Organization of Petroleum Exporting Countries). Rather, it is now done by Wall Street. This shift in the determination of international oil prices from the hands of producers to the hands of speculators is crucial to understanding the oil price rise. Today oil prices are believed to be determined by the four Anglo-American financial companies-turned-oil traders, viz., Goldman Sachs, Citigroup, J P Morgan Chase, and Morgan Stanley.
Past few years, the US financial sector has begun to turn its attention from currency and stock markets to commodity markets. According to Rediff News site about $260 billion has been invested into the commodity market — up nearly 20 times from what it was in 2003 and using $260 billion they can buy $5 trillion of commodities contracts due to margin and limits in futures. In India we are seeing huge FII’s sell-off and no support is seeing in the equity market. According to CNBC TV18 around $6 Billion has gone out of India alone and similar may be the situation for many other Emerging markets and I would like to know where is the money going. Definitely not for personal consumption but its been pumped into commodities.
Can Wall Street increase the demand?
When you trade in commodities such speculators do not own real oil. Every barrel they buy in the futures markets they sell back again before the contract ends. That may raise the price of ‘paper barrels,’ but not of the black stuff refiners turn into petrol.
Now as a speculator you have $5 Trillion margin to buy any commodity what would happen is create a fake demand till you start selling and when countries who buy black gold they would have to be buying at much higher prices due to the speculators and this causing the ripple effects and many countries creating stock of OIL going forward. As an example US strategic oil reserves were at approximately 350 million barrels for a decade till 2006. However, for the past year and a half these reserves have doubled to more than 700 million barrels. Naturally, this build-up of strategic oil reserves by the US (of 350 million barrels) is adding enormous pressure on the oil demand and consequently its prices.
In today’s prices of approximately $140 per barrel, this means that approximately $100 per barrel could be attributed to speculation! At an average price of even $100 per barrel, the entire cost for the purchase of this additional 350 million barrels by the US works out to a mere $35 billion. Needless to emphasis, this can be funded by the US by allowing it currency printing presses to work overtime. After all, it has a currency that is acceptable globally and people worldwide are willing to exchange it for precious oil but same is not the case for India where it need to buy USD before it can purchase OIL. No wonder Goldman Sachs predicts that oil will touch $200 to a barrel shortly, knowing fully well that the US government will back its prediction.
Reliance and the OIL Prices
Mukesh Ambani in the recent press appearance mentioned that he will be starting the RPL operation in September and will be providing the oil at around 25-30 USD and which means that around that level could be the actual price of Crude.