Pacific Views

Speculators Damage Oil Market

Matt Taibbi discusses McClatchy's Wikileak analysis on how the Saudis warned the US numerous times that speculators had a great deal to do with the high oil prices of 2008 and they worried that the speculators could devastate the oil market. The Saudis reported that although they increased production upon the request of the US, there weren't any takers on the market because the market was already saturated.

Saudi Oil Minister Ali al Naimi even told U.S. Ambassador Ford Fraker that the kingdom would have difficulty finding customers for the additional crude, according to an account laid out in a confidential State Department cable dated Sept. 28, 2008,

"Saudi Arabia can't just put crude out on the market," the cable quotes Naimi as saying. Instead, Naimi suggested, "speculators bore significant responsibility for the sharp increase in oil prices in the last few years," according to the cable.

One of the reasons that the spikes in oil are true problem for the Saudis is that it could render the US market a "dead-zone" according to this 2010 cable which delineates the concerns of how climate change and energy usage will change the US market.

Prince Abdulaziz said it is important for Saudi Arabia to think through whether the United States is becoming a mature market, like Europe ("which has been dead for years" as an energy market). It is also unclear what role the USG will create for biofuels; Prince Abdulaziz noted that in 2009, the U.S. for the first time consumed more ethanol domestically than Saudi oil....Prince Abdulaziz said that Saudi Arabia needs to know what role the U.S. will be willing to have Saudi Arabia play. He asked, in effect, if we will "green" Saudi Arabia out of the U.S. market.

The cable had some other fascinating points including the fact that Saudi Arabia would like to become the Saudi Arabia of solar energy, but needs a stable oil market until they have a chance to transform their economy.

The Saudis are right that the financial speculators are playing with fire when they game the world commodity markets, because they are creating significant uncertainty that can destroy economies and companies (think airlines) throughout the world. The US should be doing more to rein them.

The question about whether "greening" of the US market cuts out the Saudi oil market leads to an even more interesting question. Could the oil shocks of 2011 lead to such "greening" of the US market that it damages the domestic oil producers too? Perhaps that explains the Republican actions over the last few days as they not only double down on how to help big oil, but also why they are demanding cutting the clean car program to fund disaster relief in the Midwest. We might just be watching the final scenes where the unregulated financial market makes the knockout punch to big-oil because they really can't have it both ways. And they are both too greedy to stop their marauding.