Scoop Opinion: Iraq And The Price Of Oil

The OPEC decision to increase oil production by 6% should have a dramatic effect on New Zealand's oil prices, but is OPEC now the dominant player in a dynamic global oil market? John Howard writes.

When petrol prices rise it's human nature for us to look for likely candidates to blame. The oil companies, OPEC, the government or uncle-tom-cobbley and all.

The alliance of oil producing states, known as OPEC, has long been trying to establish itself as a worldwide oil cartel centered in the Middle East but also including Venezula and some African nations.

Sitting on top of the world's largest reserves of crude oil, these nations have long sought to increase profits and exercise a degree of control over the West by manipulating the oil supply.

In the past, if OPEC cut production, prices rose; if they open up the taps and let the oil flow, prices plummet.

But that shouldn't be happening now in a truly free market.

Why? Because Mexico, a major producer, is not a member of OPEC, and the discipline needed to maintain monopoly prices is not something that is encouraged by the market; if one breaks ranks, prices fall precipitously - the one to break ranks first reaps the pot of gold, cashing in on inflated prices and ultimately undercutting the cartel.

As the new discovery of oil reserves in Central Asia, South America, Indonesia, Alaska and now even New Zealand, increases the supply it should have sent crude prices tumbling; - in the other words the myth of the mighty OPEC should no longer be enough to throw a scare into the markets.

For years now, oil prices have been falling and the major companies have had to undergo a series of mega-mergers just to stay viable, apart from satisfying the demands of investors for a reasonably large margin of profit.

While OPEC did announce a production cutback last April, the fact is that normally this would not necessarily lead to such a major increase in prices as we experienced.

Because of other global oil discoveries OPEC is essentially a toothless tiger, good at growling but not much of a bite.

So what was the reason for the outrageous surge in prices?

Contrary to orthodox thinking, inflation is undoubtedly a factor. Afterall, interest rates are rising through central bank policies trying to cool inflation. But it is not the major reason for the pain at the pump.

In my view, the prices we pay at the pump is partly due to the manufactured sanctions on a major oil producer - Iraq.

Those sanctions, which are killing 5,000 children a week, keep billions of litres of oil off the market. The market is not really being allowed to work as it should.

For example, the last time oil prices spiked was in 1996, but they settled down only after Iraq and the UN agreed on an arrangement where Iraq would be allowed to sell US$2 billion worth of its embargoed oil over a six-month period.

That was the signal for prices to slide rapidly. And they did.

Protesting the economic sanctions that forbids the importation of such weapons of mass destruction as paper and pencils, as well as essential food items, Iraq has withheld oil shipments and consistently argues within OPEC to curtail production.

Iran, Saudi Arabia and even little Kuwait, have combined to hike an otherwise sagging price of crude, although they have now opened the taps a little wider.

But perhaps its even more than that.

The White House has a "Special Advisor to the State Department and the White House for Caspian Energy." In a frankly mercantile policy the purpose of this office is to "enhance commercial opportunities for US and other companies."

The rationale seems to be that as an oil shortage reaches critical mass there is justification to leap in and intervene in the Caucusus, or perhaps in Columbia, to protect vital oil supplies for the West. It's a twisted kind of logic but it would make sense to outraged Western consumers.

As an added rationale to once-again go after Saddam Hussein, the contrived shortage may stoke the fires of the next international foreign policy crisis.

With major oil companies allegedly pouring millions of dollars into the campaign chests of the major US political parties, another war for oil control is almost certain - and, of course, it is a US Presidential election year.

Perhaps the best thing New Zealand could do for oil prices would be to very move strongly in the UN for an ending of the sanctions against Iraq. It not only makes sound economic sense - it's also a humanitarian issue.

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