"Oil prices jump amid fears about …" You can finish that headline with any number of options, from Iran to Venezuela. Geopolitical jitters and the ever-growing competition for crude are driving up wholesale prices. But why does it appear that the "fear factor" headlines increasingly seem to pop up when the per-barrel price dips under $70?

The complexity of setting oil prices can be explained through market theory, supply and demand curves, and arcane models that might challenge the most trained economist. And yet, it seems lately that every time the price of oil begins to dip below $70, one of the usual-suspect countries runs into difficulties and the press announces the rise in price. Further, it seems media leaders (or their sources?) are zealously reporting negative events large and small just as the price starts to slide.

The price of oil first tipped above $70 with a report that Iran was enriching uranium and wanted to wipe Israel off the face of the planet. The world suddenly got used to $70 oil. It is no secret that the governments of Iran, Venezuela, Nigeria, Russia and even Saudi Arabia do very well at $70 oil; however, with few exceptions, none of them sees this price as a good thing for the long term. But for now it is very helpful, and they really don’t want to see it come down.

To paint a metaphoric picture: Think of a toy balloon floating in the midst of a group of people. As balloons will, this one lingers for a moment, then begins slowly to drop. Someone steps forward and taps the balloon up again. It rises, lingers, begins to drop … and again someone steps up to tap it.

That balloon is, of course, crude oil prices. And the group of balloon tappers may grow large or small according to world events; but someone, somewhere, is willing to tap that price back up should it drop too far.

Who are some of the world’s most active tappers – and fear mongers?

Is there any toastier hot spot in the Middle East than Tehran, where nuclear ambition and the anti-American sentiment conspire to keep crude above $70 per barrel for most of the summer? Well, the conspiracy theory is admittedly a conjecture – such is the nature of conspiracy theories – but it is true that "four-month crude futures haven not settled below $68 or above $73 in more than a month," as AFX News reported in a June 20 release. To one analyst, James Cordier, the price suggested "hit[ting] a fair value."

Still, "Iran’s leaders have ramped up their efforts to acquire nuclear weapons based on the assumption that their capacity to resist Western pressure will be greater so long as oil prices stay higher," noted Bradley R. Gitz of the Arkansas Democrat-Gazette. "As long as oil prices remain hypersensitive to turmoil in the Gulf that we know Tehran can exacerbate, American leverage over the mullahs on the nuclear issue remains weak."

So it is conceivable that when the leadership in Iran saw what happened when they threatened Israel, they may have viewed this as part of a viable strategy. "Like it or not, the Zionist regime is heading toward annihilation," President Mahmoud Ahmadinejad said at the opening of a conference in support of the Palestinians. "The Zionist regime is a rotten, dried tree that will be eliminated by one storm." This comment and the world’s outcry that followed caused oil prices to rise. Later, prices would continue to rise as word spread of Iran’s nuclear program.

Then as prices began to ease back under $73 on April 27, another Iranian leader tapped the balloon. "If the U.S. ventured into any aggression on Iran, Iran will retaliate by damaging U.S. interests worldwide twice as much as the U.S. may inflict on Iran," Supreme Leader Ayatollah Ali Khamenei said in a speech to a workers’ assembly, according to the official news agency IRNA. And up went the price of oil.

Fears (and prices) began to subside, but on April 30 another Iranian official stepped forward to tap the price balloon. "Any action like that will increase oil price very high," Iran’s Deputy Minister of Petroleum for International Affairs, Hadi Nezhad Hoseynian, was quoted as saying in a BBC Worldwide Monitoring report. "And I believe that UN or its bodies will not put any sanctions on oil or gas industry."

Perhaps some of the taps are inadvertent? Could it be these leaders do not intend to raise oil prices with their pronouncements? Could be. The fact remains, the prices do rise.

As we exited April, it seemed the price of oil might begin to settle down. But it turned out there was no limit to interested parties wanting to keep the price of oil high – including Evo Morales in Bolivia, who, following in the footsteps of role 

model Hugo Chávez, rushed in and delivered a big balloon hit in May.

This year, Morales chose May Day to nationalize Bolivia’s energy industry, declaring, "The pillage of our natural resources by foreign companies is over."

"From a political point of view, it’s a powerful issue to manipulate, but from an industrial point of view it can do real harm," Adriano Pires, director of the Brazilian Centre for Infrastructure Studies, an energy consultancy in Rio de Janeiro, was quoted as saying in Business Day.

Still, prices did not stay up long on this news, and by May 8, prices began to settle below $70. This time, even the President of Iran was not willing to tap it back up again. The Financial Times reported that "Iran’s president sent a letter to U.S. President George W. Bush seeking to resolve ‘the current situation in the world.’"

However, other countries still wanted to get into the act. Having watched the effect that Iran’s rhetoric and Bolivia’s nationalization had on the price of oil, Hugo Chávez naturally chose to tap at the balloon.

On May 10, the Energy and Mines Commission of the Venezuelan National Assembly passed a bill to increase royalties to 33.3 percent from 16.67 percent, making a change first mentioned by Chávez on May 7.

"This is the new Venezuela," analyst Robert Bottome told the Miami Herald. "This government has absolute control, and nothing is being delayed," he said. "These bills are being passed without much discussion."

According to that article, "Chávez is demanding an ever-bigger take from the foreign companies that pump crude oil in Venezuela and risks scaring off investment he needs to boost the country’s production. He joins governments in Russia, Bolivia and Britain that have increased royalties and taxes for natural resource extraction as crude oil prices have soared."

The balloon got another tap with news from Nigeria: On May 12, another kidnapping was reported. "The price of crude oil yesterday rose above $72 a barrel after three foreign employees of Italian oil contractor, Saipem, were kidnapped from a car under police escort in Port Harcourt, heightening concerns that the nation will take longer than expected to resume pumping crude at full capacity."

After this, the price began to once again to settle down. However, too many were benefiting from these high prices seemingly related to news. From May 15 to May 22, the price settled into the $60s. However, some countries were becoming used to this higher-priced environment, and it seems the mechanisms to drive it back over $70 were in place.

Latin America works very well when we are all paying a premium for oil, so Ecuador stepped up to whack at the balloon. The Financial Times, reporting on the termination of Occidental Petroleum’s contract in Ecuador, noted: "The situations in Ecuador and Bolivia have similarities. Both governments appear emboldened by high oil prices and Hugo Chávez’s squeezing of western oil companies in Venezuela.

Both also face pressure from voters who have not shared in the economic development of recent years. But, unlike Bolivia, Ecuador’s move is so far specific to Occidental." And since this country is not a major exporter, the balloon didn’t go very high and prices stayed below $70.

We can’t have that happening. So who should step up to take a tap at the balloon but the Venezuelan energy minister. "Venezuelan oil minister Rafael Ramirez said yesterday that the oil market had enough supply to justify a production cut by the OPEC cartel," reported Platts Oilgram News. Said Ramirez: "Market fundamentals would indicate a production cut because there is a lot of oil in the market."

Accordingly, the price of oil jumped back up over $70. It continued to rise, but eventually the fear factor subsided and the price began to slide. One begins to imagine a cartel of balloon tappers watching and wondering who will take the next swipe. The next tap came from an unusual source.

Proclaimed the June 5 Wall Street Journal: "Saudi Oil Minister Ali Naimi confirms that Saudi has cut back crude-oil production in recent months, but he attributes the trend to decline in demand and closing of refineries for maintenance rather than an attempt to limit supply."

Our federal government loves to have special investigations into all sorts of frivolous theories. Perhaps this one needs some more looking into. Is it a mutual understanding among these countries and other oil exporters that if the price is going down, someone needs to come tap at the balloon? How much of the $70 price can be attributed to simple overreaction to nothing more than news?

We can leave this for others to decide. In the meantime, here’s a suggestion: As soon as the price dips below $70, start watching the news. Someone, somewhere is going to tap at the balloon and send it back over the mark again. Fear factors.

© 2006 Richard R. Loomis & Susan Salter
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