ON May 6, a leading American investment firm, Goldman Sachs, announced that oil was on the verge of another “super spike” and its price could go up as high as $200 a barrel within the next six to 24 months. The reasons it cited were China’s great appetite for crude and the Middle East’s near-exhaustion of its ability to produce more oil.

This line of argument has become a familiar refrain for pushing up the price of oil in the New York and London exchanges by speculators since the invasion of Iraq in 2003 with the help of key banks, oil traders and oil multinationals.

First, it was $100 barrier that had created great panic and was nervously awaited. It was finally breached but the mantra of record oil price remains intact. And now it is $200 barrier which looks like a tsunami. There is a near-religious belief in the market that the oil production has hit the point where most of the known reserves have been consumed; the era of cheap oil and abundant quantity is a thing of the past; high oil prices are there to stay for a long time to come and the world economies need to come to terms with this reality.

As always, Washington points finger at Arab oil-producing countries. But incidentally the problem is not a lack of crude oil supply. In fact the world is in over-supply now. On May 16, Opec downgraded slightly its 2008 estimate of growth in world oil demand. It said: “World oil demand growth in 2008 is forecast at 1.2 million bpd to average 86.95 million bpd, representing a minor downward revision.”

US oil consumption declined sharply, due to both the slowing economy and warm winter. Demand from China, the Middle East, India, and Latin America is, of course, forecast to be stronger but the EU and North American demand will be lower.

Just a few days earlier, Lehman Brothers, another investment bank drew market’s attention when it said that the current oil price was a bubble and it was about to burst. Its chief oil strategist was quoted in Daily Telegraph on April 24 saying: “Oil supply is now outpacing demand growth. Inventories have been building since the beginning of the year.”

Under the circumstances when world oil consumption is not very strong, one should expect the price to begin coming down. But it doesn’t. Why? The answer lies in what are clearly deliberate US government policies that permit the unbridled oil price manipulations.

In a well-argued study released on May 21, F. William Endgahl, an oil academic, concluded that at present at least 60 per cent of today’s $130 plus price of crude oil comes from unregulated futures speculation by hedge funds, banks and financial groups using the London ICE Futures and New York NYMEX futures exchanges and uncontrolled inter-bank or over-the-counter trading to avoid scrutiny.

It is so because the Commodity Futures Trading Commission allows speculators to buy a crude oil futures contract on the Nymex, by having to pay only six per cent of the value of the contract. At a price of, say, $128 per barrel a futures trader only has to put up about eight dollars for every barrel. He borrows the other $120. This helps drive prices to unrealistic levels. And this also helps keep alive the mythology of peak oil prices.

However, the following facts do not support the speculators’ mythology which is seriously harming the developing world’s economies. Pakistan’s oil import bill which was about $3 billion in 2004 jumped to nearly $8 billion in 2007 and is poised to exceed $10 billion this year.

(1) The US government’s Energy Information Administration (EIA) in its most recent monthly energy outlook report says that US oil demand is expected to decline by 190,000 b/d in 2008, primarily owing to the deepening economic recession. Chinese consumption is expected to rise this year by only 400,000 barrels a day which is hardly the “surging oil demand” blamed on China in the western media. Last year China imported 3.2 million barrels, and its estimated need was around seven million. The US, by contrast, consumes around 20.7 million.

Since the key oil-consuming nation, the United States, is experiencing a significant drop in its demand and China will see a minor rise in its imports, the price in open or transparent markets should, as a rule, be falling, not rising. The absence of any supply crisis hardly justifies the way the world’s oil is being priced today.

(2) Not only is there no supply crisis, there are several giant new oil fields due to begin production in 2008 to further add to supply. Saudi Arabia plans to boost drilling activity by a third and increase investments by 40 per cent to meet growing demand in Asia and other emerging markets. It is expected to raise its pumping capacity to a total of 12.5 mm bpd by next year, from current 11.3 mm bpd.

Brazil’s Petrobras is in the early phase of exploiting what it estimates are newly confirmed oil reserves that could hold as much as eight billion barrels. It is expected to put Brazil among the world’s “top 10” oil producers.

In the US, apart from rumours that the big oil companies are deliberately sitting on vast new reserves in Alaska for fear that the prices would plunge on over-supply, the US Geological Survey has issued a report that confirms major new oil reserves in an area called the Bakken, where there may be up to 3.65 billion barrels of oil.

In fact, much of the world has yet to be explored for oil.

(3) There is growing evidence that the speculative bubble which has gone asymptotic since January is about to pop. In April, oil industry CEOs at a conference reached the consensus that “oil prices will likely soon drop dramatically and the long-term price increases will be in natural gas.” In the US, stockpiles of oil climbed by almost 12m bpd in April, up by nearly 33m since January. And gas demand has fallen by 5.8 per cent.

(4) The oil price today, unlike 20 years ago, is determined behind closed doors in the trading rooms of giant companies like Goldman Sachs, Morgan Stanley, JP Morgan Chase, Citigroup, etc. The key exchange in the game is the London ICE Futures Exchange (formerly the International Petroleum Exchange). And the key role is played by Goldman Sachs which also runs the GSCI price index, which is over-weighted to oil prices. ICE was focus of a recent congressional investigation by two panels and their reports concluded that prices’ climb to $128 and perhaps beyond is driven by billions of dollars’ worth of oil and natural gas futures contracts being placed on the ICE.

(5) Through an exception granted by the Bush Administration in January 2006, the ICE Futures trading of US energy futures is not regulated by the Commodities Futures Trading Commission. A 2006 Senate report on market speculation noted: “There’s a few hedge fund managers out there who are masters at knowing how to exploit the peak oil theories and hot buttons of supply and demand … they only add more fuel to the bullish fire in a sort of self-fulfilling prophecy.”

Engdahl, to conclude, poses the question: will Democratic Congress act to change the carefully crafted opaque oil futures markets in an election year and risk bursting the bubble? On May 12, House Energy & Commerce Committee stated it will look at this issue in June. The world is watching.