Speculators? No. China? No. Nigeria? Yes.

There have generally been two trains of thought on what caused last year’s oil price spike: 1. speculators betting big, or 2. exploding demand driven by China’s runaway economy. Add Phillip Verleger’s view at No. 3.
Verleger, a professor with the Haskayne School of Business at the University of Calgary isn’t buying any of that. At the Argus Media market regulation conference today he repeated the argument he’s made before, that it was really a shortage of one type of oil – light sweet crude that is the easiest to refine – due to production disruptions in Nigeria that drove up prices. The Department of Energy helped by injecting up to 50,000 barrels per day of sweet crude into the Strategic Petroleum Reserve, he argues.
Why isn’t it speculators? Verleger said his own working of CFTC data and other information shows the large institutional investors like hedge funds actually served as stabilizing factors in energy markets.
Why not China? Sure, the country has been consuming more but there were still sufficient supplies of crude.
Rather demand for light sweet crude specifically was driven by regulatory demands in Europe and the U.S. for low sulfur diesel fuel. To get one ton of low sulfur diesel one needs to remove about 3.5 kilograms of sulfur from sweet crude. To get one ton from the typical Saudi crude one needed to remove about 180 kg of sulfur. Put another way, 44 percent of the refined output of a barrel of light sweet crude can be low sulfur diesel, while just 18 percent of one barrel of Saudi crude can be turned into low sulfur diesel, Verleger notes.
Nigeria is a major supplier of sweet crude, so the up-and-down production from that country in 2007 and 2008 due to civil war strained prices even more, Verleger said.
The Department of Energy made that worse, Verleger argues, by choosing to fill up the SPR from Aug. 2007 to June 2008 with light sweet crude, further tightening supplies.
Why did DOE choose to use the premium fuel to fill up the SPR? I asked Verleger.
His short answer: he doesn’t really know.
His speculative answers: there’s a widely followed mindset in current macroeconomic thought that high oil prices don’t really affect the broader economy. It’s based on the research done by economists including current Federal Reserve Chairman Ben Bernanke, he said.
Even more speculative: “[Former Vice President Dick] Cheney may have had a role in this,” Verleger said. “It helped some of his friends quite well.”

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