In My View

How to Fix the Oil Spigot?

We knew that the US president, George W Bush had bills to pay to the oil majors. They had bankrolled him for long. But what we do need to know is: that those paying the cash are Us. And what are we paying for? To finance the inflating coffers of some of the most regressive entities the world over.

That A-list includes the Salafist Saudi regime; their other equally regressive cousins ruling other oil producing West Asian nations. The list also has with top billing the American oil companies, who are earning hyper-profits at the cost of the consumers right down to the bottom level of the pecking order.

It is ironic that while everyone in the world is talking about inflation and price rise, there is a sense of inevitability that shrouds the runaway increase in oil prices. A neo-liberal media has created this environment of impending oil shortage on account of rise in demand from China and India to fuel price expectancy of the consumers. They have even used every scrap of bad news to explain the spikes in oil prices.

The real reasons lay elsewhere. A school textbook economic sense tells us that the prices are determined by supply and demand. But is also tells us that this would occur in a perfect market condition. The oil market is rigged to such an extent that only a few like the American energy economist, Matthew Simmons, believe that oil has economics related to it.

Instead, oil is about politics. Ever since 1938, when the American Standard Oil of California first struck oil in Saudi Arabia, and later formed Aramco (Arab-American Oil Compnay) with Texas Oil, politics governed the price of oil and its so called economic. On the one hand it enriched the enclaves of retrograde Arab princelings who ruled the countries of the oil-producing West Asian region, in turn oil also helped establish the domination of dollar as the world’s reserve currency, thus creating an American economic suzerainty.

The rise of the nationalist left in West Asia, signaled by the victory Mohammad Mossadegh in Iran, put enough pressure on these medieval regimes to scramble for some vestiges of modernism. Simultaneously, they tried to approproiate the pan-Arab nationalism of the leftist forces by staging an opposition to the existence of Israel on Palestinian lands. Hence, the price shock of 1970s that eventually led to the price of oil in 1980 - in the wake American hostages crisis in Iran - to close nearly at $ 100 per barrel of crude.

In March this year that highest level was breached. Today, oil is selling at close to $ 130 per barrel, which in inflation adjusted dollar is higher than the highest rate of the 1970s oil shock period and the 1979 crisis. What are the causes for this seemingly inexorable rise?

Considering that the dismal science has an overwhelming influence on our minds, the first cause had to be supply. The total oil supply is two million barrels per day short of the global demand of 87 million barrels per day. And you might laugh aloud at this, the US Congress has decided to sue the Organisation of Petroleum Exporting Countries (OPEC) – its primary client – for defaulting on production!

But the more important cause is what the Christian Democratic government in Berlin seems to have suddenly discovered only this week: speculation in oil futures. Traders in the New York Minerals Exchange (NYMEX) have made hundreds of billion dollars trading in oil futures almost since George W Bush invaded Iraq.

Traditional futures trading is price speculation based on economic fundamentals of given situation. But the current investors driving oil prices up in NYMEX are the ‘index’ speculators. These are people who invest in commodity indices, not on commodities themselves. They invest in the indices not to wait for the time when they would go up following the logic of a capitalist development. But instead, they actually first invest in the indices, which then re-invest the index funds to acquire the commodity futures contracts commensurate with the value of the original investment. This thus creates a vicious cycle of escalation as pernicious as the sub prime mortgage boom on the USA that went bust.

In simpler terms they are 21^st century’s hi-tech giant hoarders who today, by some calculation, hold as much oil as China’s current annual demand of 920 million barrels of oil. Need we to go look anywhere else for reasons behind the oil price leap?

The Germans have now demanded a ban on the futures trading of oil. But it is the governments of China and India who need to break up the party. They can for one shift to spot buys in a cartelized manner - instead of long term contracts - at whatever is the current rate. That would stop the speculative cycle based upon longer term price expectations on oil.

Another strategy would be to diversify the source of oil away from the dollar denominated areas to the euro areas like Venezuela and Iran. Even Nigeria could be made to fall in line if the two big sources of demand co-operate amongst themselves. Of course, we have to keep in mind that only a month ago, India’s Foreign Minister, Pranab Mukherjee had gone and paid obeisance to the Saudi royals. This visit was quite out of the blue, even after the Organisation of Islamic Countries only recently raised the Kashmir stick to beat India with. Strange are the ways of politics.

Pinaki Bhattacharya, currently located in Kolkata, is a Special Correspondent with the Mathrubhum, Kerala. He writes on Strategic Security issues. He can be contacted at pinaki63@dataone.in .