Who
Determines The Price Of Oil?
By Ralph Nader
07 November, 2007
Countercurrents.org
Question
of the day: who and what is determining the price of oil and your gasoline
and home heating bills? Don't ask Uncle Sam, because George W. Bush
and Dick Cheney are running a regime marinated in oil that does not
issue reports which explain the real determinants of petroleum pricing
beyond the conventional supply-demand curves.
First, let us create a historical
framework to provide some background. In the good 'ole oil days, before
the producer-countries' cartel in the Third World gained pricing power,
there were seven giant oil companies called the 'seven sisters' led
by Standard Oil (now Exxon) and Shell. As chronicled in Robert Engler's
classic book, The Brotherhood of Oil, they were able to affect pricing
through extra-market means. Economists called them a tight oligopoly.
OPEC later took their place
at the table in the mid to late Seventies and set the price of crude
oil at highly publicized meetings of the various member countries representatives
from the Middle East, South America and Africa. Adjusting, 'seven sisters'
concentrated their pricing and supply power downstream at the refining,
pipeline and marketing levels.
Pricing power was never total
but it was always complex, occurring in the interstices of an industry
few outsiders understood, and fewer regulators could affect. Besides,
natural gas was de-regulated between 1978 and 1993, after which its
prices really took off.
Today, a third party has
moved to the table-the New York Mercantile Exchange, a similar operates
in London and a new one in Dubai. There, boisterous traders buy and
sell futures contracts on the delivery of oil. But as Ben Mezrich, the
author of the new book Rigged said recently, the dollar amounts of these
futures contracts are far far larger than the actual oil deliveries
they represent as they turn over and over at the Mercantile Exchange.
So now the critical resource
of oil is driven by speculation at ever higher abstract electronic levels
of futures trading. Increasingly, the distance becomes greater and greater
between this abstract trading (fueled by rumors of storms in the Gulf
of Mexico, or some possible political turmoil in a region of the world,
or some other frightful excuse for bidding up) and the physical supply
and demand for oil and its refined products.
These oil gamblers in New
York and London try to justify their frenetic daily bidding by saying
that these futures markets provide liquidity, and a clear price for
oil. Alright, but who benefits when, how and where?
Certainly, the strain between
physical supply and demand in recent years does not explain such extreme
volatility. With OPEC countries down to supplying only 40 percent of
the world production, Chinese demand for oil growing fast, and the expansion
of production by Saudi Arabia and others to meet this demand, crude
oil supplies are not tight enough to explain such pricing behavior.
Old factors like inadequate
oil company investment in refinery capacity, longer down times for repairs
than some observers believe necessary, and the slumping dollar are factors
that western governments, especially the Bush regime, have not wanted
to investigate. After all, with consumers paying sky-high prices for
these fuels, free market theorists are supposed to expect expanded supplies
from recoverable reserves to grow. But, of course, the global market
for oil is anything but a free market from the producers- both corporate
and governmental- toward the downstream companies to the consumers.
In recent days, the price
of crude oil escalated to over $90 a barrel, fluctuating up to a high
of $96 a barrel. Yet the average price of gasoline in the United States-around
$3.00 per gallon-is about what it was earlier this year when the price
of crude oil was around $60 a barrel. Why the disconnect?
"It's a big gambling
hall," The Washington Post quotes Fadel Gheit, an oil analyst at
Oppenheimer. "This time it's just speculation," Peter C. Fusaro,
chairman of Global Change Associates, told the Post, adding, "There's
a large bet out there that prices will continue to trend higher. But
it's detached from fundamentals because there's no shortage of oil."
Meanwhile, the government
of Big Oil runs Washington, D.C. It thumbed its nose at pleas from then
Chairman of the powerful Finance Committee, Senator Charles Grassley
(R-Iowa) who asked the major companies, swimming in massive profits,
to contribute some charitable dollars to help the poor pay for their
winter home heating bills, and has smugly watched the major Presidential
candidates avoid the subject in their debates and declarations.
Oil companies seem to spend
more executive effort looking for oil by merging with other companies
(note the unchallenged merger of Exxon and Mobil under the Clinton administration)
than with developing efficient oil-producing and consuming technology
or expanding their solar energy subsidiaries.
So long as the price of crude
oil is set by speculators on trading floors, so long as the oil-indentured
politicians are not challenged by new candidates standing tall for people
and environments, so long as we do not protest for change and press
ourselves to prevent wasteful habits and uses, get ready for higher
oil prices.
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