May 23, 2004
The price of oil continues to reach new highs, at least when measured in US currency. This was not the expectation of the Bush administration, when they acceded to the request of Israel to remove Saddam Hussein and occupy Iraq. While there has been a reduction in the immediate threat that Iraq would supply mobile/portable rockets to Palestinians, the overall threat has increased, largely from ignorance of the subtle cultural factors involved, and an inability to foresee the consequences of relying on force and erroneous intelligence.
The markets of the world are also totally ignoring the reality of the present situation. Every commentator repeats daily a projection that the price of oil will soon come down. The prediction is based on an expectation that cooperation of the major oil producers, primarily Saudi Arabia, to increase production will meet present and future levels of demand. After the experts gain some glimmer of hope from verbal assurances an oil minister or two, the futures price declines somewhat, as though the assurances amounted to a reality.
Economics always teaches that price is a matter of supply versus demand, that the free market tussle between these two ideas provides a market price. An increase in production relative to demand is seen to act negatively on the price, because the producers lower their price in competition with other producers to maintain their market share. An increase in demand relative to production acts positively to raise the price, due to the competition between buyers who attempt to maintain their level of delivery.
While there has been considerable propaganda that these historical factors have acted to determine the price of oil in the previous century, this is not true. Oil is priced in a completely different manner than other commodities in the world market. The economic factors that normally determine price of a good, service or commodity is negligible in the case of oil. This is because there is very little elasticity on the demand side, and almost total flexibility on the supply/production side.
The buyers of oil are the developed countries, which have since the end of WWII shifted primarily to oil as their source of energy. The energy required each day by the developed countries does not vary as the price of oil fluctuates, as economic theory says it must. The world demand level is fixed, and is slowly rising even though the price is now at all time record levels.
The sellers of oil are exporters of a commodity that they themselves do not need in great quantity. They can, if they choose, produce only enough oil for their own domestic requirements. The excess over their own needs is directed first to the demand of close neighbors who have no oil, or produce less than they require, and only then to the greater world market.
Actually, the producers are not obligated to sell their oil at all. If the price is not satisfactory, they can withdraw from the market until the price meets their minimum price. It is the willingness of producers to meet the demand of the developing countries that allows price levels the developed countries are comfortable with. The developing countries have little or no flexibility in their needs, thus if the producers withdraw from the market until their price is met, the developing countries have no recourse but to pay the price the producers set.
For the past fifty years the fiction has floated, that free market forces determine the price of oil. This is clearly seen to be false when the OPEC ministers meet to discuss production levels. Their primary concern is that the price of oil does not rise to a level that endangers the overall world economy, nor declines to a price that makes the sale and export of this valuable energy source imprudent.
The sums of money involved are astronomical. The current production level is around 75 million bbls/day. At US$ 40 the total is US$ 3 billion/day, or just over US$ 1 trillion/yr. The major importer of oil is the US, buying over 10 million bbls/day, at a cost of US$ 400 million/day. Over a year this outlay to foreign countries for energy needs, at US$40/bbl, amounts to US$ 146 billion.
The question facing the world today is whether the US and Britain are prepared to use military force in order to get the essential oil for their economies. Neither country has an announced energy policy. The US has held talks on the issue, but has not released the details of their conclusions. The minutes of energy talks, held in vice president Cheney's office, have been kept secret, and attempts to have these minutes released has resulted in the issue going before the Supreme Court of the US.
A think tank in Texas, the James A. Baker Institute at Rice University, has delivered a report on the oil situation to Cheney, and it contains the recommendation that the military be present at the talks. Rumsfeld is the secretary of the military, and he and Cheney are the main hawks in the Bush administration. They are the men responsible for the invasion and occupation of Iraq. If Bush is re-elected their policy of using force to ensure that there is sufficient oil for US needs will continue.
Oil producing countries have been the targets of US intervention for decades, and the intensity of these interventions will continue and increase. The lack of an international oil policy places the whole world at risk. It is imperative that the matter be the subject of discussion at the international level, and that price and production levels are not the reason for continued hostility.
The US has destroyed a number of countries using excessive force. The bombing of Laos and Cambodia were extensive, dropping a planeload of bombs every ten minutes around the clock for ten years. Yet there has been no US assessment of the consequences, and no effort to remove the still explosive debris. The story in other parts of the world is the same. No effort to restore Afghanistan is being made, and there is little expectation that Iraq will be restored to its former level of infrastructure and industrialisation.
The situation in Israel goes back to the independence of 1948, and now 55 years of bloodshed have passed with no end in sight. The honour and future of the Israeli state is forfeit, as there is only international condemnation of their actions. The US intervention in Iraq is directly connected to Israeli ambitions for increasing its borders to achieve a 'Greater Israel', a sad reminiscence of Hitler's Nazi policies.
The US support of Israel is noted by the entire world, and especially by the oil producing countries. While there is a lack of coordinated price-fixing, there is a natural lack of empathy for the military and financial assistance the US provides to Israel. One may expect that a lack of cooperation in agreeing to a low oil price is the direct result of aggressive and arrogant US foreign policy, seen to be indifferent to the killing caused by their armies.
If the developed countries do not act with greater humanity, there will be a permanent premium on the price of oil. It is reasonable to expect that a minimum 'premium' of UD$ 20-40/bbl be a permanent part of the price of petroleum, used as compensation in the countries the US, Britain and other developed countries have victimised.
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