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Who Determines the Price of
Oil?
RALPH NADER
Counterpunch
Wednesday November 7, 2007
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.
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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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INFOWARS:
BECAUSE THERE'S A WAR ON FOR YOUR MIND
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