The oil factor

Print edition : June 18, 2004

Recent increases in world oil prices indicate both the fragility of current international capitalism and the political realities on which it depends.

THE gyrations in the Indian stock market over the past few weeks may well have been driven dominantly by domestic factors, especially political changes and the ensuing attempts by investors to influence or predict the policies of the new government. But in most other countries across the world, financial markets have been in a tizzy over a very different issue: the recent rise in oil prices.

A burning pipeline that was damaged in an alleged act of sabotage on May 18 in Fahama, north of Baghdad.-MARWAN NAAMANI/AFP

By the last week of May, the world trade price of oil had increased to nearly $42 a barrel. This was the highest it had reached for some time, and it was increasing despite the onset of summer (which typically implies reduced oil prices). While in real terms this is still well below the peak reached in the mid-1970s, which triggered the famous worldwide stagflation, it is still high enough to cause concern among both policymakers and investors.

Usually, a rise in prices tends to be blamed on the Organisation of Petroleum Exporting Countries (OPEC), the oil producers' cartel, and their ability to affect prices by limiting supply. But the present situation allows for no such explanation. Almost all the major oil-producing countries are pushing at the limits of their production capacity.

In fact, the government of Saudi Arabia, the world's largest oil producer (and the only oil producing country with significant excess capacity at the moment) has actually been trying for several weeks to ease prices downward. It has announced that it will pump more oil itself and has also called upon other OPEC members to raise the group's production quotas by about two million barrels a day, to ease any fears of supply constraints.

This has had some impact on the markets, but not very much. Instead, most observers predict that oil prices will remain high for the next few months at least, and possibly even longer. One reason may be that the crude oil that Saudi Arabia can pump out quickly is high in sulphur content. However, it is the low-sulphur "light sweet" crude that is in demand, is preferred by refiners in the major consuming nations (including the United States and China) and is the type usually specified in world trade quotations.

If oil prices do continue to rule high, this in turn will generate inflationary pressures, which have already been evident in the U.S. Given the obsession of financial markets with inflation control, it is not surprising that they view this with trepidation. Even in India, the question of how to deal with rising world oil prices, and the extent to which they should be passed on to Indian consumers, has already become an issue for the new government.

But oil prices are especially significant in U.S. politics. The U.S. is the world's biggest consumer and importer of oil, using roughly one-quarter of the world's petroleum. Already by March the U.S. trade deficit rose sharply to a record $46 billion, and about half of the increase was accounted for by increased payments for oil imports. The U.S. oil import bill figures for April and May are likely to be much worse.

U.S. consumers are the most pampered in the world, used to low petroleum prices for their cars in particular, and usually there is a direct political fallout when they have to pay more for this item. Petrol prices in the U.S. have gone up by more than 50 per cent this year already, and there are rumblings amongst the electorate about having to pay well above $2 a gallon. President George W. Bush, up for re-election later this year and already taking a battering on his aggressive military and foreign policies, can ill-afford this additional source of national discontent.

SO why exactly are oil prices going up so much anyway? It has already been seen that OPEC controlling production has not been the cause. One reason could be that the continuing growth of oil demand, because of the world economic recovery and especially increased demand from economies in Asia (China and India) that have relatively high economic growth at the moment and are high consumers of oil per unit of income. But this is unlikely to account for the continued pressure, especially given the increase in global supplies.

Instead, the real source of the current price instability is speculation, because of persistent and even increasing fears about the future of oil supplies. Naturally, the chief source of concern about the future at the moment is Iraq.

It is not just that attacks on the export-oriented oil pipelines in northern Iraq have constrained oil exports from the occupied nation. Even in southern Iraq (which provides around two-thirds of Iraq's oil production) there have been attacks on oil production and transport facilities. If the U.S. military occupation of Iraq was really all about oil, it should come as no surprise to note that the difficulties, and indeed failure of that occupation, will create uncertainty and expectations of oil price rises in world markets.

But the relative success of Iraqi opponents of U.S. occupation, who have continued to disrupt oil supplies from that country, is not the only source of apprehension. In the past months, there have been several attempts by insurgents to attack energy targets inside Saudi Arabia, and some of these have been at least partly successful. There is no reason to believe that these attacks will reduce or be eliminated in the near future.

Partly for this reason, Saudi Arabia has not been able to calm the energy markets with promises of more oil output, as it had successfully managed in the past.

Of course, this increase in violent attacks against oil facilities in different parts of West Asia is no accident, but is related directly to the U.S. military occupation of Iraq and its general geopolitical strategy in the region. The Bush regime sought to establish its control over world oil resources (and to underline thereby its control over the world economy) through aggressive military intervention. Paradoxically (but perhaps predictably), it has succeeded in diminishing its control and creating more uncertainty on the future of the oil economy.

In all this there is one further point that deserves to be noted. In the international press fingers are usually pointed at the OPEC countries, but one important potential oil producer gets ignored in the discussion. One country with amongst the largest proven reserves of oil in the world today is the U.S. But the U.S. has systematically encouraged (or forced) other countries to provide oil for its own voracious appetite, while carefully hoarding its own reserves. Surely, if the U.S. and the world economy require lower oil prices so badly, the solution in the form of increasing production is quite near to hand?

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