You Cannot Blame all Oil Price Problems on The Arabs.
June 24th 2008 00:12
You Cannot Blame all Oil Price Problems on The Arabs.
OPEC is a business for want of a better word. It is designed to maximize profit for the member nations. It is not a charity and will not begin to act like a charity any time in the future. As much as we do not like it the oil it presides over belongs to the members of OPEC and it is theirs to dispose of how they wish. The argument is no different for any other natural resource or commodity owned by any other nation on the planet. The possessor of the commodities will always be looking to maximize profits. The OPEC mentality of ever increasing oil prices could be summed up by the deposed Shah of Iran in a 1973 interview to the New York Times.
"Of course [the price of oil] is going to rise,"... You buy our crude oil and sell it back to us, refined as petrochemicals, at a hundred times the price you've paid to us...; It's only fair that, from now on, you should pay more for oil. Let's say 10 times more."
When we fill up at the tank the words of the Shah may still echo through the current popular folk law. We are being constantly being led to believe that the whole problem comes from a price fixing cartel set up Western hating Arabs. The recent meeting at OPEC led to Saudi Arabia promising to increase production by 200,000 barrels a day in order to stem the price increases. Yet despite this offer prices increased on the stock markets rather than decrease.
The reality check that seems to missing from this folk law is any acceptance that there could be other variables affecting the price of crude oil. The rule of ‘demand and supply’ cause pressure upon any commodity price and crude oil is no exception. China and India have increased their demand for fossil fuels astronomically with both countries aiming to move from Third World status to industrial power houses. With this comes the improvement of living conditions and wages to match. The additional roll on effect is that suddenly cars are now affordable to a population that just a generation ago could not dream of owning one. This demand is only going to increase as both nations embrace the motorist culture that West did more than 50 years ago. The supply side is going to find it easier than ever to sell it black viscous commodity. We must also look forward to say in another 20-30 years and wonder what will happen when African nations start to develop in the same manner that India has.
Yet the suddenly price increases overnight has little do with a sudden demand created in the last 24 hours. Something else is causing the price increases separate to the material control over the commodity and that is occurring on the stock markets around the world. The price of oil increases have as much to do with price speculation as anything else.
Speculation on the future price of commodities goes on all the time and can artificially inflate the price beyond reason. At the peek of the Dot Com boom stock market speculation created paper castles out of vapourware companies. In some cases a company did not even have to produce a thing to raise millions of dollars. Yet at the day of reckoning many of these companies were found to be little more than empty shells that existed for the sole purpose of being speculated upon. Money ran through the fingers of the venture capitalists as they talked up and down prices to suit themselves. Going back further to the start of the Soviet invasion of Afghanistan we had a sudden increase in the price of gold. During the first Iraq War the price of petrol in Australia increased from 48 cents per litre to about 80 cents per litre. After the war it dropped for some time and slowly incremented to around 70 cents per litre. By the time the second Iraq War hit prices started to increase rapidly as speculators operated upon fear of fuel shortages. Since the Iraq war prices tend to fluctuate with every crisis.
The solution to the current fuel price crisis is not a simple case of telling the Arabs to increase production because demand will continue to increase. The price is being set based upon a world parity mentality. Australian made a policy decision in the mid 1970’s to adhere to world parity prices on fuel as did many other nations. In the 1980’s and 90’s there was decrease in the number oil refineries being built around the world making conversion of crude oil to usable fuel a choke point. Each choke point on the supply side put price pressure on the demand side giving ample room for price speculation and futures. Million spent on purchasing fuel today is seen as a good investment when the price trend is up. When the fuel is sold at an inflated amount to another speculator then it is their interests to see further price increases.
Whether there is another bust waiting for this oil price boom is yet to be seen. Yet most booms do have a cycle where they hit their absolute limits and speculators start to desert the commodity as being unstable. The property booms of the past often boasted that prices could not possible down because land was in limited supply. Such boasts prove false if a down turn in demand spirals into a recession. In this regard it would not be in the financial interests of the OPEC nations to see their best customers lose purchasing power. Yet it is probably in everyone’s interest to remove the speculators from the oil market.
OPEC Revenue
OPEC is a business for want of a better word. It is designed to maximize profit for the member nations. It is not a charity and will not begin to act like a charity any time in the future. As much as we do not like it the oil it presides over belongs to the members of OPEC and it is theirs to dispose of how they wish. The argument is no different for any other natural resource or commodity owned by any other nation on the planet. The possessor of the commodities will always be looking to maximize profits. The OPEC mentality of ever increasing oil prices could be summed up by the deposed Shah of Iran in a 1973 interview to the New York Times.
When we fill up at the tank the words of the Shah may still echo through the current popular folk law. We are being constantly being led to believe that the whole problem comes from a price fixing cartel set up Western hating Arabs. The recent meeting at OPEC led to Saudi Arabia promising to increase production by 200,000 barrels a day in order to stem the price increases. Yet despite this offer prices increased on the stock markets rather than decrease.
Oil Prices over time
The reality check that seems to missing from this folk law is any acceptance that there could be other variables affecting the price of crude oil. The rule of ‘demand and supply’ cause pressure upon any commodity price and crude oil is no exception. China and India have increased their demand for fossil fuels astronomically with both countries aiming to move from Third World status to industrial power houses. With this comes the improvement of living conditions and wages to match. The additional roll on effect is that suddenly cars are now affordable to a population that just a generation ago could not dream of owning one. This demand is only going to increase as both nations embrace the motorist culture that West did more than 50 years ago. The supply side is going to find it easier than ever to sell it black viscous commodity. We must also look forward to say in another 20-30 years and wonder what will happen when African nations start to develop in the same manner that India has.
Yet the suddenly price increases overnight has little do with a sudden demand created in the last 24 hours. Something else is causing the price increases separate to the material control over the commodity and that is occurring on the stock markets around the world. The price of oil increases have as much to do with price speculation as anything else.
Speculation on the future price of commodities goes on all the time and can artificially inflate the price beyond reason. At the peek of the Dot Com boom stock market speculation created paper castles out of vapourware companies. In some cases a company did not even have to produce a thing to raise millions of dollars. Yet at the day of reckoning many of these companies were found to be little more than empty shells that existed for the sole purpose of being speculated upon. Money ran through the fingers of the venture capitalists as they talked up and down prices to suit themselves. Going back further to the start of the Soviet invasion of Afghanistan we had a sudden increase in the price of gold. During the first Iraq War the price of petrol in Australia increased from 48 cents per litre to about 80 cents per litre. After the war it dropped for some time and slowly incremented to around 70 cents per litre. By the time the second Iraq War hit prices started to increase rapidly as speculators operated upon fear of fuel shortages. Since the Iraq war prices tend to fluctuate with every crisis.
Even to look at this hurts my eyes. $1.60 per litre and still going up.
The solution to the current fuel price crisis is not a simple case of telling the Arabs to increase production because demand will continue to increase. The price is being set based upon a world parity mentality. Australian made a policy decision in the mid 1970’s to adhere to world parity prices on fuel as did many other nations. In the 1980’s and 90’s there was decrease in the number oil refineries being built around the world making conversion of crude oil to usable fuel a choke point. Each choke point on the supply side put price pressure on the demand side giving ample room for price speculation and futures. Million spent on purchasing fuel today is seen as a good investment when the price trend is up. When the fuel is sold at an inflated amount to another speculator then it is their interests to see further price increases.
Whether there is another bust waiting for this oil price boom is yet to be seen. Yet most booms do have a cycle where they hit their absolute limits and speculators start to desert the commodity as being unstable. The property booms of the past often boasted that prices could not possible down because land was in limited supply. Such boasts prove false if a down turn in demand spirals into a recession. In this regard it would not be in the financial interests of the OPEC nations to see their best customers lose purchasing power. Yet it is probably in everyone’s interest to remove the speculators from the oil market.
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Comment by Anonymous
Comment by Damo
For the Sake of Argument
My Apologetics
Thanks for your comment.
So I can put you down for increased price speculation?
Also:
It might better if you signed a name on the bottom of your post so that you are not confused with other anons that comment
Comment by S.L.
The Political Brief
Fellow Orbler, Howard, has been talking about speculators pretty often lately. Some of his other ideas are a little... uh... unique... but I thought you might find his posts interesting.
I agree with you, Damo, that what goes up might just come down. Energy independence seems to be the best method to bring it about. More oil, more refineries and nuclear energy are about the biggest and best ideas around. Newer technology is still a ways off.
Comment by Damo
For the Sake of Argument
My Apologetics
Thanks for your comments.
Unique ideas run rampant in the blogsphere even more so when they get passed through a cult.
This is just an open question to get people thinking about what can be done about this issue.
Definitely I think speculation is gambling on the futures where more people suffer as a result. No capitalist system works uninhibited. They have laws and regulation to prevent predator behaviour. I am just wondering how long it will take before people ask the sane questions about oil price speculation.
Comment by S.L.
The Political Brief
Really Long Link
Lester Caudill has some statistics about the American public that you may find interesting. What does the Australian public think?
Comment by Damo
For the Sake of Argument
My Apologetics
As I have said before, for the time being, I am not really getting involved in the USA election debates. Too much partisan noise at the moment to make a contribution that people will bother seeing as objective.
Attitudes to drilling and the like can shift from poll to poll over time. Since I not holding better stats I cannot really comment on their validity or ramifications.
Comment by D. Armenta
The Florida Keys and Everglades
The Black Sheep Chronicles
What constitutes bad manners?
The male mystique
Debate Fan
Comment by Damo
For the Sake of Argument
My Apologetics
Thanks for your comments.
It is still as clear as mud to me.
Comment by Anonymous
VIDEO
For sale: one used country - cheap
A very special relationship
Over the years, the Saudi Royal Family
has put at least $1.4 billion
into the hands of the Bush family and its friends.
Comment by Damo
For the Sake of Argument
My Apologetics
Thanks for you entertainment.
I had a good laugh.