FacebookTwitterGoogle+RedditEmail

Oil Prices, Market Regulation and the 2008 Elections

On June 6, 2008 crude oil futures surged to an all-time high of $139.12 per barrel, a doubling of price in the past 12 months. U.S. Treasury Secretary Henry Paulson rightly suggested that the increasing price of oil is “a real burden on American consumers.” The surge in oil prices is also threatening millions of poor people forcing them further into poverty, according to a report by the UN Development Programme.

Secretary Paulson has blamed the increase in oil prices on rising demand. However, there has not been any dramatic rise in demand even as economies in China and India continued to soar over the past year. It stands to reason that growth in energy demand is somewhat correlated with growth in gross domestic product (GDP). As an economy grows so will its need for energy. The projected annual growth rate for worldwide GDP is about 4.1 percent annually over the next quarter century. China and India is expected to lead that growth at about 6 percent per year.

Further, the demand for oil is tied to consumption of fossil fuels. According to Energy Information Administration (EIA), the official source of energy statistics from the U.S. government, worldwide consumption of energy from liquid sources, “is projected to increase from 83 million barrels per day (bpd) in 2004 to 97 million barrels per day in 2015 and 118 million bpd in 2030.” This represents a less than 2 percent annual growth in projected oil consumption. Thus, global growth or the Chinese red-scare alone cannot account for a doubling of gas prices at the pump.

On the supply side, the latest EIA estimates show that oil output from non-OPEC countries remain weak but that weakness is somewhat offset by increases in supply from OPEC countries lead by Saudi Arabia, which increased output in May by 300,000 bpd and will increase supply even more once its Khursaniyah oilfield is online. EIA projects that OPEC crude oil production is expected to increase during the third quarter of 2008, contingent on security situations in Iraq and Nigeria.

If neither demand nor supply explains the doubling of prices (and it is certainly not the falling US dollar), it leaves us with one other possibility – market speculation. Reminiscent of the Worldcom saga when telecom analysts like Jack Grubman working in concert with Worldcom CEO Bernie Ebbers put out false information about the “explosive demand for networking infrastructure” once again a group of market insiders are peddling rumors about dramatic demand increases. On May 6, Goldman Sachs speculated that oil could reach $200 per barrel fueled by the surging economies of China and India. “Goldman Sachs was one of the founding partners of online commodities and futures marketplace Intercontinental Exchange (ICE). And ICE has been a primary focus of recent congressional investigations; ….. Those investigations looked into the unregulated trading in energy futures, and both concluded that energy prices’ climb to stratospheric heights has been driven by the billions of dollars’ worth of oil and natural gas futures contracts being placed on the ICE—which is not regulated by the Commodities Futures Trading Commission,” wrote Ed Wallace in Business Week. Speculation coupled with lax regulation is causing untold misery to millions, while the shrewd insiders continue to game the system.

Heck even to play Monopoly you need rules! So how can complex markets trading sophisticated financial products be left without public oversight? In calling for more stringent regulation, the idea is to strike the right balance between fairness and efficiency. William Greider in his book the Soul of Capitalism writes, “With a few important exceptions, the agents of capital operate with dedicated blindness to capital’s collateral consequences, an indifference to the future of society even as they search for the future’s returns. The capital system does not authorize financial agents to think about such things and may well penalize them if they do.”

Undoubtedly futures markets serve an important societal function by allowing appropriate management of risk for both farmers and factories. The markets in and of itself are thus not the problem. It is the unmitigated greed of speculators and the herd mentality of the rest that creates the perfect storm for the development of price bubbles. While regulation may not be a panacea it can certainly help by injecting more transparency into markets like ICE. It appears that lessons from another unregulated energy market, Enron, have been forgotten all too soon.

Thus far both Presidential candidates have parroted the Bush administration’s line that increased demand from China is the reason for runaway gas prices. It is time they take another hard look at the data. Will any candidate favor more stringent regulation to prevent the next speculative bubble? Will they commit to using the Presidential bully pulpit to promote a culture of social responsibility such that doing well cannot come at the expense of doing good? After all the free market envisioned by Adam Smith requires human society to be “bound together by the agreeable bonds of love, affection and are, as it were, drawn to one common center of mutual good offices.”

PARVEZ AHMED is associate professor of finance at the University of North Florida. He also serves as chairman of the board for the Council on American-Islamic Relations. He can be reached at pahmed@unf.edu

 

Your Ad Here
 

 

 

 

 

More articles by:

November 15, 2018
Kenneth Surin
Ukania: the Land Where the Queen’s Son Has His Shoelaces Ironed by His Valet
Evaggelos Vallianatos
Spraying Poisons, Chasing Ghosts
Anthony DiMaggio
In the Wake of the Blue Wave: the Midterms, Recounts, and the Future of Progressive Politics
Christopher Ketcham
Build in a Fire Plain, Get What You Deserve
Meena Miriam Yust
Today It’s Treasure Island, Tomorrow Your Neighborhood Store: Could Local Currencies Help?
Karl Grossman
Climate of Rage
Walter Clemens
How Two Demagogues Inspired Their Followers
Brandon Lee
Radical Idealism: Jesus and the Radical Tradition
Kim C. Domenico
An Anarchist Uprising Against the Liberal Ego
Elliot Sperber
Pythagoras in Queens
November 14, 2018
Charles Pierson
Unstoppable: The Keystone XL Oil Pipeline and NAFTA
Sam Bahour
Israel’s Mockery of Security: 101 Actions Israel Could Take
Cesar Chelala
How a Bad Environment Impacts Children’s Health
George Ochenski
What Tester’s Win Means
Louisa Willcox
Saving Romania’s Brown Bears, Sharing Lessons About Coxistence, Conservation
George Wuerthner
Alternatives to Wilderness?
Robert Fisk
Izzeldin Abuelaish’s Three Daughters were Killed in Gaza, But He Still Clings to Hope for the Middle East
Dennis Morgan
For What?
Dana E. Abizaid
The Government is Our Teacher
Bill Martin
The Trump Experiment: Liberals and Leftists Unhinged and Around the Bend
Rivera Sun
After the Vote: An Essay of the Man from the North
Jamie McConnell
Allowing Asbestos to Continue Killing
Thomas Knapp
Talkin’ Jim Acosta Hard Pass Blues: Is White House Press Access a Constitutional Right?
Bill Glahn
Snow Day
November 13, 2018
Patrick Cockburn
The Midterm Results are Challenging Racism in America in Unexpected Ways
Victor Grossman
Germany on a Political Seesaw
Cillian Doyle
Fictitious Assets, Hidden Losses and the Collapse of MDM Bank
Lauren Smith
Amnesia and Impunity Reign: Wall Street Celebrates Halliburton’s 100th Anniversary
Joe Emersberger
Moreno’s Neoliberal Restoration Proceeds in Ecuador
Carol Dansereau
Climate and the Infernal Blue Wave: Straight Talk About Saving Humanity
Dave Lindorff
Hey Right Wingers! Signatures Change over Time
Dan Corjescu
Poetry and Barbarism: Adorno’s Challenge
Patrick Bond
Mining Conflicts Multiply, as Critics of ‘Extractivism’ Gather in Johannesburg
Ed Meek
The Kavanaugh Hearings: Text and Subtext
Binoy Kampmark
Concepts of Nonsense: Australian Soft Power
November 12, 2018
Kerron Ó Luain
Poppy Fascism and the English Education System
Conn Hallinan
Nuclear Treaties: Unwrapping Armageddon
Robert Hunziker
Tropical Trump Declares War on Amazonia
John W. Whitehead
Badge of Shame: the Government’s War on Military Veterans
Will Griffin
Military “Service” Serves the Ruling Class
John Eskow
Harold Pinter’s America: Hard Truths and Easy Targets
Rob Okun
Activists Looking Beyond Midterm Elections
Binoy Kampmark
Mid-Term Divisions: The Trump Take
Dean Baker
Short-Term Health Insurance Plans Destroy Insurance Pools
George Wuerthner
Saving the Buffalohorn/Porcupine: the Lamar Valley of the Gallatin Range
FacebookTwitterGoogle+RedditEmail