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Oil Prices on a roller coaster ride
THE RECENT tripling of crude oil prices sparked a protest wave throughout Europe. Protesters directed their anger at high fuel taxes, accounting for 72% of the pump price in Britain. Barely tolerable when oil prices were low, pump prices became intolerable as oil prices surged from $10 to over $35 a barrel.
Despite the huge share of taxes, Blair - like Jospin in France and Schroder in Germany - blamed OPEC (Organisation of Petroleum Exporting Countries) for the price increases, demanding that they immediately cut the price of crude oil.
The politicians could not explain why OPEC producers have been restricting exports in an effort to push up prices. They are silent, too, about the shortages created by the big oil companies' long-term underinvestment and by financial speculation on international oil markets.
Why has the price of oil gone up and down like a roller coaster over the last 18 months? It's partly the anarchic working of the capitalist market. But there are also political factors: the deepening crisis in many oil-producing states and a reaction against the policies of the Western powers.
For about ten years, from the late 1980s to the late 1990s, oil prices were quite stable and relatively cheap, (about $18-$22 a barrel), apart from a short, sharp rise during the 1990-91 Gulf War. Strong demand from the advanced capitalist countries and the Asian "tigers" during 1995-97 pushed the price up to about $25 a barrel.
After 1997, however, there was a sharp fall down to $10 a barrel or less early in 1999. There was a glut of oil. The slump in Asia sharply reduced demand from that region.
On the supply side, Saudi Arabia and Venezuela, two of the biggest producers, had increased their exports to grab bigger shares of the world oil market. Simultaneously, Iraq had been allowed to resume oil exports under the UN "oil-for-food" programme.
Cheap oil further lowered the West's production costs, especially in the US, boosting the big corporations' profits. It hardly benefited European petrol consumers, however, as governments steadily increased fuel taxes. But a price of $10 a barrel or less spelt disaster for many oil-producing states.
Most of them rely on earnings from oil exports to pay interest on their huge foreign debts. Some, like Indonesia, Nigeria and Venezuela were battered by turbulence from the Asian crisis. Indonesia, Nigeria, Venezuela and Mexico were all shaken by political upheavals.
Falls in oil revenues for Russia, a major oil exporter, threatened the survival of Yeltsin's regime. Even the reactionary Saudi Arabian regime faced mounting economic problems and social unrest threatened.
OPEC producers were not at all united at that time. Middle Eastern producers, Iran, Iraq, Kuwait and Saudi Arabia, had frequently been divided by armed conflict. Saudi Arabia, Venezuela and others habitually cheated on their OPEC quotas. Big exporters like Russia and Mexico are not members of OPEC.
In 1999, however, US imperialism's strategists became alarmed at the effects of plummeting oil prices. The Cardenas regime in Mexico was under threat, while the deepening social crisis had brought Hugo Chavez's radical government to power in Venezuela.
Committed to supporting Yeltsin, pushing up crude oil prices to boost Russia's foreign earnings from oil exports was about the only way the US could bolster his position.
Early in 1999 the US put pressure on Saudi Arabia to restrict its output and push up prices. The Saudi regime, desperate to increase its own oil income, cut back on its exports and urged other OPEC producers to do the same.
The Western powers, however, got more than they bargained for. Oil prices shot up during 1999, exceeding $30 a barrel in March 2000. Apart from OPEC cuts, the Iraqi regime suspended its oil-for-food sales late in 1999. Only when the price went above $30 did Saddam resume sales.
This March, the US again intervened to demand that Saudi Arabia and OPEC increase their exports to bring the price down. At its meeting in Vienna, OPEC agreed to higher export quotas but so far, this has had only a limited effect on prices.
The key oil producers are still very reluctant to flood the market and suffer another catastrophic decline in income.
The campaign for higher prices is led by Venezuela, which currently holds the OPEC presidency. Chavez's position reflects the deepening crisis in all the underdeveloped countries. Oil accounts for 70% of Venezuela's exports, 60% of the government's tax revenues.
For every dollar the price per barrel falls, the country loses $1 billion (£700 million) a year. "We don't want prices to drop below their present level," Chavez said in August: "Lower prices would be like passing a death sentence on ourselves and our people."
EVEN AFTER OPEC agreed to increase exports, oil prices kept rising, going above $37 in September. Some OPEC representatives and oil industry experts even dispute whether there has been a shortage of crude oil at all.
They blame the price rise on the chaotic international oil market, the oil industry's inadequate infrastructure, and on escalating financial speculation in oil markets.
With low crude oil prices squeezing their profit margins, the big oil companies have been very reluctant to invest in new refinery capacity and transportation facilities. "There's no big shortage of crude oil," said a senior European trader. "There's a refinery capacity problem, especially in the US, and there's a logistical problem." (Financial Times, 11 September)
The world's tanker fleet has been operating at 97% of capacity and US oil refineries have been running flat out, which doesn't suggest a shortage of crude.
When oil companies' profits were squeezed by low oil prices, they were unwilling to invest in increased capacity to keep up with surging demand.
They see recent price rises as a short-term trend, expecting that longer-term prices will decline. Why stock up now if it will be cheaper to buy later? Consequently, US fuel stocks are at their lowest for 24 years.
Desperately trying to cushion the oil crisis's impact on the 7 November presidential elections, Clinton announced he was releasing 30 million barrels from the US's 571 million barrel strategic petroleum reserve, and increasing federal aid for families' heating fuel by $400 million.
His prompt action was in marked contrast to Blair's refusal to make any concessions on fuel prices. Whether 30 million barrels will be enough to guarantee supplies this winter remains to be seen. It's possible that, if the US keeps drawing on the strategic reserve, OPEC will make further cuts in output to sustain higher prices.
Fuel shortages in the West have been aggravated by intensive financial speculation in oil commodity markets: "The oil price has gone from $10 to $35 a barrel yet production has only altered by around 3% [says a London oil trader]. The market is not functioning properly..." (Daily Telegraph, 14 September)
"The paper markets have driven the price up," commented an oil company trader. (Financial Times, 12 September). The "paper market" refers to the trading of futures (contracts to buy future consignments and "derivatives"). The futures market is intended to "hedge' or insure against future rises/falls in oil prices. But like other "hedge" markets they have themselves become a volatile, speculative market.
THE OIL crisis reflects the chaos and conflict of world capitalism. In the producing states of the underdeveloped countries, oil has enriched the ruling classes, financed militarisation and wars, but failed to solve the deep-seated social crisis inflicting the people of these states.
The biggest profits from oil, however, go to the giant oil companies which dominate the industry, and especially to the traders and speculators.
In the advanced countries, oil should be used in the most efficient, environmentally-friendly way possible. Oil revenues should also be used to provide decent conditions of life for the majority of people in the oil-producing states.
This will never happen under capitalism, which is motivated by the pursuit of profit. Moreover, oil is always used by states as a weapon in pursuit of power and prestige.
The oil crisis shows the need for the public ownership of oil production, transportation, refining, and distribution. Then oil, together with natural gas and other renewable energy sources, could be used in a planned way to meet society's needs, not fuel big corporations' profits.
We should take into public ownership the handful of giant oil companies which dominate the world petroleum industry. Only the planned development of oil reserves and distribution will eliminate the perpetual cycle of shortage and glut, and the destabilising fluctuation of prices.
The "oil shock" is not yet as serious as the trebling (in inflation-adjusted terms) of oil prices in 1973, which triggered the 1974-75 world slump. World Bank and IMF economists predict that higher oil prices will cut between 0.5% and 0.75% from world growth in the coming year. But this is a minimum estimate.
Dearer oil is bound to cut across growth and cut the big corporations' profits. Higher consumer spending on fuel will cut overall consumer spending, which has been the locomotive of economic growth, especially in the USA.
"Historically," comments professor Andrew Oswald of Warwick University, "sharp rises in the price of energy have always been the best predictor of a slump to come." (Observer, 3 September)
The wave of fuel-price protests in Europe are a foretaste of the political upheavals which will accompany the coming turmoil in the world economy.
In The Socialist 6 October 2000: