Last fortnight ago oil chiefs in the UAE said oil prices were rising “too high and too fast.” It is in order to find ways to keep the price level reasonable that the Kingdom is hosting a meeting of oil producers and consumers in Jeddah, on June 22.
OPEC producers have increased output to try and put a brake on the rise. In the Kingdom’s case, not only did it increase production by 300,000 bpd to 9.45 million bpd this month, it has even expressed its willingness to increase it further. To no avail. In normal circumstances, such a production increase would have produced a fall in price. But these are neither normal circumstances nor normal times. Market forces are not working as usual. Because of the extra production, supply in fact now exceeds demand and commercial inventories are growing. Still the price goes up. Alexei Miller, head of the Russian energy giant Gazprom, has just warned that the prices are headed for $250 a barrel.
That is because of speculators who have seized control of the market. The problem started because a weak dollar forced investors to look elsewhere for profits; they latched on to oil futures. But they have taken a liking to them and a completely new investment structure has been created. Banks and financial houses have set up hedge funds to invest in oil prices and profit from them. They do not want the price to go down; they want it to continue its steady and unjustifiable ascent. The proof of that is that announcements which would normally result in prices falling — such as new finds off Ghana and Brazil or that Greenland has mega-reserves beneath its melting surface are ignored — but a ruptured pipeline or the threat of a storm near offshore platforms are used as excuses for pushing prices up even further.
The situation is now alarming. It is crippling for consumers in industrial economies where it has triggered a wave of protests and strikes, and even more so for those in developing countries whose hopes of prosperity may be dashed; the food crisis is a direct consequences of the oil price rise. In the long term, it is even more dangerous for producers. Consumers are going to look to alternative technologies and energy sources.
OPEC will help if extra production is required but that has to be part of a larger package of price-calming measures. Producers cannot do it all themselves. Thus the need for consumers and producers to get together. The target has to be the speculators. The use of hedge funds and massive financial reserves to push up the price of oil is immoral. Economies — people’s livelihoods and their hopes of prosperity — are at risk.
But can the genie be forced back into the bottle? Having developed the mechanisms to push prices up and benefit from them, can banks and financial institutions be persuaded to stop? There are ways. Speculation could be taxed out of business, although it would require unprecedented cooperation between countries that till now have been loathe to work together on tax matters.
