OIL PRICES THE GEOPOLITICS OF SPECULATION

OIL PRICES THE GEOPOLITICS OF SPECULATION
VOLATILE OIL-PRICE MAKERS AND TAKERS

Ali Kadri | Tuesday, April 17, 2012. [[EXTRACTS]]

http://www.4thmedia.org/2012/04/17/volatile-oil-prices-the-geopolitics-of-speculation-oil-price-makers-and-takers/

Every market is a process of social and power relationships. In every market there are price makers and price takers. The oil market, however, is no ordinary market, and the struggle to control the oil market, therefore, is no ordinary struggle. With oil being rudimentary to global accumulation and the monetary system remaining in part commodity-based, the degree of control of the oil market translates into some degree of enhanced power in all other markets.

But to control an oil market, the principal player, which is undoubtedly the US, has to develop a strategy of intervention at the source, military or otherwise, which cuts down to size other players.

Consequently, the extent to which the US infuses tensions in oil producing areas, calibrates the degree to which oil-states relinquish sovereignty over oil and keeps at bay other major players are measures that represent the collateral necessary to lay the foundation of the oil-dollar standard. This unending power exercise constitutes the cornerstone of the commodity-money or, more concretely, oil-dollar based global monetary system.

On the surface of things, oil prices change in response to economic and geopolitical factors. In recent history, however, the amplitude of oil-price variations has been more systematically attributed to growing Iran-related geopolitical risks and abundant liquidity as distinct from refinery margins and smaller cushions- a cushion is the size of the band between supply and demand.

The oil bubble has come to siphon part of excess liquidity, strengthen the dollar, and bolster US imperial rents. Despite the fact that very high international oil prices may thwart an already fragile global recovery, which has been running on empty insofar as jobs are concerned, US raucous war-on-Iran hubris continues to rattle the market.

Below the surface, however, oil prices are too important to be left to the ‘market.’ With the oil-dollar standard holding, rising oil prices dampen the performance of all importing economies to a higher degree than they do the US economy. Oil price variations therefore engender a shift in the degree of power enjoyed by the US economy vis-à-vis others.

In the ongoing depressive cycle, which does not nudge in spite of rising debts, reasserting US stature through the oil control mechanism gains ground. Financial capital has been altogether content as a result of expanding US indebtedness and rising fictitious capital.

Capital as whole has shown robustness as a result of debts burdening working people in ways that reduce their means to acquire a decent living. Pauperising working folk, in times of a predominant crisis in social ideology, raises the share of real value and wealth acquired by the ruling classes.

In a sense, rising debts or fictitious capital have had non-fictitious and dire effects on the working classes in the more advanced economies. But the real dire consequences of expanding fictitious capital fall upon the peoples of the Middle East. Wars of aggression meant to underwrite expanding US debts by staking claims to oil rise in intensity by the weakness of the bond tying oil to the dollar. Oil prices therefore have much more to say about the state of the global economy than simply the cost of petrol at the pump.

VOLATILE OIL PRICES

Crude oil prices exhibit high variability. More recently, the OPEC Reference Basket Price reached U$140 per barrel in July 2008, it declined to US$35 by the end of that year, and now prices are over the US$ 100 once more. Financial speculation, mainly the buying of crude oil futures, was behind the2008 price surge and the present hike is driven by speculation around a very geopolitically charged future.

It is worth noting that the much talked about geological considerations relating to oil-finiteness are not responsible for the oil price rises of either 1973 or 2004. Oil reserves matter in the long run; current oil prices have not been determined by beliefs that pertain to the long run.

These geological considerations have an impact only on the forward looking or long-term price. But geopolitical problems unnerve the market instantaneously and are becoming portentous by the minute. Problems in the Gulf, past and present, have gained the semblance of permanence and, with talks of an inevitable attack on Iran, they are rising in intensity.

The foremost short-term concern influencing oil-price relates to a sudden disruption of supply and a higher risk of a diminution in the cushion provided by Saudi Arabia which provides the bulk of surplus capacity.

On the consumption side, demand for oil continues to rise by one to one and a half percent on average yearly. An increase in the rate of growth of China and other parts of Asia over the past two decades has meant that demand for oil has steadily risen. Constraints on the production capacity of the cheaply extracted and sweet oil both in the upstream sector (OPEC countries) and in the downstream USA are slowly coming into evidence.

However, until this moment, supply constraints have not represented a problem per se because more refineries are accepting the sour quality crude and, the cushion has been anything but tight. One ought to note that the petroleum market cannot function effectively unless a certain volume of surplus production capacity is available. The extra volume is needed to offset the effects of strikes, storms and smaller wars.

No cushion however would suffice for a war that would result in the closure of the Straits of Hormuz. The fear factor developing around this trumped-up story, in particular, is of unusual significance to feeding sharp oil price movements. Neither the integrated market nor intelligence services, however, are daft enough to believe this fabrication around Iran’s military capability.

Imagine that Iran’s capabilities are potentially able to block the straits and withstand a US assault in the Gulf, would the dollar, the US, the world as we know it be the same? Like Iraq, Iran’s power is being exaggerated in order to justify aggression. Militarism and US control of the Eastern flank of the Persian Gulf are far more relevant as provinces of capital accumulation than the contribution of puny oil revenues.

The price of oil is increasingly realized in futures markets. It rests on an assemblage of futures, spot, physical forward and derivative markets where, with expanding liquidity, the futures markets lead. Participants in these markets include major financial institutions such as Goldman Sachs, Morgan Stanley, Merrill Lynch, Société Générale, and J.P. Morgan.

A large number of hedge funds and individual punters also take part in this market. Hedgers, one may add, are also speculators in view of their fear that the actual price is liable to be less favorable than the price that they are willing to ensure. In today’s oil market, therefore, the major players are speculators.

The principal point to discern from this is that the price of oil also moves in response to differential rates of return from investment in other markets and not solely demand-supply concerns.

Thus, in the presence of ample liquidity and low rates of return in other markets, concocted perceptions or expectations of what the supply-demand balance is likely to be in the months ahead including, fear of sudden future Gulf-war related shortage, draw the excess liquidity and become the most powerful driving forces of this market.

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