- How to explain the oil price? Why is it so high? Are
we running out? Are supplies disrupted, or is the high price a reflection
of oil company greed or OPEC greed. Are Chavez and the Saudis conspiring
- In my opinion, the two biggest factors in oil's high
price are the weakness in the US dollar's exchange value and the liquidity
that the Federal Reserve is pumping out.
- The dollar is weak because of large trade and budget
deficits, the closing of which is beyond American political will. As abuse
wears out the US dollar's reserve currency role, sellers demand more dollars
as a hedge against its declining exchange value and ultimate loss of reserve
- In an effort to forestall a serious recession and further
crises in derivative instruments, the Federal Reserve is pouring out liquidity
that is financing speculation in oil futures contracts. Hedge funds and
investment banks are restoring their impaired capital structures with profits
made by speculating in highly leveraged oil future contracts, just as real
estate speculators flipping contracts pushed up home prices. The oil futures
bubble, too, will pop, hopefully before new derivatives are created on
the basis of high oil prices.
- There are other factors affecting the price of oil. The
prospect of an Israeli/US attack on Iran has increased current demand in
order to build stocks against disruption. No one knows the consequence
of such an ill-conceived act of aggression, and the uncertainty pushes
up the price of oil as the entire Middle East could be engulfed in conflagration.
However, storage facilities are limited, and the impact on price of larger
inventories has a limit.<http://www.amazon.com/exec/obidos/ASIN/0307396061/counterpunchmaga>
- Saudi Oil Minister Ali al-Naimi recently stated, "There
is no justification for the current rise in prices." What the minister
means is that there are no shortages or supply disruptions. He means no
real reasons as distinct from speculative or psychological reasons.
- The run up in oil price coincides with a period of heightened
US and Israeli military aggression in the Middle East. However, the biggest
jump has been in the last 18 months.
- When Bush invaded Iraq in 2003, the average price of
oil that year was about $27 per barrel, or about $31 in inflation adjusted
2007 dollars. The price rose another $10 in 2004 to an average annual price
of $42 (in 2007 dollars), another $12 in 2005, $7 in 2006, and $4 in 2007
to $65. But in the last few months the price has more than doubled to about
$135. It is difficult to explain a $70 jump in price in terms other than
- Oil prices have been high in the past. Until 2008, the
record monthly oil price was $104 in December 1979 (measured in December
2007 dollars). As recently as 1998 the real price of oil was lower than
in 1946 when the nominal price of oil was $1.63 per barrel. During the
Bush regime, the price of oil in 2007 dollars has risen from $27 to approximately
- Possibly, the rise in the oil price was held down, prior
to the recent jump, by expectations that Democrats would eventually end
the conflict and restrain Israel in the interest of Middle East peace and
justice for the Palestinians.
- Now that Obama has pledged allegiance to AIPAC and adopted
Bush's position toward Iran, the high oil price could be a forecast that
US/Israeli policy is likely to result in substantial supply disruptions.
Still, the recent Israeli statements that an attack on Iran was "inevitable"
only jumped the oil price about $8.
- Perhaps more difficult to understand than the high price
of oil are the low US long-term interest rates. US interest rates are actually
below the rate of inflation, to say nothing of the imperiled exchange value
of the dollar. Economists who assume rational participants in rational
markets cannot explain why lenders would indefinitely accept interest rates
below the rate of inflation.
- Of course, Americans don't get real inflation numbers
from their government and have not since the Consumer Price Index was rigged
during the Clinton administration to hold down Social Security payments
by denying retirees their full cost of living adjustments. According to
statistician John Williams, using the pre-Clinton era measure of the CPI
produces a current CPI of about 7.5%.
- Understating inflation makes real GDP growth appear higher.
If inflation were properly measured, the US has probably experienced no
real GDP growth in the 21st century.
- Williams reports that for decades political administrations
have fiddled with the inflation and employment numbers to make themselves
look slightly better. The cumulative effect has been to deprive these measurements
of veracity. If I understand Williams, today both inflation and unemployment
rates, as originally measured, are around 12 per cent.
- By pumping out money in an effort to forestall recession
and paper over balance sheet problems, the Federal Reserve is driving up
commodity and food prices in general. Yet American real incomes are not
growing. Even without jobs offshoring, US economic policy has put the bulk
of the population on a path to lower living standards.
- The crisis that looms for the US is the loss of world
currency role. Once the dollar loses that role, the US government will
not be able to finance its operations by borrowing abroad, and foreigners
will cease to finance the massive US trade deficit. This crisis will eliminate
the US as a world power.
- Paul Craig Roberts was Assistant Secretary of the Treasury
in the Reagan administration. He was Associate Editor of the Wall Street
Journal editorial page and Contributing Editor of National Review. He is
coauthor of <http://www.amazon.com/exec/obidos/ASIN/0307396061/counterpunchmaga>The
Tyranny of Good Intentions.He can be reached at: <mailto:PaulCraigRoberts@yahoo.com>PaulCraigRoberts@yahoo.com