Why the Oil Price Is High, By Paul Craig Roberts

[Echo In Light]

Why the Oil Price Is High
By Paul Craig Roberts

11/06/08 "ICH" -- 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 against us?

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 currency status.

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.

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 speculation.

http://www.informationclearinghouse.info/article20072.htm

[BrklynLib at work]

1. I cannot help but believe this is going to make the BushCo minions rich, and that is all that

matters to them.
It is astonishing that so large a group put their own private interests above those of their country...and that there are people out there who would actually support a party that would continue those policies. The image that these people bring to mind is that of lemmings...running at full speed over the edge of the cliff into the water below.

EDIT: Eventually I WILL learn to use spell check.

[Echo In Light]

2. That was the determined course all along. They weren't ushered in in 00 to serve the country

All of the phony "terror" jazz and subsequent phony wars were cooked up by them {taking a page from the Reagan/Bush playbook}, and their numerous enablers, to serve as proper justification/cover for their nefarious aims, both here and abroad.

[dmosh42]

3. I watched the Senate Energy's committee recently...

and (Commodity mkt hearing)it was brought out that two factors play a big part in this surge in prices. For one, Goldman Sachs brokerage has a steady control of about 30% of futures oil contracts. They hint at a rise in prices and the hedge funds join in in bidding the commodity higher. The other factor is they can do this because they only have to put up 5% of the asset price. Plus because there is no short term capital gain tax, it can be sold again for quick profits. Also, these transaction are no longer regulated since 2000, so nobody knows who is doing the buying. It was suggested by the trade experts that just by changing the law to require more assets to be put up on each transaction would cause the speculators to back off. But my feeling is there are many congressional people who are directly, or indirectly making money on this. So no bill has been offered. Sen Byron Dorgan stated that he wanted to present this action, but I haven't seen anything yet.