Locking In the Price of Oil

By Joel D. Joseph

Contrary to popular myth, the price of oil is not magically determined by supply and demand. The price of oil is rising again even though demand is low. This shouldn’t be happening in a free market. Oil is manipulated by OPEC (the Organization of Petroleum Exporting Countries) and by speculators.

The speculative run-up in the price of oil to $140 per barrel in 2008 was the initial trigger for the current financial crisis. Oil is now selling for more than $60, slowing down economic recovery.

Speculation in oil futures has increased exponentially. This is a relatively recent phenomenon. Concerning futures contracts for oil, NYMEX, the world’s largest commodity exchange, only began trading in 1981. Trading in commodity futures allows speculators to buy a crude oil futures contract with only a small payment (about 6%) of the value of the contract. For example, at a price of $65 a barrel, a futures trader only has to put down about $4 for every barrel, while borrowing the other $61. This ability to leverage commodity futures purchases by up to 16 to 1 helps drive prices to wildly unrealistic levels. Added to this is the momentum of the recent rise in oil prices—it seems to keep going up and up with new speculation adding fuel to the fire.

This new oil bubble is bound to burst. Does this boom and bust cycle help anyone but the speculators? I don’t think so. It doesn’t help OPEC nations either. It doesn’t help consumers or airlines or anyone else who relies on petroleum.

Oil prices should be fixed, not by OPEC, but by an agreement with OPEC. The US, Europe, Japan, Russia and China should jointly negotiate a fixed price for a barrel of oil. It can be priced in dollars, Euros or Yen or a combination of the three.

This would significantly help to stabilize the world economy. The price of oil should be high enough (at least $50 per barrel) so as to encourage alternatives to fossil fuels. But it should not be so high as to kill off the economy as $140 per barrel oil did last year.

All these nations could agree to increase the price over a five or ten year period. For example, now that the world economy is in a deep recession, we could start with $50 per barrel oil for one year, with a scheduled increase to $55 per barrel in 12 months and $60 in two years, and possibly $75 in three or four years.

The market price for oil was about $68 per barrel on June 5. It peaked at $140 per barrel a year ago. In 1972 oil was $3 per barrel. Oil boomed up to $14 in 1978, and increased again to $35 per barrel in 1981. From 1981 until 2002, however, oil futures rarely moved above $20 per barrel. Oil was as low as $11 per barrel in February 1999, and closed at a peak of $35 per barrel in the first week of September 2000. In the last 10 years oil has gone crazy, increasing 1,500%, and then diving more than 50%. This roller coaster ride plays havoc with all industries that rely on oil, including trucking, airlines, plastics manufacturers and delivery services like UPS and Federal Express.

Oil prices have undergone a significant decrease since the record peak it reached in July 2008. On December 23, 2008, crude oil spot price fell to $30.28 a barrel, the lowest since the global financial crisis began, and has been trading between $35 a barrel and $70 a barrel in 2009.

If we fix the price of oil, by agreement among nations, speculation on oil futures will cease. The oil producing countries, as well as consumers, can plan their spending and their lives. The only losers in this scenario are the speculators.

Joel Joseph is chairman of the Made in the USA Foundation, a non-profit organization dedicated to promoting American-made products. Email joeldjoseph@gmail.com.

From The Progressive Populist, July 1-15, 2009

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