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WorldVoices: What Is Driving Up Oil Prices?

[Editor’s Note: WorldVoices—a recurring feature on the WorldPolicy blog—links to opinion and analysis of current events from English-language news sources around the globe.]

By Eleanor T. West

According to the World Bank, a rise in food prices has pushed 44 million people into poverty since last June.  The World Bank attributed the rise in price to the recent increase in the cost of fuel due to conflicts in the Middle East and North Africa. “This is the biggest threat today to the world's poor where we risk losing a generation,” said Robert Zoellick, the Bank’s president.

In a speech on Tuesday, President Obama addressed the soaring price of food and fuel and argued that the price was being driven up not by a lack of supply, but instead by speculation. His comments led to a flurry of opinions on whether or not speculators could be blamed for the spike in oil prices. Saudi Arabia’s Petroleum and Mineral Resource Minister Ali Al-Naimi, chimed in. “Based on the supply-and-demand fundamentals, crude oil prices should not be this high,” he said.

While the debate over speculators’ role in rising oil prices continues, the result of the soaring food prices is drastic. In Kenya, protestors have taken to the street to demand that the government provide food assistance.

The U.N. news service IRIN reports on the effects costly food has in Kenya.

 In northern Kenya, the sharp increase in fuel prices has hit relief operations, increasing the vulnerability of communities already in the grip of severe drought.  Abdullahi Ali, a resident of Sericho in Isiolo, said prices of tomatoes, cabbage and milk, for example, had more than tripled and many families were unable to afford a proper meal. "This is the most terrible situation I have ever experienced since my childhood and strong tea is now the most common meal for many families. Here in Sericho, we are facing the worst water crisis, with people using weak donkeys, which have eaten nothing, to fetch water more than 40km away," Ali said. 

The Moscow Times discusses the financial markets' heavy hand in oil prices.

The experience of the past 35 years shows that researchers have at best a very limited ability to predict not only a price range for future oil prices, but even whether prices will increase or drop at all.

Now oil prices are determined not so much by supply and demand — as was long thought to be the primary factor — but by financial markets. Most oil is currently traded using derivative financial instruments that are not based on the physical exchange of crude between seller and buyer. In the 1990s, physical transactions accounted for about 30 percent of oil traded, but they now number less than 1 percent.

In effect, oil has become a speculative commodity whose price is determined by how investors anticipate its value will increase or decrease at a given point in the future.

Writing on the website of Al Jazeera English, Danny Schechter claims there is a “scam” behind the dramatic increase in food and oil prices.

The consequences are catastrophic for the global poor as their costs go up while their income doesn't. It's menacing American workers too, who in large part have not seen a meaningful raise since the days of Reagan (keeping it this way is clearly behind the current flurry of attacks on unions).

Usually you hear this debate in scholarly circles or read it in political tracts where orthodox views collide with more alarmist projections about the oil supply "peaking". [Officials] in the Third World don't see the subject as academic. Reserve Bank of India Governor Duvvuri Subbarao charges that: "Speculative movements in commodity derivative markets are also causing volatility in prices". The World Bank has held meetings on the issue, because it is seen as a matter of "utmost urgency".

Finance expert Phil Davis runs a website and widely read newsletter to monitor stocks and options trades.  When I met Phil the other night, he was on fire, enraged by what he believes is the scam of the century that no one wants to talk about, because so many powerful people armed with legions of lawyers want unquestioning allegiance, and will sue you into silence. It's all a game of manipulating oil supply to keep prices up. And no one seems to be regulating it.

In an opinion piece for The Wall Street Journal, James Herron questions Obama’s reasons for naming speculators as the driving factor behind the rise in oil prices.

It’s an appealing position that President Obama has taken. Believing that all is well in the oil market—and prices would be far lower if it weren’t for wicked speculators —is easier than acknowledging the genuinely parlous state of world oil supplies.

He didn’t make the populist call for OPEC to increase its oil production in order to reduce prices for hard-strapped US motorists. Instead he parroted the OPEC position that there is enough oil available to meet demand. Speculators are reacting to major geopolitical changes, not driving them. The stalemate in Libya probably means that 1.3 million barrels a day of the highest quality oil supply will remain off the market for many months more. “While speculators are holding record long positions in oil and are a key element in the oil rally, they react to policy inputs,” said Olivier Jakob, an analyst at Petromatrix. “It is not the speculators, but policymakers, that decided to launch a new war on an oil producing country (Libya).”

A piece for Forbes by analysts from STRATFOR suggests that conflicts have less effect on oil prices than investors.

The reason STRATFOR no longer predicts oil prices is because supply, demand and geopolitical risks are no longer reliable tools for predicting commodity prices, and haven’t been since the early 2000s. Industrial demand is fairly easy to predict, since it is based on — and highly constrained by — actual structural realities.Not so with investors, who — almost by definition — trade on intuition as they seek to outthink the markets and each other. But perhaps most important, unlike the industrial world, the world of investors has no single or collective pulse to take. Even if there were, investors often respond to price shifts in a manner opposite to industrial players.And so those investors have become the oil market’s price setters.

In STRATFOR’s opinion, investors’ collective activities are now the primary drivers of oil pricing, more critical than anything that happens in Saudi Arabia or Russia on most days.



Eleanor T. West is an editorial assistant at World Policy Journal.

Photo courtesy of Flickr user Travlr.

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