I’m not an economist, but I can count.
Lost in all the fancy talk about global economic growth and free markets is one simple truth: growth seems to stall every time oil tops $80 a barrel and resume once oil falls below that mark again.
What’s been missing is a world oil pricing cop in a global economy with no over-arching regulatory mechanisms. Someone who could prevent these wild fluctuations, which are so useful to the investors who control the oil spigot – like the House of Saud – and so damaging to the rest of the species.
Oil was trading as low as $76.85 a barrel Oct. 3 on the New York Mercantile Exchange. That’s the lowest level since September of 2010. The drop is largely due to the newfound willingess of President Barack Obama and the Saudis to work together to fill the vacant role of world oil pricing cop.
It means that we can all look forward to a rebound in economic growth now that prices have moderated. This decline in oil prices may help us escape a double-dip recession, just as the spike that preceded it was responsible for suffocating the nascent global economic recovery and pushing us to the brink of economic contraction.
The decline is a win for Obama’s discreet oil diplomacy.
He helped convince the G-8 industrialized nations to release 60 million barrels of oil from world reserves in June via the International Energy Agency – with half of the amount coming from the 727 million barrel U.S. strategic oil reserve. The Saudis supported the move by increasing their own daily output by 1.5 million barrels after prices rose above their preferred trading range of $80-$90 a barrel.
The amounts are small in comparison to daily global consumption of 89.3 million barrels. However, they were more than enough to prick the oil pricing bubble and convince speculators in essence to “move along folks, the show’s over.”
It’s no coincidence that the global economy really sucked during the nine months ending in May as investors piled into oil, driving up the price for a barrel of West Texas Intermediate crude at the storage hub in Cushing, Okla., to $113.39 from $72.96. We saw a similar scenario during the 18 months ending July, 2008, when WTI spot prices surged to $145.16 a barrel from $50.51, according to Energy Information Administration data.
Those high prices helped push us into the deepest recession since The Great Depression – an 18-month-long contraction that ended in June 2009.
The short-term problem isn’t that the world is running out of oil; that’s a long-term problem. The short-term problem is that the world has not established a way to regulate global oil price manipulation and speculation, and needs to begin doing so very badly.
The new oil cops are a stopgap measure, rather than a permanent solution. They’re more like the old Guardian Angels vigilante group that policed neglected areas of New York City in the late 1980s than a true police force.
Both serve as a deterrent to predatory behavior. Rather than cure all.
Until a permanent global regulatory mechanism is established, the global economy will remain trapped in a boom-and-bust cycle dictated largely by excessive oil prices. The only winners in that scenario are those who either are positioned to anticipate these massive price swings or precipitate them.
Major oil producing nations and their ruling classes can do both.
It’s an old story.
The U.S. was subject to massive abuse by monopolies and trusts at the end of the 19th century, in the absence of effective national regulation, as regional economies merged into a single national economy. We’re facing a similar challenge now at the global level as national economies have become more closely linked together into a global economy.
The painful truth is that the United Nations is a toothless pitbull when it comes to regulating world trade, monopolies, trusts, market manipulation and labor abuses. We’ve run headlong into a global economy with no speed regulators thanks to pro-globalization groups like the World Economic Forum, which meets every year in Davos, Switzerland.
To put it another way: the Standard Oil trust that former President Teddy Roosevelt helped break up in 1911 is alive and well, in function if not in name, a century later. Many of the wealthiest people on the planet are once again raiding the pockets of decent, hardworking people by jacking up oil prices.
They’re not giving us more of the product for the money, or providing a better product. They’re simply taking more.
The only reason the Saudis stepped in was because high prices were costing them oil money by reducing demand and gutting the value of the rest of their stock market portfolio.
Powerful oil-producing nations routinely base their budgets for social welfare programs on different oil price ranges. Russia, which generates 10 million barrels of oil a day, is counting on $116 a barrel oil right now. Venezuela and Saudi Arabia have different targets.
That gives nations like these a powerful incentive to manipulate prices.
The various oil producing nations don’t always agree on how best to do that. Some want the highest prices possible regardless of the impact on the global economy. Others want the highest prices consistent with stable consumption. They’re willing to work together to ensure there is no real competition on prices – like the kind that occurs in a truly free market.
Consumers always lose when producers create false scarcities to manipulate prices upward via collusion. That’s why it’s illegal in this country and needs to be illegal at the global level.
There’s more oil being pumped out of the earth on a daily basis now than ever before – more than we need – and we’re paying more for it than ever before. Prices typically fall as supply increases in a free market, but this isn’t a free market.
Consumers aren’t just up against the oil producing nations and their ability to turn the global petroleum spigot to support high prices. They also face the self-serving machinations of market speculators who are soaking up the excess supply right now.
The huge increase in worldwide storage capacity that has taken place the past five years is the best evidence of the role speculators are playing. They’ve bought so much crude that they’ve run out of places to put their physical oil.
In some cases speculators and the oil producing nations and companies are one and the same.
It’s foolish to assume that oil producing companies and nations only make money on the sale of their oil and are not using their massive reserves of dollars and advance knowledge of supply fluctuations to game stock markets. How much could you make if you knew a week ahead of time that the Organization of Petroleum Exporting Countries (OPEC) was going to reduce its production by 1 million barrels a day, or increase it by a similar amount?
The U.S. has a rule against insider trading. Many oil producing nations do not. Meanwhile, the United Nations is largely missing in action on the entire issue.
That’s why there is no global free market in oil. Instead, there is a highly manipulated market where the losers are overwhelmingly the non-rich. The money being made isn’t coming out of thin air, either.
It comes right out of your wallet and pocketbook. It’s a de facto tax on being poor and middle class, a de facto tax on working for other people, and a de facto tax on being part of the other 99 percent of the planet’s population.
Sadly, the beneficiaries of the growth fostered by the world oil cops will be workers in low-wage nations that don’t feature the crushing health care costs of the United States. Not the beleaguered American middle class.
Most multinational corporations aren’t looking to significantly beef up their labor forces here in the United States, even if they are led by a fellow American. Today’s CEOs view themselves as citizens of the world, rather than patriotic Americans, and would rather boost profits by adding staff oversea than help their own countrymen and women.
Meanwhile the rest of us are still dutifully paying taxes into a national economy that has been hijacked by the multinationals.