Too Much: A Commentary on Excess and Inequality
Why Oil Prices Are So High
| We trim and append this 2008 article posted at AlterNet June 10. The author, as does yours truly, belongs to the US Basic Income Group and is the editor of the online weekly Too Much and an associate fellow at the Institute for Policy Studies. |
By Sam Pizzigati
In the late 1990s, we had the stock market bubble. That popped. Then we had the housing market bubble. And that popped. Lately the market for crude oil bubbled to an all-time high, nearly $140 per barrel. Why now all the bubbles — and busts? It’s because we have too much wealth concentrated in too few pockets, nurturing speculation in oil.The speculation that results in high prices at America’s gas pumps comes mostly out of hedge funds, those shadowy mutual funds on steroids open only to the deepest of deep-pocket investors. This special status largely frees hedge funds from any federal financial oversight and regulation. They buy and sell oil futures contracts — with borrowed money.
That can be risky. But the rewards can be staggeringly huge. A sweet deal for sweet crude can stuff hundreds of millions, even billions of dollars, into hedge fund manager pockets.
Futures contracts have been around, of course, for years, and such contracts can serve a useful purpose. Airlines, for instance, can use futures “to lock in” the price they’ll have to pay for oil in the future. But manic trading in futures, as billionaire investor George Soros told a June 3 US Senate hearing, blows commodity price bubbles.
Since the end of 2000 by when almost all limits on speculative trading in commodity markets had been deregulated away, commodity trading volume has jumped six-fold. This speculative shot in the arm, Consumer Federation of America research director Mark Cooper believes, is adding at least $40 a barrel to the price of oil, about a third of the recent going price.
Hedge funds argue that oil price hikes simply reflect the vagaries of global supply and demand. Any congressional probe into commodity speculation, billionaire hedge fund manager Boone Pickens noted earlier this month, would be a “waste of time.”
Many independent observers couldn't disagree more. In the Financial Times, London School of Economics analyst Meghnad Desai noted that nothing happening in the real-world market for oil — like growing demand from China — can explain the current oil market.
“The best way to counter speculation,” says Desai, “is to make it less profitable”. Governments could tax trades in speculation more than trades in “making or taking delivery of oil.”
JJS: However, taxing trades does not close the underlying wealth gap.
Nor would re-regulating work. If the rich got rid of rules once, they can do it again.
The basic, permanent solution is to close the wealth gap.
- 1) End active subsidies for oil, such as public funds for their research into squeezing petroleum from tar sands, etc.
2) End passive subsidies, mainly the state’s failure to charge polluters, and every phase of oil use from extraction to combustion is enormously polluting, even climate-changing; charge oil for sloughed off damages.
3) End taxes on oil’s competitors, on the income, sales, and buildings of people in alternative energy businesses.
4) And the granddaddy of them all, quit letting just a few people corral and enjoy all the windfall value of oil, i.e., its value while still in the ground, untouched; instead, tax oil fields in the country and maybe also oil shipments into the country.
Could hugely profitable oil companies pass the taxes on? Not if there’s enough competition. Competition between oil companies, between oil and other energy sources, between refineries producing fuels, between energy users like cars powered by gasoline vs. by fuel cells, and between heating oil suppliers and home insulators.
Want to foster such healthy competition? Get rid of taxes on our efforts and instead recover the value of land, resources, including the EM spectrum, and the ecosystem. Get rid of subsidies for special interests and instead share out surplus public revenue, something Alaska does with oil rents.
This geonomic revenue shift is what would preclude giantism in the energy market, over-concentration of wealth and power, and the need for quixotic regulation. Then the price of gas would not be pumped up by speculation but only by oil’s scarcity. Out from under taxes and subsidies, the market would hasten along alternatives to chastened consumers. The alternatives kicking in would ease back demand for oil and lower the price of gasoline. But recovering and sharing the value of land and resources comes first.
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Jeffery J. Smith runs the Forum on Geonomics.
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Also see: World Economy: What Does Carbon Cost?
Part II, Behind the Deflating Stock Market Bubble
Have 1,000 U.S. Souls Died for Oil? |
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