By BENJIE OLIVEROS
The law of classical economics dictates that when demand exceeds supply, prices go up and dampens demand until it reaches equilibrium with the supply. On the other hand, when demand is low and supply exceeds it, prices would go down until demand increases and achieves equilibrium with supply. This is called the invisible hand of the market. This is the logic of neoclassical or neoliberal economics, thus, the push for limiting government intervention in the economy through deregulation, liberalization and privatization.
However, stagflation hit the world economy in the 1970s and this baffled economists. Stagflation, or stagnation coupled with inflation, should not have occurred because in a stagnant economy, unemployment is high and demand is low so why do prices increase? The response of economists and governments of advanced capitalist countries is to push for more deregulation, liberalization and privatization plus controlling inflation through raising or lowering interest rates. But still, this did not solve the problem of rising prices even during these times when the world is suffering from a Great Recession, which progressives say is more aptly described as a Great Depression comparable to what the world experienced in 1929.
So what is wrong with the world economy?
Recently, there is an ongoing debate in the US about who is to blame for rising oil prices. In fact, the Republicans are using the issue of high oil prices to criticize the economic policies of US President Barack Obama.
Pump prices of gasoline in the US has increased by 30 percent in the last two months to reach $3.52 a gallon. (This amounts to P150.51 a gallon or P37.63 a liter, much lower than Philippine oil prices.) US consumers fear that it would reach $4 a gallon. (P171 a gallon or P42.76 a liter)
And yet, demand for oil in the US is at a 15-year low. Because of low demand, oil companies have been shutting down large refineries in the US. According to a report written by Matthew Philips “Angry About High Prices, Blame Shuttered Oil Refineries,” which was published by Bloomberg Businessweek, since December, the US has lost from four to five percent of its refining capacity. However, this hardly affected the supply of oil because, according to a report “Spiking Gas Prices: GOP Sides with Big Oil Again” published by www.opposingviews.com, the number of oil drilling rigs in the US quadrupled during the last three years. The number of its working oil and gas drilling rigs topped that of the world combined. So demand for oil is low and the supply has considerably increased.
The blame could not rest on increasing production costs either. In fact, according to the same report, ExxonMobil, ConocoPhillips, BP, Chevron and Shell racked up a combined profit of $137 billion in 2011 even if they produced four percent less oil.
Thus, if the demand for oil in the US is low but supply is increasing, who or what is to blame for the spike in oil prices?
I could think of two reasons.
First, oil, aside from gold, is the current commodity of choice for speculators. In a May 2008 article published on the website “Geopolitics – Geoeconomics,” by F William Engdahl, he said, “As much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds.” He cited a June 2006 report of the US Senate Permanent Subcommittee on Investigations entitled “The Role of Market Speculation in rising oil and gas prices,” which revealed that “…there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices.” The same US Senate report also discovered that a lot of companies trading in the oil futures market are not actually producers or users of oil. Who are these speculators? The same article identified Goldman Sachs and Morgan Stanley, as the two leading energy trading firms, as well as Citigroup and JP Morgan Chase.
Speculators have been taking advantage of tensions in Syria and Iran by frantically trading in the oil futures market – the New York Mercantile Exchange for light, sweet crude and the ICE futures for Brent crude, as well as the Dubai Mercantile Exchange – thereby pushing spot prices up. This has also been the case in 2008 when speculators took advantage of the unrest in the Middle East, Sudan, Venezuela and Pakistan even if no supply shocks actually happened.
Second, what we are experiencing is the invisible hand of the oil monopolies – the biggest of which are Exxon Mobil, Royal Dutch Shell, and BP, with Chevron Texaco on fourth – that control the supply and dictate the prices of oil, and are the biggest winners in the spikes in oil prices.
What is true in oil likewise applies in other commodities. Speculation and the invisible hand of monopolies play a major role in determining prices. Adam Smith must be turning in his grave. But mainstream economists and governments still refuse to look beyond their archaic, albeit rehashed, theories, which they label as new.