http://www.informationclearinghouse.info/article20072.htm
By Paul Craig Roberts
11/06/08
"ICH" -- -
How to explain the oil price?
Why is it so high?
Are we running out?
Are supplies disrupted,
or is the high price a reflection
of oil company greed or OPEC greed.
Are Chavez and the Saudis conspiring against us?
In my opinion,
the two biggest factors in oil's high
price are the weakness in the US dollar's
exchange value and the liquidity that the
Federal Reserve is pumping out.
The dollar is weak because of
large trade and budget deficits,
the closing of which is beyond
American political will.
As abuse wears out the US
dollar's reserve currency role,
sellers demand more dollars as
a hedge against its declining
exchange value and ultimate
loss of reserve currency status.
In an effort to forestall a serious
recession and further crises in
derivative instruments,
the Federal Reserve is pouring
out liquidity that is financing
speculation in oil futures contracts.
Hedge funds and investment banks
are restoring their impaired capital
structures with profits made by
speculating in highly leveraged
oil future contracts,
just as real estate speculators
flipping contracts pushed up
home prices.
The oil futures bubble, too, will pop,
hopefully before new derivatives are
created on the basis of high oil prices.
There are other factors
affecting the price of oil.
The prospect of an Israeli/US attack
on Iran has increased current demand
in order to build stocks against disruption.
No one knows the consequence of such
an ill-conceived act of aggression,
and the uncertainty pushes up the
price of oil as the entire Middle
East could be engulfed in conflagration.
However,
storage facilities are limited,
and the impact on price of larger
inventories has a limit.
Saudi Oil Minister Ali
al-Naimi recently stated,
"There is no justification for
the current rise in prices."
What the minister means is that
there are no shortages or supply
disruptions.
He means no real reasons as
distinct from speculative or
psychological reasons.
The run up in oil price coincides
with a period of heightened US and
Israeli military aggression in the
Middle East.
However,
the biggest jump has
been in the last 18 months.
When Bush invaded Iraq in 2003,
the average price of oil that
year was about $27 per barrel,
or about $31 in inflation
adjusted 2007 dollars.
The price rose another $10 in 2004
to an average annual price of $42
(in 2007 dollars), another $12 in
2005, $7 in 2006, and $4 in 2007 to $65.
But in the last few months the price
has more than doubled to about $135.
It is difficult to explain a $70
jump in price in terms other than
speculation.
Oil prices have been high in the past.
Until 2008,
the record monthly oil price
was $104 in December 1979
(measured in December 2007 dollars).
As recently as 1998 the real price of
oil was lower than in 1946 when the
nominal price of oil was $1.63 per barrel.
During the Bush regime,
the price of oil in 2007
dollars has risen from $27
to approximately $135.
(see
http://inflationdata.com/inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp
)
Possibly,
the rise in the oil price was held down,
prior to the recent jump,
by expectations that Democrats
would eventually end the conflict
and restrain Israel in the interest
of Middle East peace and justice
for the Palestinians.
Now that Obama has pledged allegiance
to AIPAC and adopted Bush's position
toward Iran,
the high oil price could be a
forecast that US/Israeli policy
is likely to result in substantial
supply disruptions.
Still,
the recent Israeli statements that
an attack on Iran was "inevitable"
only jumped the oil price about $8.
Perhaps more difficult to understand
than the high price of oil is the low
US long term interest rates.
US interest rates are actually
below the rate of inflation,
to say nothing of the imperiled
exchange value of the dollar.
Economists who assume rational
participants in rational markets
cannot explain why lenders would
indefinitely accept interest
rates below the rate of inflation.
Of course,
Americans don't get real inflation
numbers from their government and
have not since the Consumer Price
Index was rigged during the Clinton
administration to hold down Social
Security payments by denying retirees
their full cost of living adjustments.
According to statistician John Williams
( www.shadowstats.com ),
using the pre-Clinton era measure
of the CPI produces a current CPI
of about 7.5%.
Understating inflation makes
real GDP growth appear higher.
If inflation were properly measured,
the US has probably experienced no
real GDP growth in the 21st century.
Williams re****ts that for decades
political administrations have fiddled
with the inflation and employment numbers
to make themselves look slightly better.
The ***ulative effect has been to
deprive these measurements of veracity.
If I understand Williams,
today both inflation and
unemployment rates,
as originally measured, are around 12%.
By pumping out money in an effort
to forestall recession and paper
over balance sheet problems,
the Federal Reserve is driving
up commodity and food prices in
general.
Yet American real incomes are not growing.
Even without jobs offshoring,
US economic policy has put the
bulk of the population on a
path to lower living standards.
The crisis that looms for the US
is the loss of world currency role.
Once the dollar loses that role,
the US government will not be
able to finance its operations
by borrowing abroad,
and foreigners will cease to
finance the massive US trade
deficit.
This crisis will eliminate
the US as a world power.
Paul Craig Roberts a former
Assistant Secretary of the US
Treasury and former associate
editor of the Wall Street Journal,
has been re****ting shocking cases
of prosecutorial abuse for two decades
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