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Why Is Oil More Expensive?

by Ingo Schmidt Thursday, Apr. 24, 2008 at 3:33 AM

The reason for the high price of oil is that specualtive capital after the eruption of the US real estate crisis in the summer of 2007 now wreaks its havoc in the oil- and other raw material sectors. Workers have a world to win whose contours can hardly be defined.


By Ingo Schmidt

[This article published in: SoZ - Sozialistische Zeitung, February 2008 is translated from the German on the World Wide Web,]

Neoclassical economic theory taught us, prices reflect the scarcity of a good. The rule is in force: the higher the price, the scarcer is the supply in relation to demand. A dramatic shortage seems to be occurring when we apply this rule to crude oil. In 1998, the price for a barrel of oil was under . At the beginning of 2008, a barrel of oil was more than a 0.

A supply shortfall is now undeniable. Strong economic growth and raw material demand in India and China along with supply limitations contributed to the civil wars in the oil producer countries Algeria, Iraq and Nigeria. OPEC member states that could influence the worldwide oil supply by setting production quotas did not have a majority in the past to counteract the oil shortage by raising production. Whether adequate unused production capacities exist is controversial. Soaring oil prices in the last years have led to a profit explosion of the oil companies. Hardly any investments were made to expand production and processing. This investment reserve is very understandable given the risk that oil production facilities could be destroyed through international wars or civil wars.

Irrespective of the actual shortage of the oil supply, no one would seriously argue that the oil supply has fallen 90% in the past decade as could be assumed with the tenfold increase of price in this period. The future outlook is more important for understanding oil price development than the day-to-day relation of supply and demand. The global oil supply is finite. According to neoclassical theory, supply shortages and higher prices can be expected. These realities will lead to reduced energy consumption and development of alternative sources of energy. This sounds rational under capitalist conditions of production.

To the joy of the profit-mongerers, the future will open up their own business opportunities. These fields are unknown. Even if everyone knows of the finiteness of oil reserves, people argued excellently about the time of their exhaustion. The uncertainty about new oil resources, production technologies and the availability of oil substitutes like bio-sprit made the energy market into a playground of speculators who learned to make a business out of their own uncertainty and the uncertainty of other people. This is a different reality than the world of neoclassical theory informed by market prices. The greater the uncertainty about future developments – and the war on terror produces more uncertainty every day – the less the costs and returns of long-term investments are calculated. Speculations on or against future fluctuations of the price of oil become all the more promising.

After capital seeking investment led to the dot-com bubble in the 1990s and after its bursting drove to a speculative real estate boom superseded by a veritable financial crisis, the energy market is now next in line. In view of the finiteness of oil, there are good reasons for a higher long-term oil price and ecological reasons for seeking alternatives to a production model based on burning fossil energy.

Nevertheless the high oil price is caused by speculative businesses that have little to do with the present or future availability of oil, not by knowledge about future scarcity. Rather the reason for the currently high price of oil is speculative capital after the eruption of the US real estate crisis in the summer of 2007 now wreaks its havoc in the oil sector and other raw material sectors.

Faithful to the primal capitalist motto “Whoever dares wins,” the stock market bustle implies only the hesitant need worry about access to energy. Active and daring persons – those who can make big deals in the stock market game – will keep their energy-wasting lifestyle in the future. As owners of great assets, they can afford wrong speculations even when it hurts in the isolated area.

Speculations whether concentrated on information technologies, real estate or as nowadays on raw materials are low-risk and highly effective methods of enrichment for owners of massive financial assets. A redistribution from labor- to assets income occurs.

Whoever risks 1% of his or her total assets in a failed, real estate – or oil gamble does not risk much but contributes to higher prices in the respective sector by buying corresponding securities. Whoever believes as a small property owner that he can join the rich and puts a considerable share of his or her assets on one number risks bankruptcy and proletarianization. Proletarians risk losing all they have. Higher real estate- and oil prices lead to lower real wages. Speculation turns out to be a proven means for reducing real wages, redistributing wealth from wages to profits and reducing the number of profit-mongers. Simplified in a Marxist way, this is how class relations appear after 20th century capitalism led to the rise of a new numerous middle class and temporarily to considerable salary increases at least in the metropolises.

The class struggles intensify. The situation becomes more complicated when capitalism develops its productive forces in a destructive way. The ecological problems of a production fueled by fossil energy cannot be solved through mere ownership of the means of production as the working class movement long believed. Therefore the battle against the profit claims of owners of capital cannot be separated from the search for alternative methods of production and alternative ways of life.

Workers have a world to win whose contours can hardly be defined. Genuine uncertainties are involved here unlike the stock exchange world where insecurity about future prices leads only to reproduction of the same. Political mobilization becomes harder. Ecological, economic and social transition demands are necessary to make the search for “another world” more attractive. “Another world” is on the banner of the global justice movement. The weakening of a worker movement caught in corporatist-productivist ideas and the transformation of a once radical environmental movement into a party-organized avant-garde of neoliberalism (the German Greens) could teach us many lessons useful for building a red-green class movement.

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