By ALAYSA TAGUMPAY E. ESCANDOR & JM RAGAZA

Massive demonstrations swept across the world to protest the rising cost of oil, arguably the most important commodity in the post-Industrial age.

As energy expert Daniel Yergin states, “Oil has meant mastery throughout the twentieth century.” Thus, national economies are increasingly vulnerable to sharp spikes in fuel prices.

In India, institutions and businesses were closed, trains and flights cancelled, and roads were emptied, to call for cuts in oil import duties. Thousands of fishermen in Spain and Italy blockaded fishing ports, while independent truckers in Portugal, France, and the US blocked roads to call for rebates in fuel taxes and stable oil prices.

On the domestic front, jeepney drivers paralyzed public transportation to insist on the abolishment of the Oil Deregulation Law and the cancellation of the 12 percent value-added tax on oil products. While the removal of consumption taxes may provide instant relief, transnational oil companies still retain virtual supremacy in the country.

Yet, even as more people take to the streets, oil prices continue to soar by a rate that escapes the logic of supply and demand.

The End of Cheap Oil

For many years, oil was a cheap commodity, due in large part to technological advances that helped keep production and distribution costs down. In the 1990s, the market was secure, and prices of crude were stable, averaging at only USD10 to 20 per barrel.

At the onset of the 21st century, however, fast-growing economies have placed greater pressure on oil demand. The voracious appetite of China alone has pushed the cost of petrol up. Meanwhile, instabilities in the Middle East, many of which were caused by US intervention, have also contributed to a nervous market. Meanwhile, volatile conditions encourage investments in oil futures–contracts based on speculation.

It was “the end of cheap oil,” economists predicted. A look at today’s mercantile exchange proves the forecast right. Indeed, as of June 10, 2008, oil prices were almost at USD140 per barrel. According to calculations, it will reach USD200 per barrel this year.

Politics of Petroleum

International media outfits have presented inadequate oil production as the overriding reason for the crisis.

Several theories have been formulated to explain the reduced supply, the most popular of which is the Peak Oil Theory, which states that reserves are running out since crude oil is a non-renewable resource. News of newly discovered oil fields, however, has disproved this assumption. As of May, US crude inventories increased by almost six million barrels proving that supplies remain abundant.

The media has also played up accusations against the Organization of Petroleum Exporting Countries (OPEC) for allegedly failing to pump more oil into the world market.

Founded in 1960, OPEC’s mission was to “ensure the stabilization of oil markets in order to secure an efficient, economic, and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital to those investing in the petroleum industry.” It is now constituted by 12 member states, all of which are Third World Countries whose economies depend heavily on oil exports.

The US and OPEC, however, have a long history of antagonism. In the 1970s, Israel developed into a leading military power due to US support, attacking neighboring regions that had close ties with the Soviet Union. This instigated the Yom Kippur War, in which Egypt and Syria sough to regain the territories invaded by Israel. Using oil as a political weapon, OPEC refused supplies to western countries that supported Israel, delivering a substantial blow to the US economy.

Since then, the Middle East has been the target of US aggression.

Artificial Scarcity

To mitigate OPEC’s influence in the market, the US stockpiled oil reserves and increased their production. Simultaneous with the rise in dominance of transnational oil companies, OPEC’s influence significantly declined.

Now, poorer OPEC members, such as Nigeria and Algeria, often lag behind the organization’s agreed oil quotas, due to civil war and poor oil infrastructures. Meanwhile, the damage cause by the Gulf War and Iraq War has severely limited the production capacity of another OPEC member, Iraq.

OPEC Secretary-General Abdalla Salem el-Badri notes, “The countries that belong to OPEC currently supply about 40 percent of the petroleum consumed in the world. One cannot exactly say that we truly control the market.”

There is a wide consensus that OPEC’s reduced capacity has contributed to the increase in oil prices. El-Badri points out that US oil companies create “bottlenecks” in the refining process that significantly limit petroleum products despite an abundance of crude. In conjunction with the rise in oil costs, transnational companies reduce operations below capacity, making artificial scarcity inevitable. Independent think-tank IBON reports that oil companies also gain “super profits” through transfer pricing, which expands fuel prices at each stage of the production and distribution chain.

At present, only a handful of oil companies–such as Exxon Mobil, BP, Royal Dutch Shell, Chevron, and Texaco–dominate the entire oil operations from exploration to marketing.

Beyond Supply and Demand

Market volatility hints that prices are no longer solely determined by supply and demand. Instead, less obvious forces profit from the artificial oil shortage. To illustrate, it would take years for oil prices to increase by USD16 in the past. These days, however, it only takes 36 hours.

Dubbed as “casino trading,” investors make super profits by aggravating scarcity to accelerate demand. Directed by speculation, “hot money” is channeled from stocks and real estate loans to oil futures, pushing prices to spectacular levels.

Simultaneous with the emergence of a globalized world economy, the futures market has made profit-generation possible without the actual possession of goods. As a result, the volume of oil futures traded no longer reflects the actual volume of commodities exchanged in the real market.

The irony of speculation, says Benjie Oliveros of Bulatlat, is that it spurs price spikes without any contribution to the real economy. Subsequently, speculation is removed from the production process, failing to create new value even as it attempts to squeeze more value out of an existing one. Oil and geopolitics expert F. William Engdahl estimates that 60 percent of today’s pump price is “pure speculation.”

Whether the people’s way of living is threatened by real scarcity or mere manipulation is an issue, not just of economics, but of ethics. More and more, people are questioning the integrity of a system that deprives the many to provide for a few, while entire civilizations are subverted at the whims of a handful. ●

Published in print in the Collegian’s June 19, 2008, with the headline, “MEGATREND: Linking profit and scarcity in the oil industry.”