By Joe Montero
One constant during the present crisis has been a the downwards direction global share markets are travelling. On some days they fall more sharply than at others. The current plunge has been caused by a new spike downwards of the price of oil, which is now sitting at a negative $US35.20 to $-37.63 a barrel depending on United Kingdom or United States prices.
How could there be a negative price? And if there is, why are we still paying so much at the bowser? The answers to these questions say a lot about the irrationality of the oil market, the operation of the economic system, and what both mean in the Australian context.
Then there is the reality that this is dying industry, which will eventually be forced out by the climate crisis and the need to stop the creation of carbon emissions. It is a weakness that has seriously shaken the foundations of the industry, and will do so even more in the future, and this makes it even more vulnerable to shocks.
Oil has become a critical foundation of the financial system. It profits from drilling, refining, and selling the products to consumers.
Less well known, is that a major source of profit is made through speculation. Billions of dollars are diverted into buying and then hoarding to sell again, when the created shortage drives up the price. The difference between the purchase and selling price is the source of profit. This what a futures market is.
If you don’t really believe it, just take a look at the media reports. They are full of news from and commentaries from representatives of the futures industry.
This oil futured market was opened in New York by NYMEX in 1983, and in London by LIFFE (which later merged with the London Commodities Exchange or LCE) established it’s equivalent in 1988, and in both cases, this was driven by the deregulation of the finance industry.
Another piece of evidence is the opposite of the existence of this futures market is the price of gold shifting in the opposite direction. It gained $US8.50 an ounce on the same day. This is another futures commodity. Investors in oil futures are selling out and investing in gold.
Because of the important place the oil futures market has in the whole financial system, what is going on in oil spreads through it, and on to the whole economy. This is why share prices have fallen.
A futures market would not exist without there being a cartel able to impose control over supply, or the existence of oil exchanges, where the only thing that movers is the money.
When they talk about a negative price, it means that the speculators are selling the oil for less than they paid for it. Given that the financial system has invested so much in this, the loss must have a multiplier effect through the whole economy.
Recent falls have been caused by a combination of a break down in the cartel’s supply, via a dispute between Saudi Arabia and Russia, plus a sharp fall in demand, caused by the Coronavirus and lockdown. People are staying home. Industry has virtually stopped. Increased supply and falling demand, have caused a fall in the market price.
At the end of the line, the price charged is not the market price. It is addeed to by price gauging from the futures market. It might be good for those profiting from it. But it comes as a cost to everyone else and the economy.
The finance industry should not be so dependent on this oil market. It distorts it, takes investment from more important needs across the whole economy and society, and generates what can only be called monopoly profits. That is profit not generated by adding value to the economy, but by taking from others, by exercising market control.
Distortions like this are bound to create vulnerability, and when a shock hits, its impact is going to be more profound, than would otherwise be the case. This is exactly what has happened.
In trying to overcome this crisis, the big oil producers have now announced a major cutback in production. There has been no immediate correction. Nor is there going to be much of one any time soon. How can there be, when oil is not traded in a free market?
For an oil industry operating as it should, the monopoly cartel of finance companies, futures dealers and handful of oil companies must be broken.
The Australian share market fell by 48 points yesterday (20 April 2020), caused by exactly the same shocks, and because the cartel operates here too.
It doesn’t have to be this way. Australia is self-sufficient in oil and has the potential to manage it very differently. Better than most countries.
Unfortunately, the Howard government tied Australian oil security into the global market and global price. This has made Australia far more vulnerable to external shocks.
A first corrective step is to unlock from the global market and produce oil for domestic needs and at domestic prices. A second step is to ensure the oil industry is in Australian control. This means clipping the oil companies, through an authority that takes control over exploration, refining and marketing.
The primary purpose must be to meet the needs of the population and economy and not guaranteeing monopoly profits. The way things stand at the moment, this is not possible.
Monopoly is also a barrier against putting into effect, a properly planned transition form a carbon economy to a sustainable one, and do it in a way, which causes the least pain.
The alternative scenario is to leave it all more or less as it is, wait till the crunch comes, and be left by the ruin it brings. Do we really want to go down this road?
In the meantime, do we want consumers to continue to be ripped off and allow an irrational industry to continue to harm the economy, environment, and people?