World economy

Black gold rush and casino capitalism

www.socialistworld.net, 22/10/2004
website of the committee for a workers' international, CWI

A ’black gold’ rush is in full swing.

Lynn Walsh, Socialist Party

Profiting from the soaring price of oil, financiers are gambling billions on the New York and London commodities markets. Over the last two years increased demand for oil, especially from China, and the interruption of supplies from several major oil producing countries, have pushed up oil and gas prices. But massive financial speculation on oil markets has added at least $15 a barrel ($/b) to crude. Oil hit $40/b in May and topped $50/b at the end of September.

The surge in demand for oil has come mainly from strong economic growth in China and, to a lesser extent, the United States. But with little spare production capacity globally, oil supplies have been disrupted by a series of dramatic events.

The occupation of Iraq has drastically reduced its oil production, from 3m barrels a day (bpd) to around 1m bpd, with frequent interruptions. Last year there was an oil ’strike’ in Venezuela, really a bosses’ lockout aimed at bringing down Chávez’s government. Putin’s trial of strength with Yukos, the oil and gas giant headed by the jailed Khodorovsky, reduced Russia’s output. Nigeria’s production has been cut by the insurgency in the Niger Delta region. Then there were four hurricanes in the Caribbean, reducing Gulf of Mexican production by a third for weeks.

But there is more than unexpected disruption behind the supply problems. For 10 or 20 years, the big oil companies, despite their huge profits, have seriously under-invested in new oil fields and refining capacity. New, large-scale oil deposits are now very scarce, perhaps non-existent, and most new fields are more expensive to develop. Most oil fields are in politically unstable regions, and the companies and their investors are more reluctant to risk their money. Refinery and transport facilities are also lagging behind.

The ’hidden hand’ of the capitalist market, we are told, reliably matches supply and demand, perhaps with a few time lags here and there. With oil and gas, however, vital fuel for the world economy, there is a huge, long-term mismatch between supply and demand.

Intensive exploitation, without social investment, provokes upheavals that threaten even existing production levels. But big business prefers short-term speculation to long-term development.

Oil futures market

In the past, oil was overwhelmingly traded on the "physical" market. Big consumers (manufacturers, airlines, petrol retailers, etc) purchased their fuel directly from producers, the big oil corporations and national oil companies. Recently, however, a rising share has been traded on the oil futures market, a finance-driven commodities market.

A ’future’ is a contract that gives the purchaser the option of buying a consignment of oil for an agreed price at a specified date, usually between a few weeks and five years ahead. The buyer pays a premium (a deposit) for the contract, a fraction of the total price. They may or may not exercise the right to buy the oil consignment when the time comes.

Futures developed, supposedly, to enable big oil users to guard (or "hedge") against sharp price fluctuations. Rising prices, however, and the prospect of even higher prices, offer the chance of fabulous gains for speculators. Recently, big banks (like Barclays), investment banks (like Morgan Stanley), hedge funds (secretive clubs of big investors), and super-rich freelances have all gambled heavily in oil futures.

Speculation

With huge funds at their disposal, a futures-market player may, for example, buy an option for an oil consignment, say 1m barrels, at $45 a barrel (total $45m). Within a few weeks, when the option falls due, they may then buy the consignment, paying the agreed $45/b. Meanwhile, prices may well have risen and they can resell it the same day at, say, $50/b (total $50m). It’s not had to work out the gross profit.

Supply and demand factors aside, large-scale intervention by speculators helps push up the price. If oil prices fall and they decide not to exercise their option, they lose only their premium, a small stake on the gambling table. And it’s all done with borrowed cash, at rock bottom interest rates.

"This is the hottest oil market I have ever seen," says the head of a big oil company, "A lot of new banks are coming in and all the speculation is very disruptive." One of the hedge funds involved, London-based Aspect Capital Management, gambles $250m (£140m) a day on oil futures.

This is casino capitalism in all its glory. Greedy speculation conjures up colossal profits. For whom? For what? Market volatility and higher prices will soon work through to our cost of living: higher gas and electricity prices, dearer petrol, higher bus and train fares, dearer everything. Sooner or later, ’market forces’ (expensive fuel) will reduce demand, and oil and gas prices will fall. Meanwhile, the chaos could bring a world economic slump. Or turmoil on financial markets could trigger a crash.

Oppression

Energy resources are vital to our social well-being. They should not be controlled by the capitalist market, under which the struggle for private profit and strategic power are the driving forces. Exploitation of oil and gas by the capitalist powers has always been based on oppression and exploitation. Oil imperialism has never been shy of making alliances with dictators mired in corruption and the blood of their people. Look at Iraq, the Middle East generally, Central Asia, Nigeria. It’s not by chance that many oil-producing countries are so unstable.

Workers in Nigeria, who recently waged a general strike, enjoy little benefit from the country’s oil riches. The people of the Niger Delta, the main oil-producing region, live in dire poverty. Shell aims to pump crude out of the ground for $2/b and sell it at $36/b. No wonder production has been disrupted by a growing resistance movement.

Socialist planning

Oil and gas, like other natural resources, are a precious treasure store for humankind. Always seeking short-term profits, capitalism has exploited non-renewable fossil fuels (oil, gas and coal) with wanton disregard for the long-term impact. Burning fossil fuels is the main cause of atmospheric pollution and global warming, which threatens catastrophe unless reversed. Do London and New York commodity speculators lose any sleep over this? Big finance, for sure, invests only pathetic amounts in the development of alternative, renewable energy sources.

The production and distribution of energy should be taken out of the hands of big business and freed from the destructive anarchy of the market. To avoid economic and ecological disaster, resources like oil and gas must be developed on a planned, global basis. Planning has to be democratic, under the control of the working class and other exploited people, the majority of society.

Planning would balance economic needs with long-term environmental effects. Alternative, renewable energy sources would be developed. Poor countries would be allocated their rightful share of resources to help accelerate development.

Clearly, this will not happen under capitalism. That’s why we need to change the system, in Britain and internationally. We urgently need socialism. We need socialist economic planning under democratic workers’ control and management. Where better to start than the nationalisation of the big oil companies and the banks who are gambling away our future?

From The Socialist, paper of the Socialist Party, cwi in England and Wales.