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The following article appeared in Left Business Observer #109, November 2004. It retains its copyright and may not be reprinted or redistributed in any form - print, electronic, facsimile, anything - without the permission of LBO.


Driving madness

Since the first installment of LBO’s series on oil in #108 [not on this site], crude prices have continued to rise (though they fell a bit off their highs as this issue was going to press). The reasons are the same as those behind the long price rise from the December 2001 low: strong growth in demand, led by China, with the U.S. seriously pitching in; political anxieties in major producing regions, like Iraq and Nigeria; and tight supplies, with most producers pumping full out and few major discoveries of oil reserves. To those could be added recent weakness in the U.S. dollar, the currency in which oil is priced; since the 2001 low, oil priced in dollars is up about 160%, but to buyers with euros, it’s up just half as much. And add to that a flow of speculative money into the oil market, which can take prices beyond any “rational” level.

It may be that we’ve seen the speculative blowoff in the oil market, and prices are about to settle back to a more comfortable level. It may also be that major economies are slowing enough to cool down the demand for oil. While that would be good news in the short-term—slack economies and weakening labor markets aren’t good for most people—it would be a shame if attention were deflected from oil as a significant political and economic issue.

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To the orthodox, the way to deal with rising demand is to increase supply. In the short-to-medium run, that’s not impossible.