Page 3 of 3 Bubbles, risk, crunch and war
By Cyrus Bina and Fernando Dachevsky
incredible denials to the contrary, is not only influencing oil prices but also
causing the volatility.
It appears that the US fiasco in Iraq is about to be obscured by yet another
potential fiasco, this time much more devastating, in Iran. The replacement of
Admiral William Fallon, commander of the US Central Command in the Persian
Gulf, with a careerist and seemingly neo-con-friendly military officer, army
General David Petraeus, is indeed not the kind of information that could simply
escape the minds of those who have set their eyes on the prize in Wall Street.
At the same time, the precipitous decline in the value of US dollar
gives rise to two separate effects in the price oil: (a) the direct effect via
the nominal value of oil in dollar and (b) the indirect effect via flight from
dollar to oil due to speculative asset-holding or exchange value. The impending
global recession, of course, will have ceteris paribus [all else being
equal] a moderating effect on demand, thus a possibility of moderation in price
in real terms. However, the flight from the dollar does not readily lend itself
to a predictable outcome, due to its uncertain speculative nature.
FD: Since oil is an essential input to the production of a great number
of products, what could happen if the price of oil keeps growing as the US
economy slows? How much of the actual problems in the US industry are
consequences of the high petroleum prices?
CB: Crude oil, its most significant joint-product, natural gas, and its
manifold derivatives, such as gasoline, jet fuel, home-heating oil, and so
forth are not only constituent components of the energy sector as a whole but
also inputs to essentially a whole host of production processes that are
defining the bulk of production worldwide.
Yet it would be a grave mistake to focus exclusively on the use-value of crude
oil. For, while the physical (input-output aspect) and thus material requisite
of oil is necessary, it is by no means sufficient to speak of oil as a
commodity without focusing on its exchange-value, that is its value formation
and thus price determination in conjunction with the social dimension of value.
In other words, the same processes that obtain their negative impact from
increasing price, soon or late, tend to adapt to the situation by reinventing
the production process and cutting demand, much like the adaptability of the
biological species in nature. However, we must be careful not to label them as
natural but social, at the very heart of which lies the historically specific
socioeconomic system.
Therefore - by focusing on dynamic interactions of the economy as a whole - the
fact that the price of oil is increasing beyond the expectation of the public
is itself an indicator of sorts for the primary influence of the turbulent
economy and not the other way around. In other words, it is not only utterly
false to replicate the textbook message of supply-side economics that "supply
shocks" (such as the oil crises since the 1970s) are responsible for past US
recessions, thus reversing the direction of causality, but it is also
misleading the public as to the physical (that is external), and not social
(internal), origin of economic crises.
To be sure, in a grand loop of dynamic interaction the $130-plus oil will
undoubtedly reinforce the decline of the US economy and, for that matter, shunt
the world economy toward deep recession. Consequently, if we draw a parallel
between the present economic crisis (respectively, in the US and the world) and
the gravitational fields in astrophysics, we may be able to perceive how the
quantitative result of the oil price hike, which itself is an outcome of the
dynamics of the world economy, in turn obtains its effect on the gravitational
field of the latter.
Hence, the prognosis of both the right (the orthodoxy), and the liberal/radical
left (the self-proclaimed "heterodoxy") does not seem to hold water in this
case. The significance of high oil prices is, therefore, inseparable from the
dire need for reorganization, if not restructuring, of the US and world economy
via the present crisis.
Finally, the proposals that would push the envelope toward US domestic oil
exploration - such as the one by the Bush administration in regard to drilling
in the Alaskan National Wild Refuge (ANWR) and his recent calls for more
extensive drilling of US coasts - do not alleviate the pressure of supply even
by a long shot but also create an impression that all these problems are due to
the lack of self-sufficiency, thus relying on public fear to achieve their end.
It's also imperative to note that the recent proposal by the George W Bush
administration - concerning high gasoline prices - to lift the moratorium on
the exploration of oil and gas from the long disputed Outer Continental Shelf
on the coats of California and Florida is not only silly but a smokescreen.
This proposal has no validity and is a wishful thinking in the view of the fact
that production from these fields will come to market no later than 2030 -
according to an unimpeachable comprehensive study.
Therefore, Bush's pitching, and Republican presidential candidate John McCain's
catching, over this crucial matter are essentially practical jokes. Any
reasonable policy should rather seriously look into the development of
alternative sources of energy as well as alternative system of transportation
(that is, public, clean, safe and renewable) in the United States.
Focusing on oil demand/supply alone is a mirage; global oil price formation is
the most complex issue in economics. In the meantime, while fear mongering in
both domestic and foreign policy is the sine qua non of the Bush
administration, the hoax of "energy independence", particularly in today's
interdependent world, is the hallmark of the US Democratic Party candidates in
the present election year.
FD: How is the crisis going to affect the oil producing countries, such
as Venezuela?
CB: The present crisis is multidimensional, thus its impact is
wide-ranging and varying from country to country. Oil exporting countries,
particularly the developing countries with a relatively sizable population
(such as Iran and Venezuela), are potentially subject to high food prices,
which would translate into the loss of sizable foreign exchange due to the
importation of basic staples, such as corn, rice, wheat, etc. Prices of other
food items that are dependent on these commodities are also expected to rise.
This situation is in part due to a new US phenomenon (production of fuel from
corn, and so forth), which is ostensibly motivated by the fiction of energy
self-sufficiency and the fabrication of so-called "national security", which
then unwisely is replicated by countries like Brazil - despite the apparent
double-injury reflected in the high price of food and inexhaustible source of
pollution against the environment with its implication for global warming.
Hence a potential crisis is on the horizon through the competition of food and
fuel.
On the other hand, the high price of crude oil can be translated into added oil
revenue for oil exporting countries, such as Iran or Venezuela. This may offset
the negative effect of high food prices in these countries. Yet, due to a
significant decline in the value of the US dollar - the denominating currency -
the real price of oil is not as high as it appears, which in turn speaks to the
real level of oil revenues of the exporting countries, such as Venezuela and
Iran.
This is particularly significant for Iran and Venezuela, whose respective
governments do not see eye to eye with the Bush administration (particularly in
the case of the latter, which is under severe embargo), whose bulk of foreign
exchange may be in euro or, if in US dollars, does not entirely lend itself to
a shopping spree in the US goods market.
To all this, we may add the impact of an impending global recession and its
moderating influence on the worldwide demand for oil. Thus, in the final
analysis, in the absence of structural change and the persistence of the center
of gravity (of production), a change in the price of oil (and, by implication,
change in exporting countries' oil revenues) is subject to the complex set of
contradictory factors that are spelled out above.
Cyrus Bina is distinguished research professor of economics at the
University of Minnesota, Morris, USA. He is the author of, among others,
The Economics of the Oil Crisis (1985)and co-editor of Beyond Survival:
Wage Labor in the Late Twentieth Century (1996).
This is an edited and updated version of an interview of Cyrus Bina by
Argentinean journalist Fernando Dachevsky originally published April 30, 2008.
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