Why the Oil Price Is High

by Paul Craig Roberts

How to explain the oil price? Why is it so high? Are we running out? Are supplies disrupted, or is the high price a reflection of oil company greed or OPEC greed? Are Hugo Chavez and the Saudis conspiring against us?

In my opinion, the two biggest factors in oil’s high price are the weakness in the U.S. dollar’s exchange value and the liquidity that the Federal Reserve is pumping out.

The dollar is weak because of large trade and budget deficits, the closing of which is beyond American political will. As abuse wears out the U.S. dollar’s reserve currency role, sellers demand more dollars as a hedge against its declining exchange value and ultimate loss of reserve currency status.

In an effort to forestall a serious recession and further crises in derivative instruments, the Federal Reserve is pouring out liquidity that is financing speculation in oil futures contracts. Hedge funds and investment banks are restoring their impaired capital structures with profits made by speculating in highly leveraged oil future contracts, just as real estate speculators flipping contracts pushed up home prices. The oil futures bubble, too, will pop, hopefully before new derivatives are created on the basis of high oil prices.

There are other factors affecting the price of oil. The prospect of an Israeli-U.S. attack on Iran has increased current demand in order to build stocks against disruption. No one knows the consequence of such an ill-conceived act of aggression, and the uncertainty pushes up the price of oil, as the entire Middle East could be engulfed in conflagration. However, storage facilities are limited, and the impact on price of larger inventories has a limit.

Saudi Oil Minister Ali al-Naimi recently stated, “There is no justification for the current rise in prices.” What the minister means is that there are no shortages or supply disruptions. He means no real reasons, as distinct from speculative or psychological reasons.

The run-up in oil price coincides with a period of heightened U.S. and Israeli military aggression in the Middle East. However, the biggest jump has been in the last 18 months.

When Bush invaded Iraq in 2003, the average price of oil that year was about $27 per barrel, or about $31 in inflation-adjusted 2007 dollars. The price rose another $10 in 2004 to an average annual price of $42 (in 2007 dollars), another $12 in 2005, $7 in 2006 and $4 in 2007 to $65. But in the last few months, the price has more than doubled to about $135. It is difficult to explain a $70 jump in price in terms other than speculation.

Oil prices have been high in the past. Until 2008, the record monthly oil price was $104 in December 1979 (measured in December 2007 dollars). As recently as 1998, the real price of oil was lower than in 1946, when the nominal price of oil was $1.63 per barrel. During the Bush regime, the price of oil in 2007 dollars has risen from $27 to approximately $135.

Possibly, the rise in the oil price was held down, prior to the recent jump, by expectations that Democrats would eventually end the conflict and restrain Israel in the interest of Middle East peace and justice for the Palestinians. Now that Barack Obama has pledged allegiance to AIPAC and adopted Bush’s position toward Iran, the high oil price could be a forecast that U.S.-Israeli policy is likely to result in substantial supply disruptions. Still, the recent Israeli statements that an attack on Iran is “inevitable” only jumped the oil price about $8.

Perhaps more difficult to understand than the high price of oil is the low U.S. long-term interest rates. U.S. interest rates are actually below the rate of inflation, to say nothing of the imperiled exchange value of the dollar. Economists who assume rational participants in rational markets cannot explain why lenders would indefinitely accept interest rates below the rate of inflation.

Of course, Americans don’t get real inflation numbers from their government and have not since the Consumer Price Index was rigged during the Clinton administration to hold down Social Security payments by denying retirees their full cost of living adjustments. According to statistician John Williams, using the pre-Clinton era measure of the CPI produces a current CPI of about 7.5 percent.

Understating inflation makes real GDP growth appear higher. If inflation were properly measured, the United States has probably experienced no real GDP growth in the 21st century.

Williams reports that for decades political administrations have fiddled with the inflation and employment numbers to make themselves look slightly better. The cumulative effect has been to deprive these measurements of veracity. If I understand Williams, today both inflation and unemployment rates, as originally measured, are around 12 percent.

By pumping out money in an effort to forestall recession and paper over balance-sheet problems, the Federal Reserve is driving up commodity and food prices in general. Yet American real incomes are not growing. Even without jobs offshoring, U.S. economic policy has put the bulk of the population on a path to lower living standards.

The crisis that looms for the United States is the loss of its world currency role. Once the dollar loses that role, the U.S. government will not be able to finance its operations by borrowing abroad, and foreigners will cease to finance the massive U.S. trade deficit. This crisis will eliminate the United States as a world power.

COPYRIGHT 2008 CREATORS SYNDICATE INC.

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Get used to high prices

The Fed has a mandate to keep inflation in check. But global forces and worries about the U.S. economy will keep prices high for the foreseeable future.

By Chris Isidore, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- For those struggling to deal with record gasoline and soaring food prices, there's bad news and more bad news.

Economists think inflation is here to stay. And it's likely to get worse.

A weak dollar and growing economies in emerging markets have conspired to send commodity prices higher. Those factors are unlikely to change anytime soon.

"We're more open to influences from the rest of the world than we were before," said Jay Bryson, international economist with Wachovia. "That does make it more challenging to keep inflation under control."

What's more, the Federal Reserve is relatively powerless to deal with many of these pressures.

"The Fed can't control prices of commodities determined in a global market," said Rich Yamarone, director of economic research at Argus Research. "If it could, it would have done so already."

On Friday, the Labor Department reported its latest reading on inflation. The Consumer Price Index (CPI) rose 0.6% in May. Economists were expecting a 0.5% increase according to Briefing.com. This was the biggest jump in a year. And over the past twelve months, prices are up 4.2%.

The so-called core CPI, which excludes food and energy, also picked up speed. It rose 0.2%, in line with forecasts. The core CPI was up 0.1% in April.

And the June CPI numbers could wind up showing even bigger gains. So far this month, retail gasoline prices have hit a series of record highs and topped $4 a gallon for the first time.

Futures prices for oil and key commodities such as corn have also climbed to record levels. Corn futures shot above $7 a bushel for the first time Wednesday as flooding in the Midwest trimmed forecasts for this year's harvest.

But it's not just oil and food that are leading to higher prices for consumers. A separate inflation reading reported Thursday showed the price of imports, excluding oil, were up 6.6% in the 12 months ending in May. That's the highest increase in that measure in 20 years.

A weak dollar has overseas exporters demanding more greenbacks for their goods.

Rapid growth of manufacturing and services overseas has workers in developing economies such as China and India winning healthy wage increases. That also raises prices of those countries' exports.

In addition, those countries have seen robust gains in auto sales, which should lead to even more demand for oil in the years ahead.

Another factor lifting prices is a weaker dollar. The dollar has lost about 13% of its value compared to the euro since August. This means it takes more dollars to bid for commodities against traders in Europe and Asia.

The Fed's hands are tied

Much of the weakness in the dollar has been laid at the feet of the Fed, which has slashed interest rates seven times since September. At the same time, central banks elsewhere have made only small cuts to their interest rates.

And even with the Fed now signaling it is likely to keep rates steady in the near term, the dollar has continued to slide as the head of the European Central Bank suggested that the ECB would raise rates soon. Those comments sent oil soaring to a record close of $138.54 on Friday.

Oil analyst Peter Beutel, president of Cameron Hanover, said he believes 90% of the rise in oil prices since last August was due to the Fed's rate cuts and the expectations of rate hikes in Europe.

"If the dollar was where it was last August, there's a very good chance we might never have seen $100 a barrel oil, maybe not even $90," he said.

The Fed, which has a mandate to keep prices in check, has been voicing greater concern about inflation in recent weeks. Most recently, Fed Chairman Ben Bernanke said Monday there is an increased risk of high food and energy bleeding through to the price of other goods and services.

But most economists don't expect the Fed to raise interest rates -- its traditional way of combating inflation -- until the end of the year at the earliest.

Generally, higher rates cool U.S. economic activity and cut demand for goods and services, which in turn leads to lower prices.

However, the Fed also has a mandate to foster sustainable economic growth. And with the unemployment rate registering its biggest spike in 22 years in May, the Fed is not likely to push rates higher soon, economists said.

There's also the fact that the Fed typically prefers to stay on the sidelines in the middle of a presidential election.

"I think you'll see the Fed talk up a storm about the caustic nature of inflation, because that's all they can do now, at least until the election is over," said Yamarone.

To that end, investors are currently pricing only a 20% chance of a hike at the Fed's next meeting, a two-day session that concludes on June 25.

Others say the Fed also has to be worried about the reaction of financial markets if it made a sharp and sudden move to raise rates.

"The Fed is painted into a corner," said Barry Ritholtz, CEO and director of equity research for Fusion IQ. "They don't dare raise rates. The credit crisis is not even remotely behind us. So the Fed has limited options and there's only so much they can do."

With that in mind, Wachovia's Bryson thinks that inflation will peak in the third quarter of the year with an annual rate of 4.3%. Yamarone sees consumer prices getting as high as 5% annually.

But Bryson said even if the rate of price increases retreat late in the year, the new floor for prices will be a lot higher than they used to be.

"Corn and oil are not going to go back to where they were a few years ago," he said.

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10 Shocking Facts About Global Slavery in 2008

Feature photo by tim.matsui. Photo by camera_rwanda

2008 witnesses the 200th anniversary of the abolition of the transatlantic slave trade in America. Amidst the celebrations, what many people fail to realize is that slavery persists today in the modern world on an enormous scale.

In spite of the Universal Declaration of Human Rights adopted by the UN in 1948 stating that “slavery and the slave trade shall be prohibited in all their forms,” the figures accompanying the modern slave trade seem inconceivable in a global society that prides itself upon its modern-day values and emphasis on human rights.

1. There are more people in slavery now than at any other time in human history.

According to research carried out by the organization Free the Slaves, more people are enslaved worldwide than ever before.

In its 400 years, the transatlantic slave trade is estimated to have shipped up to 12 million Africans to various colonies in the West. Free the Slaves estimates that the number of people in slavery today is at least 27 million.

The National Underground Railroad Freedom Center suggests that three out of four slavery victims are women and that half of all modern-day slaves are children. ‘Countless other’ people are in other forms of servitude which are not legally classified as slavery, according to the Anti-Slavery Society, described ambiguously by some as ‘unfree labour’.

2. The value of slaves has decreased.

A slave in 1850 in American South cost the equivalent of approximately $40,000. According to figures published by FST, the cost of a slave today averages around $90, depending on the work they are forced to carry out.

A young adult male laborer in Mali might only fetch $40, whereas an HIV-free female might attract a price of up to $1000.

Expert Kevin Bales says that because modern slavery is so cheap, it is worse than that of the Atlantic slave trade.

People have become disposable and their living conditions are worse than ever before as a result of their value.

3. Slavery still exists in the US.

Estimates by the US State Department suggest up to 17,500 slaves are brought into the US every year, with 50,000 of those working as prostitutes, farm workers or domestic servants.

According to the CIA, more than 1,000,000 people are enslaved in the US today. Thousands of cases go undetected each year and many are difficult to take to court as it can be difficult to prove force or legal coercion.

4.Slavery is hidden behind many other names, thus disguising it from society.

These names are chattel slavery (the traditional meaning of slavery), bonded labor, trafficking, forced labor, and forced marriage, amongst others.

5. The least known method of slavery is the most widely used.

Bonded Labor occurs when labor is demanded in order to repay a debt or loan and the cyclical nature of debt and work can enslave the person for the rest of their life. Some conditions are so controlled that slaves are surrounded by armed guards while they work, many of whom are slaves themselves. This has been found in Brazil. It is estimated that there are 20 million bonded labourers in the world.

6. Human trafficking has recently been described as “the fastest growing criminal enterprise in the world.”

This shocking claim was made by former Secretary of State, Madeleine Albright. The UN estimates trafficked human cargo generates around $7 billion dollars a year.

7. To buy all bonded laborers out of slavery could cost as little as $40 per family.

The $40 figure was provided by the Center for Global Education, New York. Kevin Bales compares the total cost of ending all slavery with one’s week’s cost of the war on Iraq.

8. Free the Slaves believe it is possible to end all slavery within 25 years.

Ending slavery won’t be easy, but humanity is up to the challenge.

9. Many slave-produced goods might reach your home without you realizing their origin.

Industries where slave labor is often highly suspected include cocoa, cotton, steel, oriental rugs, diamonds and silk. Currently the only way to ensure the products you buy are slave-free is to buy Fair Trade certified goods.

10. Your actions affect global slavery.

By buying fair trade, learning more about modern slavery, spreading the word, and joining a movement such as Free the Slaves, Anti-Slavery International, or the American Anti-slavery group, you as an individual can help abolish slavery completely.

With the number of slaves rising due to increasing economic returns, a universal lack of awareness and anti-slavery laws not being enforced, the National Underground Railroad Freedom Center believes “efforts to combat slavery will have only limited effectiveness” unless something is done on a larger scale.

The bicentennial of the abolition of the slave trade would be better commemorated by every individual taking meaningful action to help end the exploitation of human labor once and for all.

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