"In a State that has completely lost its moral core it’s almost inevitable that those who tenaciously pursue their principles and speaks out against the hypocrisy of power will find themselves silenced."
War in Libya and protests across the Middle East are exploited by companies too quick to pass costs to vulnerable consumers
Oil prices have reached their highest level in the last two-and-a-half years. By the end of last week crude oil prices for April delivery rose above $104 a barrel on the New York Mercantile Exchange – the highest since September 2008 – while on the International Commodities Exchange in London, Brent crude oil for April delivery was even higher, at more than $115 a barrel. And the immediate prognosis for prices is still upwards.
The crisis in the Middle East – and particularly in Libya – is generally believed to be the impetus behind the latest spurt in prices. But Libya produces less than 3% of global petroleum output, and Saudi Arabia (whose excess stocks are already more than annual production in Libya and Algeria) has already promised to make up any shortfall. In any case, global spare oil capacity is closer at present to historic highs than to historic lows.
The price spike is therefore driven by uncertainty, rumour and speculative activity in futures markets. Libya is only part of the problem – and in fact oil production still continues in many Libyan facilities, despite the civil war. The concern in financial markets is really about the possible endgame if the unrest spreads to Saudi Arabia. But the price rise is happening well before such a drama actually plays out, and before any serious disruption to global supply.
We all know who loses from increasing oil prices: most of us. Oil prices directly and indirectly enter into all other prices through higher fuel costs in production and transport. Agriculture is directly affected, so food prices will rise further, worsening the resurgent food crisis. Such cost pressures have another consequence – they push governments to inflation-control measures such as higher interest rates, which in turn add to costs for business, especially small businesses. And this will worsen the chances for the fragile global economic recovery in the wake of the crisis. So people throughout the world will face lower real incomes and perhaps reduced employment opportunities.
Developing countries which import oil tend to be much worse affected than developed importers. First, the energy intensity of output is much higher (twice the level, on average) than production in OECD (developed) countries; and second, developing countries are often more constrained in terms of foreign exchange, so high oil import bills lead to balance of payments difficulties. The poorest countries are usually the worst affected, and within developing countries poorer groups take the brunt of the impact in a higher cost of living and lower wage prospects.
So the doubling of the oil price over the last year has destroyed any of the positive effects of foreign aid that developing oil importers receive. And the negative effects are compounded for food-importing nations. During the last price peak in 2008 there were calls for compensatory financing by the IMF for oil and food importers. That never came about, and this time there have been no calls for such intervention – or at least none loud enough to be heard.
But who gains from rising oil prices? The conventional view is to look at the leading exporters and assume they are the beneficiaries, and even that there is a redistribution of global income away from oil importers to oil exporters. This approach is reinforced by the media, which emphasises the windfall gains of governments in exporting countries. But this misses the point. The really big winners – accounting for the largest portion of the gains by far – are the big oil companies. In fact, Big Oil, which suffered a setback during the height of the recession, is back with a bang, riding on the back of the recovery in petroleum prices in 2010.
The large oil companies that announced their results in January have reported a doubling of profits in 2010 compared with the previous year. The three big US firms ExxonMobil, Chevron and ConocoPhillips together made nearly $60bn after costs and taxes. The profits of the Anglo-Dutch company Royal Dutch Shell also doubled, even though production was lower than expected.
Why do the profits of big oil companies increase so much during periods of high or rising oil prices? Basically the costs per barrel of the companies reflect the historical costs of drilling, exploration and/or purchase of crude oil, which often have little or nothing to do with current crude prices. But they are quick to pass on crude oil prices to consumers in the form of higher prices for their products. By contrast, they tend to be much more lethargic about passing on lower crude prices in the form of lower prices of processed oil. So increases in crude oil prices lead to enormous windfall gains for them. In the current price surge, therefore, the real – and maybe only – gainers are financial speculators in the futures markets and the big oil companies which can pass on much more than their own costs in the form of much higher prices due to a general sense of frenzy in the markets.
The case for immediate and substantial taxes on those windfall profits, therefore, is very compelling. During his presidential campaign Barack Obama promised to impose such a tax in the US, but his administration has not yet done so. The usual arguments against such taxes are that companies that make more profits anyway pay more taxes with a given tax rate; that they will further increase the prices paid by consumers because the companies will pass on the tax in the form of even higher prices; and that they will benefit foreign suppliers rather than domestic companies.
But all these arguments can be refuted. The point about the windfall profits is that they result from what are essentially anti-competitive company practices, in the form of rapid upward revisions and downward "stickiness" of prices. So taxing them is only fair, because these surpluses do not reflect the investment outlays or current company costs but their ability to profit from price spikes created by other forces.
The taxes thus collected can be used for subsidies or public investments that encourage more efficient energy use in production and consumption, and the development of clean energy alternatives that can also be used in homes. They can be used to develop mass transit systems that use much less fuel than deregulated and congesting private vehicle-based traffic.
Developed country governments – such as that of the UK – could also use at least some of the proceeds of such taxes to provide compensatory and no-strings aid to poor developing countries hit by the latest price surge. That is, of course, if they are really serious about their claims about "ringfencing" aid.