With fuel prices continuing to rise people are looking for someone to blame.

A few days ago the Australian Prime Minister Kevin Rudd decided it was the oil-producing nations of OPEC (twelve countries including Saudi Arabia, Iran, Iraq, Venezuela and Nigeria) and called on the G8 countries to 'apply the blowtorch' to force OPEC to increase oil production.

Rudd was echoing the British Prime Minister Gordon Brown who had implied just a day or so earlier that the OPEC countries were deliberately restricting their output in order to maintain the artificially high prices.

Other people have pointed the finger of blame at the oil multinationals, namely the five corporations - Exxon/Mobil, ChevronTexaco, ConnocoPhilips, BP and Shell - that virtually control the refining and distribution of petroleum commodities. They have pointed to the massive profits the 'five sisters' are making and the suspicion is that they are profiteering.

In recent months, as the price of crude has soared, the OPEC producers have certainly gained huge increases in oil revenue, as have non-OPEC producers like Russia. But it seems unlikely they have been deliberately restricting their output (in any case, OPEC now accounts for only 40% of world oil production). In fact, they say they have been pumping oil to something near their maximum capacity.

Certainly the oil regimes have welcomed price increases as compensation for the sharp fall in the value of the US dollar (in which oil is priced). In real, inflation-adjusted terms, the 1979 peak of $39.50 was only surpassed in May this year. The OPEC countries now fear that excessively high crude prices will provoke a world recession, leading to a fall in demand for oil and a disastrous slump in their oil revenues. This is hardly in their best interests and they are blaming the financial speculators for the current situation..

The oil multinationals are also blaming the speculators but there is a certain amount of blame shifting going on here.. Just as the producers have always sought to maximise their revenue, the five sisters have always worked to maximise their profits from pumping, refining and distributing petroleum products. For instance, as crude prices rose between 1999 and 2006, US oil refineries increased their profit margin per gallon of gasoline from 22.8% to 53.5%. Today, their profit margin is no doubt even higher.

There is no doubt that, as a broad trend over recent years, oil prices have been pushed up by supply and demand factors. Strong growth of the world economy after 2003 (averaging 5% a year) and even higher growth in the emerging Chinese and Indian economies (over 10% a year) have created a massive demand for oil.

At the same time, supply has been restrained by a series of problems. Globally, the production of crude oil is rising faster than the discovery and development of new reserves. Many experts say that 'peak oil' has already been reached and from now on reserves will inevitably decline.

Geo-political factors have also pushed up prices and provoked volatility in oil markets. The turmoil in the Middle East provoked by the invasion of Iraq by US and British imperialism - aimed at controlling the region's oil fields and securing cheap oil - has undoubtedly pushed up oil prices.

But are these forces of supply and demand sufficient to explain the recent surge in crude oil prices? Supply and demand have fluctuated only slightly since oil was $60 a barrel at the end of 2006. There have been no big supply shocks recently. Demand, moreover, has declined slightly as a result of a slowdown in the US and some European economies According to The Economist. "Consumption has been falling for the past two and a half years." Normally, oil prices would be easing downwards under these conditions. Yet they have exploded - and the obvious cause is speculation.

So what's going on?

The real reason for the oil price explosion was recently spelt out by a veteran Wall Street oil analyst in testimony to a US Congressional committee that is investigating the oil market. Fadel Gheit of Oppenheimer & Co told the committee: "I believe the current high oil prices are inflated by as much as 100%. I don't think industry fundamentals of supply and demand justify the current high prices, which I believe, are driven by excessive speculation.

He went on to say: "There is a total disconnect between supply and demand and the price of oil . Oil companies can profitably obtain crude oil for $15 to $20 per barrel. Historically, the price of crude has been about three times the extraction price. So oil should be selling at $45/b. "Anything over $45 a barrel is all fat."

"I truly believe that major investment banks and a large number of high-risk-taking financial players have seized control of the oil markets, especially in the last six months... Financial institutions, while making billions of dollars in profits, are wrecking global economic growth. The same bubble that happened in housing and tech stocks will come back and haunt us."

Billionaire George Soros, who made his money from gambling on world currency markets, says that speculators - and he has specifically fingered pension fund managers - are exaggerating price rises and creating a dangerous bubble in oil and other commodity markets.

He says that today's speculative activity is similar to the situation before the 1987 stockmarket crash. If the speculators head for the exit door, he says, then there will be a crash.

The soaring prices of petrol and diesel are already aggravating the downturn in the American economy provoked by the credit crunch. And the US recession - yet too be officially announced - is already adversely impacting on Europe, Japan and little old New Zealand with one of the most 'open' economies in the world.

Inevitably the demand for oil will decline when it simply becomes too expensive to buy. This will lead to sharp drop in oil prices.

Keep an eye on the media when this happens. Wendy and Hillary on the six o'clock news shows will be portraying this as 'good news for consumers'.

Don't believe the hype.

The return to lower oil prices will have come too late to prevent the economy from pulling out of its tailspin. Moreover, lower prices - and therefore reduced oil revenue - will spell economic and political crisis for many of the oil-producing regimes. This has major international implications.

The frenzied speculation in commodity markets - like the sub-prime mortgage crisis in the United States - arises from the chaos of casino capitalism, where big oil corporations and ultra-rich financiers compete and gamble for the biggest share of the profits

Capitalism is incapable of securing and supplying vital energy, food and raw materials in a balanced way that would meet the needs of society as a whole. Despite what the Green Party might think, it will never take adequate measures to conserve natural resources, protect the environment and combat global warming.

Capitalist governments and giant corporations are taking only token measures to develop alternative sources of safe, renewable energy.

What is needed is a genuine socialist solution.


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