Oil prices set to rock world economy

WORLD LEADERS are showing considerable worry about the continued rise
in oil prices. On 10 August, US light crude broke the $45 a barrel mark,
the highest price ever in New York. Oil prices have risen 30% this year
alone.

Kevin Parslow

The fear of capitalist business people, politicians and economists is
that such a high price will end the current world economic upswing. With
interest rates rising internationally, businesses are facing much higher
costs in the next few months.

For most people, the most immediate effects are the extra pennies put
on a litre of petrol or the surcharges put on holiday flights by big
airlines. But if big business makes workers pay for the price hikes with
redundancies and rises in the cost of living, then a much broader effect
will be felt.

Why are we seeing big price increases now? We are seeing an exceptional
meeting of problems on both the supply and demand sides of the oil market.
On the demand side there are two main factors: the world upswing and
China’s massive economic expansion. The world upswing, particularly in the
USA, has produced a greater demand for oil than forecast. America’s
drivers are also driving more gas-hungry vehicles than before.

China’s desire for oil is phenomenal; its massive economic growth, in
comparison with the rest of the world, has produced an increase in demand
for oil of 20% in just the last year. If this economic growth comes to a
sudden halt, this demand will fall back substantially. But until then its
thirst is almost unquenchable.

The problem for oil importers is that only Saudi Arabia has reserves
that can be made available to the market.

Supply and demand

The problems on the supply side can be summed up in one word:
instability. Too many of the major oil producing nations and regions are
amongst the hottest of the world’s ‘hot spots’.

Iraq, suffering under the effects of US-led occupation, has to reduce
or turn off oil exports whenever the chaos becomes too fierce. Iraq has
the second largest reserves in the world. And the recent attacks in Saudi
Arabia by groups linked to al-Qa’ida have caused turmoil too.

Other oil producers are adding to the global uncertainty. The Russian
government has chosen to launch an attack on giant oil company Yukos this
year, threatening to sell off its assets to pay outstanding ‘tax bills’.
Venezuela, the western hemisphere’s biggest oil producer, has been in the
midst of the referendum campaign to decide whether President Ch‡vez
remains in office. Nigeria, Africa’s largest producer, has faced strikes
against rises in the cost of domestic oil, compounded by ethnic clashes.

Turmoil internationally is the last thing the world oil markets need.
The only crumb of comfort for the bosses is that if the $40 figure reached
in 1980 following the Iranian revolution was measured in today’s prices a
barrel of oil would cost $80!

Nevertheless, a $80 barrel is not beyond the imagination, particularly
if the situation in Iraq continues to go against US imperialism.


IN THE UK, higher oil prices should mean bigger revenues.

However, North Sea oil production peaked in 1999 and is declining. In fact, since June this year Britain has been a net importer of oil, the first time in eleven years.

Moreover, a weak US dollar over the last 18 months (oil is priced in dollars) has contributed to the fall in UK revenues.

In June, net oil revenues only amounted to a £22 million surplus down from its May 1985 peak of £1.5 billion.