TJP

Higher Crude Oil Prices will destabilize the Economy

By Byron A. Ellis – June 11, 2008

Big oil, after a period of low profile, has once again embarked on the process of destabilizing the world economy. Big Oil has increased the price of gasoline by over a dollar in less than a month. And, the Obama administration has yet to react to their brazen reallocation of the income of hard working Americans.

The last time Big Oil extracted consumer surplus they, and the Bush administration, claimed that high prices resulted from increased world demand. The Saudis, however, have indicated that there is more than 53 days of crude oil inventory. Moreover, due to lower crude oil demand, the Saudis are cutting the number of oilrigs by as much as 20 per cent.

The claim now is that the dollar is weak and investors (speculators) are bidding up future crude oil prices because they expect that the economy will recover.

Sally Clubley in her book Trading in oil futures and options noted that studies on the New York Mercantile Exchange (NYMEX) suggest that Big Oil accounts for 85 per cent of crude oil trading. So, it is Big Oil who bids up the price of crude oil, knowing that higher crude oil prices lead to huge profit margins of refined products.

However, such brazen gouging of consumers by Big Oil reduces consumers’ ability to purchase other goods and services. For example, if a gallon of gasoline cost $2 dollars, with a $100 dollars a consumer could purchase 50 (=$100/$2) gallons of gasoline. If the price doubles to $4 dollars per gallon, the consumer will now need $200 dollars to buy the same 50 gallons ($200/$4 = 50). Therefore, the consumer has to reallocate $100 from some other budgetary expenditure (food, housing, schooling, etc.) to pay for the higher cost of gasoline.

Thus, the higher price of crude oil increases the general price level; it creates inflation and reduces real stock of money and hence the real income and employment.

A year ago, under the unwatchful eye of the Bush administration, Big Oil profits were astronomical, which lead many consumers to believe that price gouging was occurring.

Price gouging occurs when a seller’s pricing is much higher than is considered reasonable or fair. It often results from markets that are not competitive or from collusive behavior among sellers. 

It is time for the Obama administration to dismantle the ability of Big Oil to artificially increase the price of crude oil.

Post Comment

SAVE DARFUR