TJP

Traders are not the Root Cause of Rising Crude Prices

Byron A. Ellis-June 26, 2008

The inability of Congress to properly diagnose the root cause of rising crude oil prices will lead to improper solutions. Congress is now focusing on crude oil traders as the culprit for rising oil prices. However, crude oil traders are not the root cause of rising oil prices. Traders merely capitalize on the root causes, in this case, regional instability due to the Iraq invasion and bellicose behavior towards Iran.

It is clear that crude oil trade volumes began to increase after the invasion. The instability created by the war creates the potential for future crude oil disruptions and hence supply shortages. It is this potential for future crude oil supply disruption that leads futures traders to believe that real shortages will occur. It is this perception among traders that leads them to bet that prices will continue to rise. Thus, as long as the environment is unstable, traders will continue to profit from price increases.

If, however, traders perceived that stability would return to the Middle East, they would not perceive any potential crude oil supply disruption and would be betting that crude oil prices would fall. Thereby, bidding prices downward.

Instability, perceived or real, is a harbinger for higher prices, whether in central cities or in the Middle East. A typical example is the recent report that Israel is contemplating an attack on Iran’s nuclear facilities, which would create greater instability. That report caused a spike in crude oil prices, in spite of the Saudis hinting of output expansion. Therefore, it is not real supply shortages that causes higher prices, but rather perceived shortages.

Congress and the Bush administration have steadfastly refused to accept their responsibility for higher crude oil prices. Congress approved the invasion of Iraq. Therefore, they are as responsible as the Bush administration for rising crude oil prices. However, we ought not to dwell on who is responsible, but rather on the necessary steps to reverse the ominous price trend.

The first best solution is to bring the troops home. The second best solution is to work with other nations to temporary suspend or decrease the volume of crude oil trades. Congress is contemplating the latter solution. However, suspension or limiting crude oil trade volumes should not be delayed by endless studies.

Finally, saver rattling toward Iran is counterproductive to the US and the world economy. Iran’s nuclear ambition should be viewed through rational lenses.

In the last fifty years, Iran has not attacked any country and only retaliated when attacked by Iraq. However, within the past ten years, other countries in the Middle East and elsewhere have attacked many nations. In most instances, they attack under the guise of the so-called pre-emptive doctrine; which is basically imagining something is occurring in a sovereign country and proceeding to attack that country. A recent example is the bombing of Syria by Israel. So, based on behaviors, logic would dictate that it is the aggressive countries that need restraint.

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