India seems to be moving through one of the most bizarre phases of its history. The common man – aam admi – is reeling under the heavy burden of high rates of inflation not seen in recent times. The leaders of the UPA coalition openly admit that come Friday – they shudder at the prospect of burgeoning inflation figure which shows no signs of respite. And despite that, the obsession with nuclear deal goes on with an air of insensitivity which has very few parallels?
The global crude oil price is being touted as the villain of the piece. However, one is little amused; because, the big guns of globalization are also complaining of outcomes that result from that very process. There is now incontrovertible proof that speculative investment is a principal feature of the globalization process which was underway since the early–mid seventies.
Oil prices' skyrocketing is a phenomenon which is increasingly smacking of being the handiwork of international finance capital that is increasingly turning to trading in oil futures. This came to be sharply highlighted in the international conference on oil prices in Jeddah on June 22. This conference attended by 36 countries, registered the presence of all important players who have a stake in the global oil economy.
Organized by Saudi Arabia – one of the closest US allies in the region – it fell on King Abdullah, the monarch of the kingdom to fire the first salvo. He thundered against "…..speculators who played a market out of selfish interests". The other big gun – OPEC President Chakib Khelil – directly charged US and its financial sector for the current spread of crude oil price – which has risen from US $ 70 in August '07 to more than US $ 140 a barrel now. Khelil hinted the nature of complicity and observed: "A lot of people are talking about the uncertainties about the (oil) reserves. But what about the uncertainties on the dollar?"
What are the reasons for this inference on speculative nature of the crude price hike? The first indication that something unusual is happening in the oil market comes out from the fact which The Economist has pointed out - that with the 20-fold increase since 2003, investment in oil futures have gone up to US $ 260 billion. This abrupt increase is triggered by the nature of trading of oil futures. Unlike margin requirements for stocks – upto 50 per cent – the margin here in commodities is a mere 5 to 7 per cent. With US $ 260 billion, financial sector speculators can take positions of US $ 5 trillion in the futures market.
Further, oil is internationally traded in New York and London and denominated in US dollars only. Price fixation in crude has, therefore, shifted away from OPEC to Wall Street. And, behemoths like Goldman Sachs, Citigroup, J P Morgan Chase and Morgan Stanley now rule the roost.
A US Senate Sub-Committee report from June 2006 blamed the speculators squarely for the rise in oil prices. The report estimated that speculative purchases of oil futures had added as much as US $ 20-25 per barrel to the then price of US $ 60 per barrel. In the present context of US $ 140 per barrel would imply a neat US $ 100 to 105/barrel!
And, no doubt, the US government has acted as a facilitator in this obnoxious process which now hurts the aam aadmi in India and elsewhere in the world. Oil is a unique commodity where increases in production and supply do not appreciably bring down its prices. But a slight increase in demand triggers a quantum jump. Till 2006, the US strategic oil reserves were 350 million barrels. Within the last year and a half, this has doubled to 700 million barrels. One can imagine the impact of this in adding pressure on demand and the consequent prices. It is the US treasury which has borne US $ 35 billion for building up this additional stock.
The same Senate Sub-Committee report of 2006 has also pointed out that the US administration has left loophole in the US regulation for oil derivatives trading which could allow even a `herd of elephants to walk through it'. At the behest of now defamed energy major Enron, the administration inserted a provision into the commodity futures modernization act of 2000. This amendment ensures that Commodities Future Trading Commission (CFTC), the US regulator for commodity futures market, which was earlier overseeing this futures trade will not exercise oversight of trading of contracts in OTC (over the counter) electronic markets. With this amendment, overwhelming volume of oil futures trade goes on unregulated in such OTC exchanges.
That brings us to Jeddah. And wonder of wonders! Taking on Samuel Bodman, the US Energy Secretary, who insisted "there is no evidence that we can find that speculators are driving futures prices"-was our own home-grown globaliser,P.Chidambaram. The Indian Finance Minister who refused to implement the recommendations of an Indian Parliamentary committee and ban futures trading in 25 agri-food commodities gunned for the oil speculators' blood! The question that people will ask, will the 'spine' that was displayed in Jeddah remain unaffected by the strategic embrace with US administrations?