Time for OPEC to defend its rights

Time for OPEC to defend its rights
Fawaz Al-Alamy

At the invitation of Custodian of the Two Holy Mosques King Abdullah, major oil producing and consuming countries are congregating in Jeddah today to discuss why oil prices have been soaring.

Although oil touched $140 per barrel last week, it is still one of the cheapest commodities worldwide. Today a barrel of oil is 52,000 times cheaper than a barrel of platinum, 2,350 times less than gold, 112 times less than IT products, 77 times less than silver and 30 times less than nickel. In fact a barrel of oil is still cheaper than a barrel of any soda drink, three times cheaper than a barrel of dairy products, five times cheaper than a comparable quantity of almost all known vegetables.

Surprisingly, many experts believe that oil is excluded from the World Trade Organization (WTO). Other experts firmly assert that oil is a commodity subject to Articles XI and XXI of the GATT and that OPEC may be implicated under the Sherman Act, the OPEC Accountability Act, or the NOPEC Decision introduced by the US Congress. But none of these conclusions is mandated by the WTO because oil is a sovereign natural resource, like gold, silver and uranium.

The WTO agreements do not preclude South Africa from halting its gold extraction activities or Australia for refusing to extract and export its uranium or the US and the EU for monopolizing their minerals. Nor do these agreements punish the Brazilian government for refusing to export its flowers, plants and similar forestry products. A more appropriate response to rising oil prices would be for oil consumers to call on their governments to reduce or eliminate discriminatory domestic taxes imposed on crude derivatives. Such tax burdens account for 27 percent of gasoline prices in the US; 63 percent in Italy; 65 percent in Holland; 67 percent in France, Germany, and Belgium; and 68 percent in the UK. Such discriminatory taxes abrogate the very essence of free trade and adversely affect consumers and distort markets.

The Jeddah meeting will convene at a time when all forecasts indicate that oil price hikes will continue regardless of OPEC’s production policies and its market share, which amounts for less than 40 percent of global oil production.

The market is saturated with crude supplies and suffers no shortages; the current price increases do not reflect market forces and the historic seasonal trend, which is very sensitive to supply and demand. For example, we have often witnessed that demand declines and prices fall during the third quarter of the year. The current trend makes it crystal clear that oil price hikes are due to other factors. In particular, they are related to speculators’ unlawful financial practices that distort international free trade.

As oil prices are pegged to the dollar, speculators realized that the actual price of crude is not really high compared to its nominal fixed market price. Therefore, purchasing oil becomes tempting in the eyes of investors transacting in other currencies such as the euro, yen and pound sterling. Instead of speculating with the dollar, investors alternatively speculate in dollar-denominated commodities, such as oil and gold. Hence, oil prices keep soaring, while the dollar continues sliding.

Also global recession, as indicated by the aggravating crisis of the global credit slump, accompanied by the US real estate meltdown, encouraged trust and sovereign funds to adjust their speculative trends. They abandoned exchange money markets to focus on the more lucrative commodity markets. Speculative practices in oil, gold, silver, and basic food commodities resulted in unreasonable hikes in oil prices by 100 percent, wheat by 200 percent and gold by 300 percent.

The gloomy results of commodities speculation have turned into paper profits through spot speculations or through future options. Commodities yields were subject to speculative forecasts that depend on whatever data and information is available on the current and future movements of world economies and is guided by calculations governing hedging, profits expectations and exchange profits.

Three weeks ago, Mark Dorkan, a British MP, launched a brave initiative before the House of Commons demanding stricter measures to curtail the speculation that is contributing to oil price inflation.

Dorkan has called on the British government to re-implement regulations over those speculators that have become the biggest winners from the price hikes at the expense of consumers.

Separately last week, the Trade Committee of the US Congress issued its final report blaming speculators for unnecessarily raising oil prices twelve times before crude reaches the end user.

As the world’s major oil producer, Saudi Arabia must expose these unlawful trade practices. It is also imperative that consuming countries realize that the Kingdom’s role and responsibilities in the global economy have been primarily focused on securing oil availability and price stability. On many occasions Saudi Arabia had to employ its excess capacity to mitigate the impact on global markets of temporary short supply or price hikes, whether due to global increases in demand, production cutbacks, shortage of refinery capacity, political unrest or speculation.

Needless to say, Saudi Arabia must capitalize on the Jeddah meeting to highlight these facts and defend OPEC rights.

— Fawaz Al-Alamy is deputy minister of commerce and industry
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