The real costs of the price of oil

The price of a barrel of oil reached and passed $115 yesterday. It has doubled in a year. As the price of oil goes up so must everything else, as everything that is produced, distributed and consumed depends on it in some way. The higher the price of oil goes, the deeper will be the global economic slump.

There are many reasons for the soaring price of oil. Despite attempts to stave off financial meltdown, banks are failing and the US economy is diving into recession. The value of the dollar is falling against other currencies, so speculators are looking for safer options, like gold, food and oil. The more they exchange dollars for commodities, the faster the dollar falls. The pound sterling is falling for similar reasons. The lower the dollar, the higher the price of oil. It’s a vicious spiral.

In a period of inflation, many price rises aren’t due to an increase in their value – which is measured by the real cost of production – but by the falling value of the money in which the price is expressed. But for oil the situation is different. The oil companies are finding it more and more difficult to extract. The cost of production is increasing. So the value is increasing as well. And that contributes to the sharply increasing price.

As the oil price feeds through into other products, the effect is to dampen consumer demand even further. Think about it. US consumers already began to run out of credit in 2005. That triggered the mortgage crisis and a lot more. Thousands of stores are now closing, taking their suppliers and hundreds of thousands of jobs with them. The closure by JJB of 72 sports shops with the loss of 800 jobs is a sign that the crisis is now hitting the UK. Meanwhile, investment bank, JP Morgan is predicting that the credit crunch could cost up to 40,000 jobs in London’s financial services sector during 2008 and 2009, further cutting purchasing power.

All this is against the background of “peak oil”, as production peaks and begins to fall. Earlier this week Leonid Fedun, vice-president of Lukoil, said that last year’s Russian oil production of about 10m barrels a day was the highest he would see “in his lifetime”. Russia is the world’s second biggest oil producer. Fedun compared Russia with the North Sea and Mexico, where oil production is declining dramatically. Because the entire capitalist economy depends on oil, and there is no substitute, in an editorial entitled “Preparing for the age of peak oil”, the Financial Times is pushing to offset the decline in output urging Russia to “press on with privatisation of state-controlled assets”.

Movements like the Transition Initiative are on a different track. It is a fine, rapidly-growing movement focusing on unleashing the creative genius of communities to discover ways to reduce energy use to overcome falling oil production and climate change. So far, however, it has sidestepped the corporate ownership of oil and the capitalist, for-profit pressure to maximise its extraction and use. Reducing the reliance on fossil fuels depends on them ceasing to be exploited for profit. And that means bringing the era of capitalist corporations to an end through a process of democratising their ownership and control.

Gerry Gold
Economics editor