Paying for Virtual Oil by William Pfaff

By William Pfaff
Date 2008/1/5

Paris, January 3, 2008 -- Allow me, Candide-like, to reflect for a moment on an aspect of the economic situation in which we find ourselves as 2008 begins. We in the United States have an economy which in major respects is based on virtuality. This means that its most marked quality is the increasing distance it puts between itself and real things. Since Iowa is in the news, let's take corn and pork-bellies. Nothing could be more down to earth.

Any American who has spent time in Iowa or another farm state will remember that the news never is complete without a report on corn and pork-belly futures.

In the past, farm product "futures" were bought and sold on a small market in Chicago and provided a form of insurance for farmers. Their practical function was to allow farmers to plan on the basis of the professional expertise of a small community of commodity trading experts willing to risk their own experience of price movements, weather cycles, the size and movement of agricultural stocks, and estimated crop production, on the purchase and trading of forthcoming production, working under the reality-check of possibly finding themselves taking delivery of the commodity themselves, to their own profit or loss.

Take another commodity, oil. The New York Mercantile Exchange recorded an oil price of $100 a barrel on January 2 of the New Year, a record that shook the international economy.

The oil market was once like the pork-belly market. It was dominated by a limited number of traders who dealt in oil itself, buying and trading it to be hauled on ships or trains to refineries.

Then in September 2006, the Mercantile Exchange – now the "Nymex" --installed 24-hour trading of its main crude oil benchmark, and removed previous restrictions on access to other energy markets. "Financial institutions," as The Wall Street Journal puts it, "created new vehicles for making bets on the price of oil," without the need to take delivery of it.

The oil exchange was transformed from a real business that bought and sold oil to be delivered to refineries and put to use in the world economy, into a gambling house in which a barrel of oil was no more or less than a casino chip.

The relationship with reality had been severed, in order to generate speculation in virtual oil none of the gamblers actually wanted, could use, or knew anything about. They simply wished to gamble on its price, an objectively irresponsible, non-utilitarian, and ultimately dangerous activity. (The gambler's thrill usually comes from risk, but in this case ways were usually found to pass off the risk upon the "civilians" – amateur speculators -- enticed into the game.)

What drove oil over $100? The Wall Street Journal reports: Violence in Nigeria. Armed men and a shooting in Port Harcourt, center of Nigerian oil production. Reports that two Mexican oil ports might be forced by bad weather to close down briefly. A story that OPEC might be preparing a forecast that OPEC's members might not meet their share of expected global oil demand in 2024. Yes, that's 2024.

Each of these incidents or rumors drove up the price of a commodity currently in oversupply. Nothing had happened to affect the actual oil which at that same moment was on ships moving towards the ports where they regularly deliver their oil.

What, then (Candide asks), was the part of price paid per barrel for an actual shipload of oil on its way to eventual delivery to retailers on January 2 a reward to speculators, and what part was the real price of that oil, as determined by the costs of the concession, the cost of extraction, treatment, and shipping? I have no knowledge. Informed readers will no doubt let me know.

The rest of the price paid went to the people speculating on the price of oil -- on the basis of such factors as the weather last week in the Gulf of Mexico, a storm in the Gulf of Oman, a shooting in Nigeria, or the New Year's hangover of the trader.

People talk about recent years as ones in which business and governments have functioned in terms of a virtual world of symbol, signification, dissimulation and exploitation which has only nominal connection with reality -- until, of course a time comes for reality to present its accounts.

Does that time of accounting really come? By then will "we" (Karl Rove seems to have been the source for this famous remark) "have created a new reality" for those anchored in the existing, sordid, real-reality world of making and doing rather than speculating and manipulating? I should think we can be sure that "we" probably will already have moved along, leaving no address. But the oil consumer will have paid $100 for the barrel of oil.

© Copyright 2008 by Tribune Media Services International. All Rights Reserved.