My column runs the danger of becoming a serial in many parts when it comes to energy issues. Some of my three columns earlier this week have already generated useful feedback and requests for further information, particularly the question of how oil prices are determined. In my column in the day before yesterday's newsletter, I said the way the price of a barrel of oil is set is artificial and speculative - I'm talking here of the oil prices that features on the front pages of the world's media, along with all the political and economic repercussions of changes in the oil price.
How does it work? I am not an expert but I can explain what I have learnt over the years from sensible, unbiased sources, and basing myself on the most respectable economic reviews.
The role of speculation. In practice, the price of a barrel of oil is set at NYMEX (the New York Mercantile Exchange) based on daily trading. The most common form of trading is in futures (calls and puts), contracts that expire at a certain predetermined date. If the customer keeps the contract until the expiry date, then they must buy or sell oil at the price determined in the contract, paying (or receiving) the difference. All you need to be authorised to invest in oil futures is a bank account in the state of New York and the funds to cover 10% of the value of the deal. The official US bodies monitoring this type of trading explain that pure speculation (in which neither the oil nor the money to cover the cost of the deal actually exist in practice) accounts for between 17% and 20% of all trades. But the 'real' operators, the ones buying real oil, also play a key role in the futures market. Big commercial banks receiving orders from genuine operators are not included in the category of pure speculation. All their deals are considered in the statistics as real. But some assessments suggest that when push comes to shove, the speculative market actually accounts for some 60% of deals - this percentage is arrived at by comparing the volume of actual physical oil produced (the volumes of oil extracted around the world every day) and the volumes of oil traded on NYMEX. A study by the Center for Global Energy Studies last October into NYMEX revealed that operators were buying and selling an average of 500 million barrels of oil a day for an average of only 85 million of oil extracted each day… It is on the back of this set-up that the price of energy is determined for ordinary people, industry and transport, and therefore the economy as a whole and most people's living standards.
The role of big companies. I am not having a go at big oil companies in general here, but rather the specific mechanics of how oil prices are 'determined'. One should not draw general conclusions on the basis of any particular fault or short-coming detected in the way markets operate because that would turn slamming the weakest link into a political weapon to condemn the entire system, forgetting that these are systems of economic freedom that have generated and continue to generate the wherewithal for the well-being of communities and the preservation of individual freedoms. The aim of the European view of society is to criticise abuses, ensure that freedom, social gains and security go hand-in-hand, and develop the 'social market economy' (a nifty phrase that is very much of the essence today). I believe that Winston Churchill's comment that 'democracy is the worst form of government, except for all those other forms that have been tried from time to time,' broadly applies to the economy also - economic freedom is the worst of all systems, apart from all those other forms that have been tried from time to time. The banking system is vital when it comes to financing investment, and likewise big oil and gas companies are vital in their own domain. We can criticise their behaviour and note that ExxonMobil and Shell, for example, have ratcheted up their profits while cutting production, without denying Shell's crucial importance for Europe (as a Gazprom partner in the Sakhalin project, for example) and another oil company, Total, has made record profits recently while increasing production. It is these profits that will enable it to fund its recently announced future investment projects. Only big companies are capable of working with difficult partners like the mammoth Gazprom, where similar size is essential as a counterweight and to avoid being swallowed whole.
Big companies are growing in awareness that their future will involve the diversification of their business, with an eye on biofuel, wind energy and even (for Total in particular but it does not stand alone here) nuclear power, and they will also have to get involved in cutting the amount of fuel used by cars, not to mention the as yet hypothetical prospect of hydrogen power.
All these elements have to be borne in mind, while not hesitating to slam abuses.
(F.R.)