Remedies needed

In view of the extraordinary increase in oil prices over the past year, it is obvious that remedies are needed.

One year ago when oil was selling at about half of the current price, the president of Exxon blamed speculation for much of the high price. Given the virtual doubling of price since then, and with other factors unchanged, what other explanations exist?

Margin requirements for speculators to gamble on oil prices must be raised to restrain speculation. A chart of oil prices reveals an almost perpendicular rise since last winter. That indicates some kind of “bubble” reminiscent of the pattern of the tech stock market in the 1990s, and the housing surge since then. If the froth were removed from the oil market, lower oil prices would ensue. It is apparent that “investors” are placing huge bets that today’s record crude prices are trumping the age-old law of supply and demand. Other influences have not varied over the past year.

Some people make the argument that we are going to see higher prices for oil until the end of time. That is saying that the most important mechanism of capitalism – the price mechanism – is effectively destroyed. Yet, record prices should stimulate supplies coming into the market, including both oil and alternative fuels, to curb demand ultimately. However, in addition, it must be noted that oil prices are denominated in U.S. dollars, which are declining: that entails higher oil prices. That weak currency must be counterbalanced by other measures.

Something must be done to expedite oil exports from Iraq, hitherto the world’s third largest producer of oil. A resumption of that role would help to lower oil prices.

Japan has taken many successful steps that have cut its imports of oil to 4.12-million barrels a day from five million in 1973, and shrunk consumption of oil per unit of Gross Domestic Product to one-third of its 1971 level. The Japanese government has invested heavily in nuclear energy, building networks that today number 55 reactors and generate 30 per cent of its electricity. Japan also has shifted away from oil to natural gas, which it is endeavoring to extract from underground sources. Gas now provides about 15 per cent of its energy needs. Coal now accounts for 22 per cent, up from 18 per cent. (Canada has plentiful supplies of both natural gas and coal.) Those substitutes should be fully utilized by us. Japan has raised its cars’ average mileage by 30 per cent over the past decade, and further improvements are pending. Matsushita Electric, maker of Panasonic products, has devised a new fuel cell capable of supplying 50 per cent of a household’s energy demands.

Furthermore, the exorbitant profits of oil companies demonstrate that charges for their products are excessive. Exxon earned $40-billion last year, Imperial Oil about $2-billion. Clearly, they should be cutting their selling prices. Also, the pay of their chief executives is outlandish. One company paid about $750-million in a year-end bonus.

Public pressure must compel changes.

Moreover, oil companies do not compete with each other; anti-trust legislation should be enforced. Refineries are running only at 87 per cent of capacity. Why? If they were operating full out, that would reduce gasoline prices.

In a few years the industry can (and will) be supplying more product at lower prices. However, that requires some fundamental readjustments as outlined above.



Bruce Whitestone