The volatility of global stock markets has seemingly worn down speculators' patience, as they shift to the oil markets which look more alluring against the backdrop of a falling greenback.

 

Admittedly, there is a persistent rise in global oil demand, but it is unreasonable to solely blame the market for the "oil bubble" as described by many veteran oil analysts. It should be noted that there are other "invisible hands" behind the crazy oil prices.

 

US crude surged to a record US$98.62 on November 7 before retreating on profit takings. Since mid-August, oil prices have swelled about 40 percent because of the anaemic dollar, robust global demand and diminishing inventory levels, which have summoned huge speculative investment estimated to be equivalent to one billion barrels under futures contracts.

 

Institutional investors such as hedging funds joined the rally to further drive up global oil prices. These speculative investors, who do not need oil themselves, pocketed substantive profits in recent price rises, said analysts.

 

To prop up oil prices, suppliers deliberately cut their output. According to the Washington Post, countries rich in oil had not been fully exploiting their reserves. The newspaper said Iraq was producing almost 2 million barrels a day less than its 1970s peak. Production had declined for various reasons in Venezuela, Nigeria, Mexico, the United Arab Emirates, around the Caspian Sea and elsewhere.

 

Saudi Arabia and Kuwait trimmed production a year ago to drive up then-sagging oil prices at US$55 to 60 a barrel. Saudi output had been running about half a million barrels a day lower than last year, said the newspaper, citing the International Energy Agency.

 

The weak dollar poured oil on the flames. The difference between the sagging dollar and the strong euro had caused an imbalance of foreign earnings and spending for oil producers and increased their domestic inflationary risks.

 

Developing countries like China are paying much of the skyrocketing prices as imports account for about 50 percent of the nation's oil consumption.

 

Faced with worsening fuel shortages in the country, China raised petrol, diesel and jet fuels prices by nearly 10 percent to boost domestic supplies but its wholesale petrol prices are still lower than the international average. (about US$76 a barrel compared with the international average of US$102)

 

This means the Chinese government has to continue offering large amount of subsidies to refineries to cover losses they incur by selling oil at state-set prices. The government subsidized Sinopec, the nation's largest refinery company, to the tune of US$1.2 billion in 2005 and US$640 million in 2006.

 

In the meantime, soaring oil prices add to the financial burden for enterprises and individuals, and likewise increase inflationary risks. In fact, oil crises have caused at least two global economic downturns, one in 1973 and the other in 1979.

 

China has been touted as the new engine of the world economy. Therefore, if the engine fails because of high oil prices, the global economy might stall along with it.

 

Despite a temporary fall on Thursday after US Federal Reserve Chairman Ben Bernanke highlighted the dual threats of slower growth and inflation for the US economy, US crude Friday regained some of the ground as worries that supplies may come up short ahead of the Northern Hemisphere winter prompted fresh buying in crude oil futures.

 

Irresponsible speculative investing is threatening global economic security and its effect will linger on until the global oil market restores its own pricing abilities on a rough balance between supply and demand.

 

In history, there was no bubble that never burst, be it stock or oil prices. Oppenheimer and Sons analyst Fadel Gheit held that oil was US$30 a barrel overpriced. Oil share experts are studying to what extent company profits would be affected by possible oil price falls.

 

One thing for sure is that irrational oil price rises will dampen the outlook for the global economy. And that, in turn, may yet make the bubble makers pay for what they have done.

 

(Xinhua News Agency November 13, 2007)