A rise in the oil price now is particularly dangerous for capitalist stability explains ANDY KILMISTER
The beginning of June saw oil prices double their level in December 2001. In real terms this rise is similar to those in the autumn of 2000 and in 1990 when high oil prices were followed by a recession. However, measured in today's prices, oil was around $100 a barrel in the late 1970s, following the Iranian revolution, making current prices seem comparatively low. So is there an oil crisis? Does the recent price rise pose a threat to capitalist stability?
Rises and falls in the price of oil shift the distribution of profits between different segments of global capital, but they do not fundamentally alter the balance between capital and labour. As such, the impact of changes in the oil market depends on what is happening elsewhere in the economy.
For example, the impact of the higher price in 1990 was more severe than in 2000 because inflation was generally higher at the time and high oil prices reinforced the strategy of central banks to raise interest rates at the expense of growth in order to curb price increases.
In 2000 on the other hand the US Federal Reserve was determined to boost the economy in the face of the bursting of the high-tech bubble, so the impact of developments in the oil market was limited.
A rise in the oil price is particularty dangerous for capital now for several reasons. Most fundamentally, demand for oil is growing very fast at a time when new oil discoveries are slowing down.
The International Energy Authority 2004 to be the highest for 16 years, oil finds (of over 500m barrels) peaked in 1964. In 2000, there were 13 such discoveries, in 2001 six, in 2002 two and in 2003 none."
The response of conventional economists and the IEA to this is to assume that higher demand for oil will stimulate new sources of supply. As Martin Wolf wrote in the Financial Times of 2 June:
"I share the view... that high prices today are a harbinger of low ones the day after tomorrow."
But this smooth process of adjustment is likely to be difficult to achieve because the high demand for oil interacts with three important additional factors.
First, whatever might happen in the - future, the possibilities for expanding
supply in the short term are overwhelmingly dependent on Saudi Arabia. This dramatically affects the destabilising potential of any increase in political violence
According to estimates, the growth of the crude futures market now means that 20 percent of the oil price is determined by speculation rather than supply and demand for productive purposes. Stive to political turbulence and it uch speculation is extremely sensiprices rise sharply owing to a decline in confidence that can encourage further speculation and create a bubble.
The third additional factor is the importance of continued Chinese growth to the world economy. Any rise in oil prices which slowed down the Chinese economy, or risked tipping it into recession, would have a potentially dramatic effect both on world export demand and on the ability of China to continue funding the massive US balance of payments deficit.
While oil price rises essentially redistribute revenue, as argued above, the destabilising effect of such redistribution is much greater when the world economy is already highly unbalanced, as is currently the case.
Marxists have never argued that changes in commodity prices, even for very important commodities like oil, can play a determining role in creating a crisis of capitalism. But, given other factors making the system vulnerable, rapid changes in oil prices can significantly destabilise it.
Recent panics over such rises are another indication that despite capitalist triumphalism the current global economy rests on some very shaky foundations indeed