European Union (EU) energy commissioner Andris Piebalgs to propose on Tuesday 24 June 2008 to OPEC to price oil in Honest Money?

In my 11 April 2008 “OPEC and oil speculation”-post (1),
I asked why it is that OPEC cannot stop arguing that speculation is the cause of the present level oil prices
and I wondered whether the US dollar and the imminent pricing of oil in Honest Money could be
be the answer.

My argument, borrowed from Dr Walter Block, was that in normal times, the effect of the speculator on oil prices is to level them off. In normal times of plenty, when oil prices are low, the speculator by buying up and storing oil causes them to rise. In normal times of lack of oil, when oil prices are high, the speculator sells and causes prices to fall. The effect on him is to earn profits. This is not villainous; on the contrary, the speculator performs a valuable service.

Two articles published in the Sunday 22 June 2008 online editions of Arab News Newspaper outline what OPEC means by speculation. The articles also outline why these are not normal times (of lack/plenty of oil).

In an article under the title “Time for OPEC to defend its rights”, Fawaz Al-Alamy argues that
as oil prices are pegged to the dollar, speculators realised that the actual price of crude is not really high compared to its nominal fixed market price. Therefore, purchasing oil becomes tempting in the eyes of investors transacting in other currencies such as the euro, yen and pound sterling. Instead of speculating with the dollar, investors alternatively speculate in dollar-denominated commodities, such as oil and gold. Hence, oil prices keep soaring, while the dollar continues sliding. (2)

Arab News also argues in its “Drive out speculators”-article that
it is not OPEC members nor other oil producers who are to blame for the present wholly unjustifiable sky-high prices. Consumers must look nearer home. The problem started with investors in the main financial centres — New York, London, Frankfurt, Tokyo, Hong Kong and the others — as they searched for an alternative to the sinking dollar and began moving into oil. Prices started to rise. (3)

Both articles thus seem to recognise that the dollar is indeed the cause of the speculation in oil prices.

On the same Sunday 22 June 2008, Al Jazeera quoted OPEC President Chakib Khelil as saying “We believe speculation, in its noble and not noble terms, has its impact [...]” (4)

I submit that speculation in its noble terms is speculation that oil is soon to be priced in Honest Money.

On this Monday 23 June 2008, the Financial Times is saying in its weekly World Diary, “The Week Ahead”, that following Sunday’s extraordinary summit in Jeddah, Saudi Arabia, the EU’s energy commissioner Andris Piebalgs hosts the fifth round of ministerial talks between the EU and members of the oil producers’ cartel in Brussels. (5)

Piebalgs was quoted this Monday morning. 23 June 2008, as having said on Sunday in Jeddah that we are facing a unique situation, and that we should see this as an opportunity to work together, and to set a PRECEDENT for the future. Piebalgs went on to suggest a clear objective, that all can understand, for such a partnership. This may be, for example, a joint commitment to take the necessary steps with the aim of bringing oil prices to a more reasonable level, in the order for example of a TWO-DIGIT FIGURE PER BARREL, and to stabilise it at such levels for a reasonable period. (6)

It’s interesting that Piebalgs does not mention the currency in which the barrel would have a two-digit price.

What kind of precedent will Piebalgs and OPEC set on Tuesday 24 June 2008?

Ivo Cerckel
ivocerckel AT siquijor DOT ws

ENDNOTES

(1)
OPEC and Oil Speculation
April 11th, 2008 by Ivo Cerckel

http://bphouse.com/honest_money/2008/04/11/opec-and-oil-speculation/

(2)
Time for OPEC to defend its rights
Fawaz Al-Alamy
Sunday 22 June 2008 (17 Jumada al-Thani 1429)

http://www.arabnews.com/?page=7&section=0&article=111106&d=22&m=6&y=2008

SNIP
As oil prices are pegged to the dollar, speculators realized that the actual price of crude is not really high compared to its nominal fixed market price. Therefore, purchasing oil becomes tempting in the eyes of investors transacting in other currencies such as the euro, yen and pound sterling. Instead of speculating with the dollar, investors alternatively speculate in dollar-denominated commodities, such as oil and gold. Hence, oil prices keep soaring, while the dollar continues sliding.

(3)
Sunday 22 June 2008 (17 Jumada al-Thani 1429)
Drive out speculators

http://www.arabnews.com/?page=7&section=0&article=111107&d=22&m=6&y=2008

SNIP
It is not OPEC members nor other oil producers who are to blame for the present wholly unjustifiable sky-high prices. Consumers must look nearer home. The problem started with investors in the main financial centers — New York, London, Frankfurt, Tokyo, Hong Kong and the others — as they searched for an alternative to the sinking dollar and began moving into oil. Prices started to rise. But then the hike took on a life of its own; speculators moved in, seeing rich pickings to be had and the wherewithal in terms of the massive sums at their disposal to push prices even further up. Now they drive the market — and they have driven it way beyond what it should be. Supply exceeds demand — yet still the speculators buy, convinced that future demand from China, India and other rapidly industrializing economies will be so great as to absorb any present excess held in inventories and to demand even more. The fact that they have not the faintest idea what consumption will be in a year’s time, let alone five, is wholly ignored. The attitude of the consumer governments until now has been that market forces can stabilize the situation, that all that is required is a substantial increase in production; hence President Bush’s request to the Kingdom to increase oil production and to the US Congress to allow drilling in Alaska and offshore.

(4)
‘Speculators’ blamed for oil rise

http://english.aljazeera.net/news/middleeast/2008/06/200862211543806807.html

SNIP
Khelil also said that Opec had decided no special meeting on production was needed now and that a decision would be made at a regular Opec meeting in September.
“We believe speculation, in its noble and not noble terms, has its impact,” Khelil said.
Khelil said much of the rising costs can be explained by currency market turbulence.
“A lot of people are talking about the uncertainties about the reserves. But what about the uncertainties on the dollar?” he said

(5)
FT – The Week Ahead
World Diary: June 23 – 29
Compiled by Dominic Swords
Last updated June 22 2008

http://www.ft.com/world/weekahead

SNIP
JUNE 24
EU-Opec energy dialogue
Following Sunday’s extraordinary summit in Saudi Arabia, the EU’s energy commissioner Andris Piebalgs hosts the fifth round of ministerial talks between the EU and members of the oil producers’ cartel in Brussels.

(6)
EU Energy Commissioner At Jeddah Energy Meeting
Monday, 23 June 2008, 12:09 pm
Press Release: European Union
Andris Piebalgs, EU Energy Commissioner, Jeddah Energy Meeting, Sunday 22 June 2008

http://www.scoop.co.nz/stories/WO0806/S00502.htm

SNIPS
We are facing a unique situation, and one that we should see as an opportunity to work together, and to set a precedent for the future.
+
I would suggest therefore, a clear objective for such a partnership, that all can understand. This may be, for example, a joint commitment to take the necessary steps with the aim of bringing oil prices to a more reasonable level,
in the order for example of a 2-digit figure per barrel,
and to stabilise it at such levels for a reasonable period.
+
Today’s meeting represents an opportunity to make real progress on an issue that is vital to every citizen on the planet; from the poorest to the very rich. On behalf of the European Union I can unequivocally state that we will play our part in any such partnership. We would welcome a follow up mechanism that would enable to fully implement the final conclusions of the Jeddah Meeting, and to meet at regular intervals. We need to be result-oriented, and to show our industries and citizens that the current situation is of concern to us all.