23 June 2008: As has been noted before in this space, oil markets are suffering from a great deal of uncertainty. Producers and consumers all disagree on the impetuses for the doubling on oil prices over the past year—to $135 a barrel at the close of last week.

Exporting countries have maintained that that there is enough oil being pumped to meet the world’s needs and place blame firmly on the heads of speculators in the commodities markets. King Abdullah of Saudi Arabia lambasted the “selfish interests” for the ballooning prices, while the country’s oil minister, Ali Naimi, asserted: “There is enough supply of oil in the global market. Prices are responding to factors other than supply worries.”

“We believe that the market is in equilibrium. The price is disconnected from fundamentals. It is not a problem of supply,” Libya's Oil Minister Shukri Ghanem told reporters at a recent OPEC meeting. “We believe speculation, in its noble and not noble terms, has its impact.”

The theory posits that large institutional investors, like hedge funds and mutual funds, have turned to energy futures in an effort to protect themselves from the worsening economic environment and inflationary trends. They do this by purchasing contracts for future oil deliveries and holding them until the contracts are about to mature. Investors do not want to have the oil itself, just the paper rights so that they can sell them off at a profit to someone who physically brings the oil to market. It has been a profitable venture so far, as commodities are one of the few areas where profits are still strong.

The speculator line is a useful one for exporters as they can wash their hands off blame and sit back to enjoy the record prices; if there is enough supply, then it is not their fault that prices continue to climb.

And they are not alone in making the case against investors. Politicians have taken up the call in an effort to show that they are being proactive; it does not look good to sit back and say, “There is nothing I can do to bring down energy prices”—even if that is the case in the short term. In the U.S., Senator Joseph Lieberman proposed restricting investment in the commodities market. “There is excessive speculation in the commodity markets,” he said, “that is driving up the cost of food and energy.”

Barack Obama, the presumptive Democratic nominee for president, in an effort to burnish his energy credentials, has promised “common-sense regulation” to tighten investing in energy markets and increasing government oversight if he is elected to the White House.

A more common line of attack for consumers of oil has been the belief that there is not enough supply to meet the world’s growing demand, particularly from the emerging economies of India and China. According to the U.S. Energy Secretary Samuel Bodman, “there is no evidence that we can find that speculators are driving futures prices.” Instead, he cautioned that “production has not kept pace with growing demand.”

Prime Minister Gordon Brown of the UK asserted that there must be “credible future commitments on increased oil supply” as “there is more demand than supply.”

Not being able to agree on what is even causing the rush on oil has itself driving up prices. Despite all the analysis, discussion, and number crunching, this public argument between exporters and consumers has injected uncertainty into the market, neutralizing any efforts to ameliorate the situation.

For example, last week, China announced that it would be raising the price of fuel in an effort to tamp down demand. Yet, the move was widely seen as insufficient. Bloomberg summed up the mood, its headline declaring: “Oil Is Little Changed After Falling on China's Fuel Price Gain.” Similarly, American oil companies are now involved in Iraq’s oil industry for the first time in 36 years. Also, the MEND, a group that has been largely responsible for the disruption of oil production in the Niger Delta, has called off ceasefire to its efforts, which will hopefully bring some stability to the region and enable Nigeria to reestablish its production capacity. These are good signs for the oil industry, but together these moves brought down prices by a mere $4. Even a promise from Saudi Arabia to increase production has been met with reservation.

So what is it going to take to bring more clarity to the oil market? The first step must be to agree on what the causes of the increase are, thereby bringing some certainty back into the picture. Only then can fundamentals and policy really have an effect.

What do you think readers? Send us your thoughts at editors@diplomaticourier.org.