SPECTRE OF NEW GREAT DEPRESSION

This year, the honour of hosting the prestigious World Petroleum Congress, which is held once every three years, went to the capital of Spain. The official motto of the Madrid forum, held on the 75th anniversary of the international event, is "A world in transition: delivering energy for sustainable growth." However, the congress will focus on the dramatic rise in oil prices, which have beaten all records of late. The World Petroleum Congress has become the arena in which global discussion on ways to curb oil prices has manifested itself in the fullest possible manner.

Oil in two dimensions

Five thousand delegates, representing almost 800 companies from more than 50 oil and gas producing and consumer countries, discussed one of the most pressing problems for the international economy.

As if it were not enough that the price of Brent has exceeded the $146 mark for the first time in history, OPEC released a stunning forecast that, by the end of this summer, the price of oil might reach $170 a barrel. And this is likely to happen despite the fact that neither consumer nor producer countries are interested in excessively high oil prices, which might destroy demand. Western experts are concerned that the world economy is on the verge of yet another Great Depression and admit that things have not been this bad within the last 78 years.

However, the realization of the potential perils of the situation which has emerged, and the prospects of its development, does not help international organizations, nations, energy companies and intellectuals to reach a consensus on the nature of the present crisis and, still less, on ways out of it.

The majority of oil producer countries believe that the main causes of the rise in oil prices are speculative transactions in the global energy resource markets. The main consumers - the leading developed nations - argue, for their part, that the main culprit is a shortage of supply on the international market and that the problem can be resolved first and foremost by increasing oil output. The International Energy Agency insists that OPEC should put into operation new production facilities as soon as possible.

The Western oil companies, which complain that oil producing countries have very closed systems and request access to their oil reserves, also support this position. At the same time, although they profess their support for the principle of a free market, they endorsed the opinion of so-called speculative traders, who blame everything on OPEC. Rejecting the idea of speculative trade, the oil giants nonetheless admitted that investment funds are broadening their operations in the market for raw materials contracts as the most reliable sector for investment. The position of BP, Shell, Exxon Mobil and other multinational corporations is quite understandable because, thanks to these "speculative investors", they make huge profits.

As for the position of the governing bodies of Western nations, although they do not consider speculative trade on stock markets to be the main cause of the hike in oil prices, they admit that traders do play a role in inflating the "oil bubble." It is no accident that the United States has decided to tighten the regulation of stock markets. The US commission for trade in commodity futures has limited the number of oil-related transactions that one trader can carry out per day. Furthermore, it even demanded that the London-based ICE Futures Europe stock exchange, which trades US oil contracts, introduce similar restrictions.

However, there is an opinion that dealing with speculative trade using purely economic methods will not tackle the problem. Experts predict that before the restrictions on the number of transaction come in effect, traders will try to make as many deals as possible and drive price even higher. And when the restrictions come into effect, they will revert to previous price trends, which will result in higher prices than we see today anyway.

In addition, there is yet another problem. It is well known that oil prices are set in US dollars, a currency which has become considerably weaker in recent years. Following the US Federal Reserve interest rate cuts from 5.25% to 2% between September 2007 and March 2008, speculative traders on the international stock exchanges withdrew their funds from dollar-based assets and invested them in developing oil futures contracts, thereby creating a typical "bubble" in the sector. That is why the only realistic measure capable of stopping the oil traders is to raise the Federal Reserve interest rate. Then speculative investors will probably withdraw from the markets in raw materials and switch back to dollar assets. This might result in a strengthening of the US currency and cheaper oil. However, the US financial authorities show no desire to take that step, arguing that it is just these low interest rates and weak dollar that keep the country's economy from collapsing.

Awaiting a gas "attack"

In the meantime, individual OPEC countries, although they question the need for more investment in the oil producing sector of the cartel, citing as the reason the absence of any guarantees of significant increase in demand for the raw materials it supplies, nonetheless express their readiness to increase oil production. Saudi Arabia, for example, promised to increase production by 200,000 barrels a day, in other words, to 9.7 million barrels a day.

However, increased production has brought relief to the oil markets. But yet another price hike is gathering steam. The two largest exporters of natural gas after Russia - Qatar and Algeria - insist on a revision of the oil-to-gas price ratio (currently natural gas is about 40% cheaper than oil). Qatar Energy Minister Abdallah al-Attiyah said at the Petroleum Congress in Madrid that the price of natural gas should at least equal the price of oil, because gas is an environmentally friendly fuel which is an alternative to oil.

OPEC Chairman Chakib Khelil, who is also the Algerian energy and mining minister, expressed his certainty that the prices would soon be equal. He added that Algeria will abandon its practice of signing long-term contracts which, in his opinion, unfairly keeps natural gas prices low and prevents agreement with buyers on revision of prices.

This decision might be one of the first real steps towards the creation of a natural gas cartel, which has been much discussed of late. At any rate, the desire of a number of manufacturers of condensed natural gas to change the pricing system is very clearly apparent.

Naturally, countries which are rich in hydrocarbons are trying to take advantage of their natural resources and increase their clout in the international arena. And today they are giving to understand in a much more conspicuous manner than before that the cause of the crisis in the global economy, which manifests itself in the present salient growth in oil prices, is rooted in the policies of the leading nations and multinational corporations. In addition, oil price fever is also partly an outcome of global geopolitical confrontation and the likelihood of new wars, which is also in a large part the fault of the "golden billion" nations.

The political factor

Undoubtedly, developments around Iran have also influenced the latest hike in oil prices. First Israel carried out a rehearsal of an air strike against the Islamic Republic's nuclear facilities. Then the command of the Bahrain-based US 5th Fleet made its presence felt. Citing the permanent threat of blockade by Iran of the Strait of Hormuz, through which large amounts of oil are supplied to world markets, the fleet command said that the United States will on no account allow Iran to do such a thing.

Tehran's reaction was prompt. Iranian Oil Minister Gholamhossein Nozari issued a warning at the Petroleum Congress that his country would retaliate against any attack. And the price of Brent immediately shot above $146 per barrel.

Further aggravation of the situation around Iran, which stems both from the nation's defiance of UN Security Council resolutions and from permanent discussions on the issue of preparation by the United States and Israel for a military strike against the Islamic Republic of Iran, stands to drive oil prices even higher. In his interview with the French France-24 TV channel, Chakib Khelil, touching on a possible scenario of such developments, warned that if strong-arm methods are used against Iran in connection with its nuclear programme, the price of a barrel of oil might go beyond $200, or even $400.

The oil market reacted immediately to the probability of a major new war in the Near East. Like any other war, this one too, while it only exists at a hypothetical level, has already dealt a blow to global interests.