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There is no logical explanation for the soaring oil prices so far, especially that there is a balance between supply and demand in international markets, which does not explain the price rising to $112 last week.
Oil Ministers and experts in Organisation of Petroleum Exporting Countries (Opec) were confused about the continuous rises. For the first time, they were trying to convince the countries with high production volumes to further increase their output to curb the ongoing rise.
This is not what it was like for the past two decades in Opec, when ministers used to discuss and disagree on production shares and the organisation's production ceiling, with each country trying to increase its share.
Oil companies, which control a major share of international production and marketing, are thrilled at the growing profits, which reached unprecedented levels in the last 25 years. Major speculators are also making astronomic profits, and the situation seems out of Opec's control and under the control of markets and speculators.
Two years after the oil prices started soaring, suppliers of some basic commodities, including food, started increasing the prices of their commodities, at rates even higher than the rates of oil price increases. The price of steel increased threefold, and so did the prices of wheat and rice. The most important of these are the prices of food stuff, as many international organisations have warned against famines caused by shortage of food and rise in prices, which will make poor countries unable to meet the basic requirements of their people.
Reasons behind the rise in food prices are many, including climate changes, which contributed to a decline in food production. Yet, climate changes could not be an excuse as they had been there for years now. Another reason attributed is the improving standards of living in countries such as China and India, which eventually led to an increase in consumption. However, the people of these countries did not suddenly turn into greedy creatures, and if there was an improvement in lifestyle, it would be in quality rather than quantity.
The third reason is the transformation from farming food plants into planting methanol-producing plants to be used as fuel, although this is limited to certain countries like Brazil and the United States and has been going on for many years. A question arises as to whether it is more important to provide food for hungry people or fuel for the vehicles of a few people.
The issue of speculation resurfaces. Although there is a state of balance between supply and demand for food in global markets, food producers believe it is possible to make astronomic profits through speculation. It is true that the increase in energy prices has led to an increase in production costs of all commodities and services, including food. Yet, energy costs only comprise 10 per cent of food production costs, thus this increase is unjustified.
Furthermore, energy costs comprise 40 per cent of the total production costs of steel and aluminium, which does not justify the 300 per cent increase in their prices in the past two years. It seems the game of speculation has attracted the producers of basic commodities, and the skyrocketing prices of oil affected the prices of other commodities.
The world, under the domination of a sole power, has become more complicated, which requires restoring a balance between influential players. This is necessary to enable people to live within a state of balance and be provided with their food and basic commodities.
The writer is a UAE economic expert.
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