Welcome to Politics Bites, where every afternoon at It's A Free Country, we bring you the unmissable quotes from the morning's political conversations on WNYC. Today on The Brian Lehrer Show, Steven LeVine of "The Oil and the Glory" blog at Foreign Policy, and Dan Dicker author of Oil's Endless Bid: Taming the Unreliable Price of Oil to Secure Our Economy, discuss the unrest in the Middle East and its relationship to the soaring price of oil and the rising price of gas.
Oil prices have been on a rollercoaster ride this week, peaking at $120 per barrel and settling at about $110. For obvious reasons, it's tempting to blame this spike on the recent, widespread unrest that has shaken the Middle East.
However, the disorder in Libya has not forced the country to cut off its supplies. Companies may be lowering production, but the United States only gets about four percent of its oil from Libya. A Saudi promise to fill the gap should provide relief, yet prices climb regardless.
One would think that chaos and regime change would make the foundation of the world's energy infrastructure more difficult to move. If that's not the case, why is it getting more expensive? Dan Dicker said that it's a mistake to think oil prices aren't a direct result of people flooding the streets of Arab capitals; they're being driven primarily by anxious western cash flooding the market.
[Prices] are not being moved by fundamentals. Supply is ample...What you have instead is a price being driven merely by the amount of money that flows into oil as an asset class, which in fact the oil market, or any commodity market, was never intended to be — an investment, a bet or a wager. In fact, it's become that, so when these geopolitical things happen you have this flood of money into a marketplace that was never designed to accept it, and you have an enormous spike in prices.
The oil market occupies a special place in the global economy because there's no escaping the influence of investors, Dicker said.
Everyone, whether they're engaged in the market or not, is unfortunately tied to energy. Everything we do in our lives is inevitably tied to the price of energy. If you're betting or investing on a house or the stock market, you take the risk and the chances; but lots of people out there don't have a bet down on oil, and they're getting hosed by the prices at the pumps.
Investment revved up in advance of turmoil. The supply situation is stable for now, but Steve LeVine said that everyone expects it won't be in the near future, which will make oil shares much more valuable for those holding them. That's causing prices to jump, and we haven't seen the last of it.
The market is still concerned about what comes next. Are we going to see something happen in Saudi Arabia? Bahrain? Algeria is very important. If we do, you're going to see that same kind of frenzy return.
Dicker and LeVine agreed: it's all about Saudi Arabia. Unrest in Libya, Bahrain, Tunisia — price spikes don't come from these events in and of themselves, but from fear that the same thing could happen to the world's flagship petroleum producer. Those fears are not entirely unfounded, according to LeVine.
Saudi Arabia has said that while Egypt has trouble, while Libya is up in flames, and Tunisia and Bahrain, we're going to have no unrest. Then King Abdullah announced, 'I'm going to give my people $36 billion in wage increases and debt forgiveness.' The way the market saw this was, wait a second, if you're so stable, why is the king buying off his people? That's changed perceptions.
LeVine pointed back to Libya, where the nation's refineries are being compromised by looting and sabotage. Sure, it's only four percent of the United States' supply, but Libya's example proves that oil installations are obvious targets in times of upheaval, in any country.
"It has more to do with how the contagion might or might not spread to Saudi Arabia," said Dan Dicker, speaking about the logic behind the price jump.
You might say that the unrest in the Middle East has fueled unrest in the global markets; everyone on the outside looking in is nervous. But Dicker said that we can't characterize the careening oil prices as the result of wealthy investors' greed. When you dig a little deeper, you realize that much of the money being dumped into oil is in the name of pensions and retirement funds for normal, non-market savvy citizens. Our own money is killing us at the pump.
If we really want to see the villains, a lot of them we could find by looking in the mirror...The dumb money that begins to fuel that kind of speculative drive really comes from us, who want to have, instead of just paper assets, we want hard assets, and we rush into these things and we listen to the people selling these products who want to make fees off of commodity investments. In many ways it's a shared responsibility. It's not just the Goldman Sachs or Morgan Stanleys, although they do bear a tremendous responsibility. But we do too.