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Oil price hike – the causes and the solution

Posted on: Jun 13, 2008

As I wrote this post, most people from all walks of life are heavily trapped in the middle of the oil price hike issue. Some were trying so hard to back the government’s move, and most of them oppose such move; while the rest (minority, perhaps) are simply being apathetic towards the issue. As the debate progresses, the intensity and degree of the heat are arising. Demonstrations were also held in certain part of the country, and many more to come in the near future.

Many have come with various possible options on how to survive the price hike. Some of the suggestions were rather very crude and simple such as spending wisely, while at the other end of the spectrum demands total change of the system. Somewhere in the middle, there are people who blame the government of the day for being unwise in facing such issue. Thus, they call for the change of the federal and state governments alike.

The oil price hike is not an isolated issue. In contrary, it is related to the broader aspect of the global economy, of which the main role is being played by United States of America (US). It is not simply a local issue, but this doesn’t mean that the local government is totally innocent. They also must be held responsible for adapting and embracing (read: submitting) to the western Capitalist system (which is based mainly on usury and speculations). I am very sure that some of you will not agree with my statement. I may not have a formal education on economy, but I do have some bits of knowledge that I learned from my friends and fellow teachers in economics. I may be wrong though, hence if I do, please correct me…

By the way, what is the Capitalist system is all about? As the name suggests, Capitalism was derived from its most prominent aspect – Capital, i.e. the accumulation of capital and making money out of money. Most of the wealth generated in Capitalist nations is from the financial sector that doesn’t actually produce anything but provide a service where one can bet on the future price of items. The highest aim of the capitalism is to obtain happiness, by gaining material benefits as much as possible. In this endeavour, Capitalism promotes securitization (trading) of any commodity whether it is real or imagined. Originally the stock market was created to bet on the future movement of the share prices as well as the performance of a company. Thereafter the derivatives market was created which is a ‘casino’ where betting takes place on the movement of the stock market and in the last two decades all commodities can be speculated upon.

The causes

All the price hike of the crude oil, food stock, and other commodities is due to the dependency on US dollars in the fiat monetary system (which forms the backbone of the Capitalist system). Most of the global trades were using US dollars as the currency. By doing this, US will not suffer the economic downturn alone. Instead, she will drag the global economy along the drain. While in fiat system, the value of the money is made out of the thin air. The role that is played by the central bank has caused inflation, or simply said – the money is made out of debt.

But how does the price hikes related to the system?

The unstable value of the dollar has caused panic among the speculators, leading them to put their funds into safe havens such as gold and oil, thus spiking up their prices. Since oil is very important in modern economy, slight changes in the price can adversely affecting the economies. Today oil is used for numerous everyday products across the world, most commonly for powering combustion engines such as fuel oil, diesel, and petrol. Oil is also used as fuel for heating and lighting (e.g. kerosene lamp). The petrochemicals industry produces many by-products such as plastics and lubricants. Solvents (alcohols) are also manufactured through oil, without which there would be no chemicals industry. The free flowing hydrocarbons allow many farming techniques and fertilizations. Hence small shifts in the price of oil have far reaching consequences. It is no wonder when the oil price increased, other commodities and food prices would follow.

Now we can conclude that the sudden oil price hike is not entirely blamed on increased appetite towards oil as some might suggest. (There is one opinion that totally blamed the economic progress China and India for this). Instead, it is mainly due to the market speculation. This is supported by a June 2006 US Senate Permanent Sub committee on Investigations report on “The Role of Market Speculation in rising oil and gas prices”. The report noted, “… there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices”.

One geo-political expert confirmed ‘Today 60% of crude oil price is pure speculation driven by large trader banks and hedge funds and with the development of unregulated international derivatives trading in oil futures over the past decade, the way has opened for the present speculative bubble in oil prices’.

[W Engdahl, ‘Speculators knock OPEC of oil-price perch,’ Asia Times Online, May 6th 2008.]

Conclusion

I have brought my arguments to prove that recent oil price hike and also increase in price of food and other commodities are not isolated issues. I also have provided the true cause of these problems. All these problems (among others) are caused by the adoption of the corrupt and vicious system, namely the Capitalism. Thus, the only solution is by totally rejecting the system and applying the alternative system which – for this instance – can ensure that there will be no central bank that operates based on usury and also denies the role of market speculation; the system that also put the intrinsic value into our money, based on stable, bimetallic system. The system that I meant is the one that had existed in the history of human civilizations for more than 1300 years – i.e. the Islamic system or, also known as the Caliphate.

Insya Allah, I will share with you on how Islam views and tackles these issues in the series of “Invitation to Islam” in my blog. I do not want to jump straight into discussing the system that is derived from Islamic creed before I completely shared about the creed itself. Because application of the system without proper understanding of its principle or creed that it is derived from is hollow and meaningless. But for the time being, I would like to suggest you to read more on this issue in the e-book “The Global Credit Crunch and The Crisis of Capitalism” written by Adnan Khan. The e-book is downloadable at www.khilafah.com. I referred mainly to this book for writing this post.

P/s: please excuse my terrible English…

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