Solution to the Global Petroleum Crisis

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...at the end of the day, we must recognize that petroleum has become an essential asset class for institutional investors. And, given the unabated growth of institutional capital from pension funds, insurance companies, university endowments and sovereign wealth funds, petroleum prices are likely to continue their upward trajectory.

Rising petroleum prices may plunge the world into a global recession. Here’s what to do about it.

In my view, financial speculators are largely responsible for the recent surge in the price of petroleum. Indeed, this is yet another case of “irrational exuberance”, similar to the previous technology and real estate bubbles. Of course, as in previous bubbles, financial speculators will provide many seemingly convincing arguments to rationalize their actions.

However, at the end of the day, we must recognize that petroleum has become an essential asset class for institutional investors. And, given the unabated growth of institutional capital from pension funds, insurance companies, university endowments and sovereign wealth funds, petroleum prices are likely to continue their upward trajectory.

So what can be done to stem the rise of petroleum and avert a global recession?

First, the U.S. in coordination with other major economies must create a new Petroleum Speculation Tax which would be levied on financial investors that buy and sell petroleum assets but do not take physical possession of petroleum. Previous proposals have largely called for a windfall tax on energy producers. However, energy producers do not set the price of petroleum; they are price takers. The price of petroleum is set by financial investors which trade in petroleum assets. Therefore, my proposal is likely to more directly influence the price of petroleum.

Second, emerging market economies (i.e. Brazil, Russia, India and China) must accelerate their efforts to substitute petroleum with alternative fuels. For example, Brazil and Pakistan have made significant progress in substituting petroleum with sugar-based ethanol and Compressed Natural Gas [CNG] respectively.

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