Oil Prices Threaten to Tank the Economy

by John M. Curtis
(310) 204-8700

Copyright April 9, 2011
All Rights Reserved.                                         

         Driving oil prices through the roof, traders at the New York Mercantile Exchange continue to bid oil prices to record highs.  Friday’s close of $112 a barrel was only $35 away from its all-time high July 11, 2008, hit during the waning days of the Bush administration.  Back then, the oil industry blamed the price hikes on growing demand in Asia and the Indian subcontinent, ignoring the NYMEX or the rapid proliferation of hedge and private equity funds trading in oil futures.  Wall Street blamed the latest surge in crude oil prices on the devalued dollar, now worth about sixty-nine cents to the euro.  While it’s true that the dollar’s value affects crude oil prices, the biggest jump is due to wild speculation at the NYMEX and in hedge and private equity funds.  Predicting peaks in any market is not easy.  But oil prices could have a ways to go before hitting or topping its 2008 peak

            When oil prices peaked in July 2008, former President George W. Bush and Vice President Dick Cheney cheered, encouraging the oil industry to maximize profits at the expense of the economy.  Despite denying the nation had already lapsed into a serious recession, Bush and Cheney saw no correlation between high crude oil and pump prices and the emerging recession.  President Barack Obama, only yesterday hammering out a budget deal to keep the government running, must act decisively against piracy in the oil industry.  If he expects to get reelected, he’s going to have to preserve the fragile economic recovery now threatened by runaway oil and pump prices.  Wall Street’s endless excuses about the value of the dollar, growing demand in China and India or geologic shortages in fossil fuels, have nothing to do with how Wall Street drives oil prices into the stratosphere.

            Now that there’s some breathing room on the budget, Obama must call an energy summit at the White House, bringing together oil industry executives, Wall Street traders and members of the Treasury Dept. and Federal Reserve Board to analyze the effect of runaway oil prices on the economy.  Left to its own devices, Wall Street would destroy economic recovery by allowing one sector, i.e., the oil industry, to wreck the rest of the U.S. economy.  Whatever happens to the allies’ war against Kadafi in Libya, or national elections to Nigerian President Goodluck Jonathan or electricity blackouts in Hugo Chavez’s Venezuela, it has almost nothing to do with NYMEX traders or wild speculation in hedge and private equity funds.  Oil Price Information Service chief analyst Tom Kloza predicted that pump prices would exceed in 2011 the peak national average price of $4.11 hit in July 2008.

                        White House and Congressional officials act as if they have no power over the oil industry and Wall Street.  Treasury and Fed officials must look carefully at the oil industry’s first quarter results, expected to show the biggest profits since the record fleecing that occurred under Bush in 2008.  “Gas prices have more relevance on an emotional level than a lot of other things that they pay for,” said Kloza, recognizing pump prices as a punitive tax on consumers.  Given that runaway oil and pump prices can tank the economy, it’s up elected officials to find a reasonable fix to an out-of-control situation.  When wild speculation by the banking industry led to a crash in the deriviatives’ market in 2008, the White House and Congress tried to fix the problem passing financial reform July 21, 2010.  Now Obama must step up to the plate and deal with the oil industry.

            Shortages of oil or gasoline are not driving up crude oil prices in today’s market.   Today’s shortage involves “common sense” of what to do with the NYMEX, hedge and private equity funds that continue to drive commodities, like oil. through the roof.  Comparable speculation in commodities, like gold and silver, don’t have the same adverse effect on the economy.  Today’s wheels of industry still run, for the most part, on fossil fuels, including the transportation systems needed to brings goods to market.  Whether or not gold, silver or platinum spike has little to do with how average workers pay their transportation or heating costs.  “The market is being force to consider a possible major loss of Libyan barrels probably throughout the rest of this year and into the next,” said oil analyst Jim Ritterbusch, blowing the same smoke that keeps real reform from happening.

            Obama can’t delay any longer in holding a White House energy summit to figure out the best way to gain control over wild speculation in oil markets now threatening the economy.  Commodities, like oil and gasoline, must be dealt with differently than nonessential metals like gold and silver.  Oil and gasoline fuel the engines of American industry.  When oil markets go wild, they harm all sectors of the U.S. economy, fueling inflation and robbing companies of the needed profits to expand payrolls and reduce unemployment.  Spending more cash at the pumps harms the economy by leaving consumers with less cash to spend on other consumer purchases, adding to the Gross Domestic Product.  If taxpayers have less cash to spend on consumer goods and services, they can’t help the economy grow by creating new jobs, adding to government tax revenues and reducing the deficit.

 John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.

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