by John M. Curtis
(310) 204-8700

Copyright August 22, 2004
All Rights Reserved.

rude oil prices rocketed above $49 per barrel, with Wall Street commodity specialists doing their part bidding prices to unprecedented levels. Like Enron's energy traders gaming California's power market, today's oil traders have the same goal: Bidding up commodity contracts and oil stocks. While there's no smoking gun yet, the same internal manipulation that sent California's power prices through the roof now threaten the world economy, where a handful of traders at the world's most powerful stock exchanges are busy hyping fears of terrorism, geopolitical instability, dwindling supply and exploding demand. “We're not going to see $18-$20-$22 oil. Those days are over,” said Michael Fitzpatrick, vice president of energy risk-management for commodities brokerage Fimat USA Inc., blowing the same smoke and insisting that prices won't return to previous levels.

     Today's pessimism mirror the same doom-and-gloom expressed in 1980 by President Jimmy Carter, convinced that rising oil prices couldn't be stopped. Had Carter's prophecy been correct, today's oil prices would exceed $1,000 per barrel. Shortly after Carter left office, oil prices fell from over $35 a barrel to around $10, with pump prices dropping from $1.50 per gallon to under 50 cents. Whether crude oil returns to around $20 per barrel is only one small factor affecting pump prices, where oil refineries, supply-and-demand and slick Wall Street tactics play a bigger part. In fact, recent declines in pump prices reflect increases in refinery output, something denied when the oil industry hikes gas prices. When pump prices spike, they're typically blamed on lower refinery output, often attributed to fires, equipment failures and routine maintenance.

     Uncontrolled pump prices not only fuel inflation but also business failures. Today's high fuel costs, especially for diesel and jet fuel, are frequently blamed for higher electricity prices and eating up profits in the airline industry. Higher jet fuel costs together with competitive pricing makes a lethal cocktail for major airlines, already rocked by lowered demand following Sept. 11. “We're hearing about trucking companies closing up shop,” said Bob Costello, chief economist at the American Trucking Assn., concerned that rising oil prices could lead to bankruptcies and an economic slowdown. Even Treasury Secretary John W. Snow blamed oil prices for the current “headwind” or drag on the economy. Yet Snow and the White House see nothing wrong with allowing the “free” market to set oil prices, despite Wall Street specialists sending oil prices into outer space.

     Price drops at the pump reflect a strange paradox that rising oil prices don't necessarily translate into higher gas prices, especially where refineries see lower demand. With added fuel costs comes belt-tightening, as consumers cutback from ordinary purchases. Most analysts predict the current decline in pump prices won't last, though, once again, refineries—not oil prices—determine inventories. Regardless of the current run-up in oil prices, if refineries continue at current levels, pump prices could fall further. Blaming the cost of gasoline on global oil prices ignores the how refineries determine pump prices. While terrorism, war and global instability spook markets, these factors don't automatically result in high pump prices. Specialists on Wall Street love to exploit bad news, like terrorism, to hike oil prices. When markets rise, anything can be used to justify price spikes.

     Whether Bush likes it or not, high oil prices have been added to the litany of bad news heading into November. It's easy to blame the economic slowdown on high oil prices but, ultimately, the fault goes with White House. Prosecuting the war on terror or fighting in Iraq also adds to market jitters. “We're just easily one major disruption away from $60 oil or possible $3-a-gallon gasoline,” said Mark Baxter, director of Southern Methodist University's Maguire Energy Institute, underscoring the fragility of today's oil markets. While Maguire might be right, he's not fingering Wall Street specialists for today's run-up, leaving oil prices pushing $50 per barrel. If Wall Street wants oil to come down, there's plenty of news to trigger a sell-off in oil commodities. Talk about new technology, alternative fuels and energy independence doesn't address Wall Street's ubiquitous game playing.

     Before concluding that oil prices are only linked to “supply-and-demand” or “real-life” events, it's helpful to examine the way Wall Street manipulates commodity prices. “If high oil prices were Olympic events, George Bush would win medals. He's fiddling while Rome is burning,” said Sen. Charles Schumer (D-N.Y.), urging, like Democratic presidential nominee John F. Kerry, the president to release oil from the nation's strategic petroleum reserve. As Kerry and Schumer know, the White House isn't helped by high oil prices. Flooding the market with more crude might temporarily bring down prices but doesn't deal with Wall Street specialists earning a living bidding prices into the stratosphere. Commodities like petroleum deserve special treatment, and, yes, new rules, to avoid the kind of market-manipulation threatening the economy. Treating oil like “pork bellies” makes absolutely no sense.

About the Author

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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