Oil Price Madness

by John M. Curtis
(310) 204-8700

Copyright September 9, 2008
All Rights Reserved.                    

              Proving that world oil prices have little to do with supply-and-demand, the price of crude oil continues to plummet off it record high of $147 a barrel June 11.  Energy experts predicted $200-plus barrel by year’s end, spelling disaster for the transportation sector and overall economy.  Since that peak, oil has dropped over 40%, closing Sept. 9 at around 100 a barrel.  China, India and the rest of the industrial world continue to pressure demand, despite the fact that crude oil and gasoline inventories have steadily risen.  Only a stubborn worldwide recession, in part fueled by runaway energy prices, could account for the precipitous drop in consumption.  Organization of Petroleum Exporting Countries [OPEC] meeting in Vienna, not known for dropping prices, agreed to hold current production levels, signaling lower prices, abundant supplies and stability for the immediate future. 

            Despite a string of disastrous hurricanes, oil prices continued their downward slide, ignoring Wall Street’s wild speculation.  Oil futures traders still have extremely low margin requirements, allowing traders maximum leverage.  Short sellers have now dominated the market, continuing to hammer the price of crude oil.  Retailer gas sellers have watched prices drop about 20%, helping GOP presidential nominee Sen. John McCain’s (R-Ariz.) chances in November.  “All the signals are the hurricane will be a miss as far as infrastructure goes, so that should keep us moving toward $100 a barrel,” said Jim Ritterbusch, president of Ritterbusch Consultancy.  Ritterbusch was one of many analysts predicting $200 a barrel oil in June, ignoring the very real possibility that high fuel prices would cause recession.  Oil industry executives got what they asked for:  Recession-fueled conservation.

            When the oil industry pushed the pedal-to-the-metal when it came to profits, their feeding frenzy didn’t anticipate causing a worldwide recession.  Consumers and virtually all other industries felt the pinch of inflated fuel prices.  Obscenely high jet fuel costs have practically bankrupted the airline industry.  Driving pump prices to record levels decimated consumer spending, responsible for two-thirds of Gross Domestic Product.  Raking in record profits over the last two years, the oil industry plunged the rest of the economy into recession.  White House officials refused to rein-in ExxonMobil and ChevronTexaco, while they gouged businesses and consumers, before taking down the the economy.  When mortgage giants Fannie Mae and Freddie Mac went under Sept. 6, it raised more worries in the economy about the solvency of the nation’s leading financial institutions.

            OPEC grew more worried about a worldwide recession hurting crude oil demand, signaling that they would not seek an output cut.  “We will probably stay at the present level,” said OPEC president and Algerian oil minister, Chakib Khelil, refusing to knuckle-under to more fringe demands to cut production.  Keeping the price of crude high helps no one, not least of which U.S. and European economies currently under pressure to stay solvent.  “The market is fairly well-balanced,” said Saudi Arabia’s oil ministers Ali Naimi  “I think things are in balance, in a healthy position, supporting the $100 a barrel benchmark.  Even Venezuela’s ordinarily tough oil minister Rafael D. Ramirez urged the cartel to hold firm on production.  OPEC blames recent downturn in  oil prices on speculators shorting the market, driving prices back to normal moving averages.

            Hurricanes, earthquakes, tsunamis, terrorism, revolutions, demand in China and India, etc., have little to do with the price at the pump.  Big Oil knows how to manipulate news to drive prices up or down.  They also know when consumers stop spending and inventories pile up how to drop prices, especially before competitive elections.  Gouging consumers and businesses has tanked the economy and driven consumers into hibernation, creating surpluses of refined products like gasoline, diesel fuel, jet fuel, home heating oil, etc., now flooding the market.  OPEC’s knee-jerk response to swell inventories and plummet prices is to cut production.  Big Oil must take more responsibility for tanking the economy.  Industry executives can’t argue high prices encourage conservation, while, at the same time, dropping prices when it suits their profit margins.

            Big Oil has gone too far gouging businesses and consumers, eventually taking down the economy.   Now that consumers belt-tightened, Big Oil is left with growing inventories and lowered profit margins.  Regardless of how much OPEC cuts production, today’s global slowdown should continue to cut consumption.  “Right now, fundamental prices would probably be in the range of between $90 and $100, suggesting prices could go even lower before they aroused concern,” said Iraqi Oil Minister Hussain al-Shahristani, believing that the world is currently oversupplied.  What OPEC doesn’t get is that cutting production will exacerbate a global economic slowdown, further eroding the price of oil.  Instead of teaming up Big Oil, OPEC should do its part to accelerate growth in the industrial and developing worlds.  More price-gouging and market manipulation only make the situation worse.

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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