Oil Price Chaos

by John M. Curtis
(310) 204-8700

Copyright November 4, 2008
All Rights Reserved.                    

            When the dust settles after the U.S. presidential election, oil prices will likely go up, not because of increased world demand but because the oil industry won’t let price continue to slide.  During the run-up to the Nov. 4 election, oil prices continued to plummet, off nearly 60% from their mid-July high, when crude oil hit $147 per barrel.  Crude rose $1.04 to $64.95, largely on reports that the Organization of Petroleum Exporting Countries cartel expect to cut worldwide production by 1.5 million barrels.  Production cuts take time to filter into the market, typically causing a spike in oil prices.  Lowered demand in India and China, together with a precipitous drop in U.S. manufacturing, suggests that oil prices could remain soft for some time.  When the Institute for Supply Management Index fell to 38.9, the lowest level in 26 years, crude oil prices took an unexpected leap.

            ExxonMobil, the nation’s biggest oil company, reported record Q-3 profits, up a whopping 58% to $14.83 billion, no surprise to industry insiders watching the oil giant drive the economy into insolvency over the last two years.  ExxonMobil has broken its own record profits seven out of the last eight quarters.  White House Laissez Faire economics, giving the oil industry the green light without any restraints, damaged the U.S. economy, driving American businesses and consumers into insolvency.  Two years of unbridled greed contributed to the economic mess currently plaguing U.S. financial markets.  Runaway oil and gas prices drove the economy into recession, causing the recent drop in pump prices.  While welcomed relief to consumers, it comes too late to avoid recession, now spreading to China and India, once thought immune to U.S. economic woes.

            Slashing production and shrinking global inventories should eventually result in higher crude oil prices, assuming the economic slowdown can be reversed.  “The most devastating blow for crude oil today is data showing the U.S. manufacturing in October fell to the lowest level in 26 years, which means more worries for demand,” said oil analyst Phil Flynn of Alaron Trading in Chicago.  Today’s economic slowdown has dropped oil consumption by 2 million per day, causing an oil glut in domestic and world markets.  All the talk about the scarcity of fossil fuels, urgent need for conservation and alternative fuels has given way to lowered demand.  Recession in the U.S. has also jumped across the Atlantic, causing lowered demand in Europe and the U.K.  While oil prices are low by recent standards, they remain historically high, raking in big bucks for oil-exporting countries.

            Low oil and gas prices are essential for economic recovery.  Alarmingly high fuel prices eventually triggered the current recession, hurting consumers and businesses.  Oil industry executive like to say high prices encourage conservation.  While they urge conservation on the one hand, they’re dropping fuel prices to stimulate consumption at a record pace.  Over the last month, the oil industry dropped pump prices nearly 50%, down to a nationwide average of $2.50 for regular unleaded.  Industry executives don’t fool around, either lowering or raising prices to meet their needs.  When the new president takes office Jan. 20, 2009, he must deal with oil industry profiteering at the expense of the economy.  When the economy eventually recovers, the oil industry shouldn’t be allowed to reverse the progress.  Today’s lower fuel prices could easily bounce back after the election.

            High oil prices decimated the U.S. auto industry, witnessing a 30% drop in Ford’s auto sales.  General Motors and Chrysler followed close behind, adding to the poor shape of the U.S. economy.  Yet despite this bad news, the Stock Market posted a 1,500 point gain in the last week, attesting, if nothing else, to Wall Street’s disconnect.  Fund managers don’t look at the macroeconomic picture to decide when to buy or sell.  When the oil industry decides to ratchet up prices, there’s little anyone can do to stop the trend.  To assure that Q-4 matches Q-3, oil and gas prices will have to rise, despite current inventories putting downward pressure on prices.  Businesses and consumers won’t be able stop the industry raising prices after the election.  Despite the recession, big oil must gouge businesses and consumers to meet profit margins, an area where they show no mercy in a weak economy.

            ExxonMobil and other U.S. oil companies can’t be allowed to profiteer at the expense of the U.S. economy.  No one can deny the big oil’s adverse effect on today’s economic crisis.  Free market economies can’t thrive when an oil monopoly manipulates pump prices to maximize profits.  ExxonMobil’s recent profits should remind government and consumers that big oil accepts no responsibility for today’s economic downturn.  White House officials can’t give a green light to one industry to gouge virtually all other businesses.  Without affordable and stable energy prices, the economy won’t climb out of its deep hole.  Regulations must apply to the oil industry, not just banks financing American business and consumer debt.  Seven consecutive quarters of big oil’s record profits should send a loud message to Washington that regulations must apply to runaway energy markets.

  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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