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It's hard to believe it's been two years this month since this column first revealed that speculators were running riot in the oil futures market. I pointed out that unrestrained commodities speculators were causing the oil price climb we were seeing, which would send the cost of crude to a peak of $147 a barrel by the summer of 2008. At the time most "experts" quoted in the media were saying that oil prices were skyrocketing because world supplies couldn't keep up with demand, or because we had passed the point of Peak Oil. Neither position was true, of course; just looking at tanker shipments and worldwide oil supplies on hand, those concepts were obviously invalid.
Many of the columns I wrote for BusinessWeek in the spring and summer of 2008 debunked all the excuses being given for oil prices' suddenly doubling. Today it has come to be considered common knowledge, even common sense, and that's good for my track record.
Unfortunately for the country's track record, however, knowing the truth hasn't changed a thing.
Hegel, Call Your Publicist
Last October, in a follow-up column for BusinessWeek, "How Wall Street Will Kill the Recovery," I pointed out how investment banks were again profiting from taxpayer-funded bailout benefits.
They were taking those near-zero-interest loans and, instead of using the money to restart lending (and thus, it's hoped, the economy), they were pumping much of it into equities and commodities. There they were profiting from the ever-rising paper prices caused by the huge influx of cheaply borrowed money.
Apparently no one had learned anything from the great asset bubble and collapse. And no one in the government was going to do anything about it, because, if the world's investment banks were to become financially whole again, another bubble was needed.
Of course, if you had your money in stocks that were rising quickly from their post-crash bottom, you too benefited from these moves. But every industry that relies on purchasing commodities for manufacturers and every serious energy user -- not to mention the average person who had to purchase gasoline -- paid for that success. For we paid prices far higher than the market fundamentals should have dictated to provide those profits.
So it's not surprising that today we're hearing the same excuses for rising oil prices that worked in 2005 - 2008.
Cue the Same Stupid Excuses
"It's third-world demand led by China that is primarily driving the price of oil up." Not really.
Just last week the United Arab Emirates' oil minister, Mohamed Al-Hamli, said in Abu Dhabi that demand for OPEC oil fell by 2.3 million barrels a day last year, and that oil stockpiles worldwide are still well above the five-year average. Further, because the world's economy is still weak, he believes that oil demand could fall by another 100,000 barrels a day this year. (OPEC has also said demand will rise slightly this year.)
And this isn't 2008, folks. Back then President Bush and Energy Secretary Sam Bodman were publicly covering for the speculators and the price of oil, repeating the claim that oil demand was rising and inventories were falling. But last week Energy Secretary Steven Chu announced, "The oil market is oversupplied because of the recession."
Then on Thursday a week ago, the Energy Information Administration reported that another 4 million barrels of oil had been put into inventories in the U.S. and we'd stockpiled 773,000 more barrels of gasoline, even though our refinery utilization was running at only 81.9 percent.
Oh and the Financial Times published a story on March 4, saying that there will be a wave of consolidation hitting the owners of oil tankers, because "declining demand for oil and oil products and an oversupply of ships have hit large tanker operators' profits."
So what do you think was the net effect of all this news? Oil rallied, hitting $82 a barrel this past Monday.
And if you think that's odd, the futures market for gasoline jumped by a high percentage during the first week of March, which will substantially hike the price the public pays for fuel. Based on previous spreads between the futures market for gasoline and the retail price 10-14 days later, the national average price for gasoline could hit $2.93 a gallon this coming week; most of Texas could be paying $2.78 a gallon.
A Vital Stat Ignored
It's a good time to remind everyone that, according to Cambridge Energy, oil demand in the United States peaked in 2005. That's right, our oil demand started declining three years before market oil prices peaked at $147 a barrel. Shortly after oil hit that price in 2008, the International Energy Agency published its own charts on oil and fuel demands showing that not only had oil demand started falling long in advance of that peak price, but so had demand for finished fuels including gasoline and diesel. Therefore, when we were paying $4 a gallon for gasoline and much more for diesel, demand was way into a deep decline.
The market was not working. In fact, the setup driving the price of oil and gasoline was also primarily driving the housing asset bubble: Stupidly large amounts of money were being thrown at anything that could be bought, sold or securitized for quick profits -- profits that would benefit Wall Street far more than Main Street.
Well, déjà vu. Last week Reuters quoted Thomas Hoening, president of the Kansas City Federal Reserve, as saying that this new extended period of ultra-low interest rates invites speculative behavior and creates new risks to the system. That's exactly what I wrote for BusinessWeek last October.
Meanwhile Paul Volcker, former head of the Federal Reserve, has told Congress that we need to stop letting banks that the government backs and insures enter into speculation, and remove the government guarantees for investment banks that are larger speculators. And if those banks fail because their bets go bad, then let them fail.
That sounds a lot like putting Glass-Steagall back together -- a suggestion that Senator Chris Dodd rejected as "too late" for his Congressional agenda.
What Will 2010 Bring?
A week ago last Friday the February employment report came out, and nationwide we lost 56,000 jobs. That's a long way from the 800,000-plus jobs lost last February, but it's still a loss -- and the oil market shot up on that "great economic news!"
Most dealers' car sales in February's last 10 days were greatly encouraging, a trend crucial to re-instilling faith in the economy's direction. Car sales were up by over 13 percent from a year ago, which is terrific news.
But for the average consumer, what really determines whether they regain both the short- and long-term confidence they once had, which will get our real GDP headed in the right direction, is their personal variable expenses. As always it will be food, energy and gasoline costs that most affect American families' disposable income. Although in the past year a new variable expense has arisen: interest rates on most loans other than automotive and mortgages are going up, too.
The Senate hearings on speculation in the oil market -- oil was $60 a barrel, which in June of 2006 they considered excessive against demand --actually could have been hearings on how the overall market for speculative behavior was being subverted and manipulated. Those hearings were four years ago but they've done nothing.
And it is now 20 months since oil peaked at $147 a barrel, and 18 months since the worldwide financial meltdown. Yet not one thing has been done to ensure that either situation never happens again.
No, this time the government is actually lending the money to inflate these bubbles, and worse yet is charging virtually nothing in interest on these borrowed funds. This is something like, having discovered that a close family member is an addict and forced an intervention, instead of getting that person into rehab you proceed to open the family checkbook to help feed the kid's habit. Why? Because he's "seen the error of his ways."
Regulate Commodities: Save the Economy!
Don't misunderstand me. The oil market collapsed so much that, going by the fundamentals, it could have fallen back to its 1999 $10 price -- but that price won't allow continued exploration for the oil we'll need in the near future. Even $50 a barrel oil may be too cheap, considering what bringing new oil to market casts.
But we have to remember that the world's financial system crashed in part because $4-a-gallon gas had already begun killing consumerism in 2008.
And 13 months ago oil was just $33 a barrel. And then demand for OPEC oil fell by 2.3 million barrels per day -- and tanker demand for shipment followed. And still oil prices keep going up.
Until consumer confidence rises enough that most people feel like shopping again, oil shouldn't be where it is today -- assuming you believe in market fundamentals. Until the average family can see a correlation between their own circumstances and the prices of the things they must buy regularly -- not just of high-ticket consumer goods -- oil prices should echo demand.
But that's not going to happen unless the commodities market is re-regulated. And that's a situation that apparently Congress is not ready to set right.
© 2010 Ed Wallace
Ed Wallace has received the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at UCLA, and is a member of the American Historical Association. He reviews new cars every Friday morning at 7:15 on Fox Four's Good Day, frequently contributes articles to BusinessWeek Online and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF. E-mail: wheels570@sbcglobal.net; access all of Ed's work at his Web site, www.insideautomotive.com.
