This week provided us with two coincidental news items. The Financial Times printed a powerful article on the current price of oil ("Recovery in Oil Prices Ignores Fundamentals",05.20.09), commented that the price of oil has surged dramatically by 85% reaching $60.48/bbl from a February's low of $32.70/bbl.
The article goes on, "Dig deeper into the world of physical oil ... the fundamentals of supply and demand are weaker, much weaker than current prices imply. Traders -- some of the top executives at the world's largest oil companies -- say that recent rise in oil is due to investor flows ...rather than any improvement in the near term physical market."
Yes, there are the usual exculpations coming at us from all corners of the media: "improving economic outlook", "investor flows," "problems in Nigeria," "increasing consumption in China," "the weakening dollar," (approximately 10% since February vs 87% increase in the price of oil). Altogether the usual oil patch cover for oil price extortion.
The FT article brings us some element of reality by informing that demand is contracting at the fastest pace since 1981, wiping out five years of demand growth and citing the views of companies such as Goldman Sachs: "With oil inventories already at record levels the risk is that oil inventories breach storage capacity and forces spot lower." And of course that's the key, the reference to "spot" prices, meaning what would happen to the price of oil if it were traded as a physical commodity.
But oil is not "traded" nor "priced" as a physical commodity as was the case once upon a time. It is a virtual commodity priced on the trading exchanges where the mantra of "market forces" is accepted as gospel. An arena where our regulatory and oversight agencies have been snoozing for years (think SEC, as but one example).
On the very day the FT article was written, President Obama's choice to head the Commodity Futures Trading Commission (CFTC) , Gary Gensler, was confirmed by the Senate. He will have his hands full controlling the shadowy world of WMD financial instruments that nearly collapsed our economy. Will he move away from the agency's "head in the sand" policy of recent years advocating the industry's status quo, while defending commodity futures trading against accusations of undue influence, manipulation and speculation. Will he understand that the current excesses and distortions in oil futures trading risks a repeat of the excesses of last year's run-up, and that the current price is already a reflection of a speculator driven market, vulnerable to extreme manipulation? (At the risk of being boring-again, please see "Why Are We Paying $50 a Barrel for $20 Barrel Oil" 04.27.09.)
Please note this is not a argument meant to rationalize greater consumption of oil-based fossil fuels that might well result from lower oil prices. The administration is working diligently to wean us away from fossil fuels. But the time has come to arrest the manipulation of oil prices to the benefit and enrichment of the oil producers and petro despots at the expense of our economy, especially in its current fragile condition.