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Raymond J. Learsy Headshot

A Funny Thing Happened on the Way to the Gas Pump

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This may be boring, but it is important. Gasoline prices are creeping up again responding in large measure to tenacious oil prices that are nearing three month highs touching almost $65 a barrel surpassed only in September/October by market conditions influenced by hurricanes Katrina and Rita. Over the past few years the price of crude oil has advanced almost lockstep with the price of natural gas, and the advance in natural gas prices has served as a persuasive explanation and rationale for the extraordinary escalation in crude prices and in turn gasoline and refined petroleum products. But something strange has been happening. Over the last few weeks, with unseasonably warm weather, supply balances etc. the price of natural gas has plunged from a peak of $15.75 per million British thermal units (B.T.U.'s) on December 13, 2005 to a close of $8.79 on January 13, 2006 a drop of some 45%! On the same day oil closed at $63.92/bbl near its three month high. If the price of natural gas and crude oil have been so intrinsically tied together on the march to ever higher highs, why this sudden divergence in "market" pricing as natural gas prices erode? Could it be that one commodity is responding to market conditions and the other commodity is not? That the market price for crude oil is manipulated while that for natural gas is not? Inherently the market for natural gas is a geographically North American market (produced in, consumed in the U.S. and Canada, with some Caribbean and other offshore imports of Liquefied Natural Gas representing but a small portion of the total). Given the players in natural gas production and distribution, and after Enron, it does not lend itself to manipulation as the risk of anti-trust infringement and prosecution is too great.

Crude oil is another story. Much more than natural gas in North America, crude oil is a world commodity and produced in worldwide locations and priced on international exchanges on a minute by minute basis. Some 40% of the world's oil trade is controlled by the OPEC cartel and their vested interest in keeping oil prices high is paramount. It was reported this week that OPEC's revenues in 2005 were at record levels and were expected to reach $522 billions in 2006, a further increase of 10% according to the US Department of Energy. "It is just a phenomenal transfer of wealth from consuming to producing nations" said an analyst at Merrill Lynch.

The oilpatch, its supporters in and out of government and all those who benefit by high oil prices, be they oil companies, suppliers, financial institutions, "K" street lobbyists etc., will tell you that it is free market forces of supply and demand that determine oil prices. But is it so?

Consider that the minute by minute price of oil is set on the futures markets traded on exchanges in New York, London, Dubai, Singapore, etc and now increasingly through electronic trading. Trading is virtually unregulated and basically opaque - that is to say one doesn't know who is buying or selling and trading can be done anonymously through straw men or accounts and therefore lends itself to manipulation (witness the allegations of trading malfeasance at Refco) by those who have the means and interest in pushing markets higher or lower.

The members of the OPEC cartel certainly have a keen interest in pushing markets higher and given the flood of billions being cashed in, have the means to do so.

A funny thing happened on December 12, 2004. Then after a slight and inappropriately timed fall back in oil prices OPEC's President and Saudi Oil Minister predicted "Watch what happens tomorrow. I tell you prices will go up tomorrow". And indeed, with some unusual gyrations the quoted price of oil did go up on December 13th.

Putting his highly visible public reputation so clearly on the line the only way al-Naimi could have been certain that the price of oil was going to up the next day was if either Saudi Arabia through its national oil company, Aramco, or OPEC or its it agents played and manipulated the oil futures markets on that day. And if indeed the oil futures markets was manipulated on that day it raises the very crucial question; when before and since have the oil futures trading markets been tampered with, how blatantly have the markets been distorted and how have these manipulations impacted the price of oil now and in the past.

Given the malign impact the price of oil and its strange distortions are having on our economy, on the massive transfer of wealth to the OPEC cartel nations and the oilpatch in general, it is urgent that the trading of oil on commodity exchanges be closely scrutinized and subject to immediate Congressional investigation and requisite action. The time to act is now!