07/12/2009 05:12 am ET | Updated May 25, 2011

The Price of Oil Has Doubled on Obama's Watch -- the Time for Action is Now

The price of oil has leapt by more than 100% since February from a shade under $33 a barrel to over $71/bbl at yesterday's close on the New York Mercantile Exchange. Clearly the sudden and sharp escalation in prices is a looming danger to a deeply fragile economic recovery. To add insult to injury, the price is being driven by "investor sentiment" rather than fundamentals (WSJ, "Some See Replay of 2008 in Crude Oils Recent Surge," 06.08.09), this with tabulated oil stocks 19% higher than a year ago, according to the U.S. Energy Information Agency, not taking into account the scores of millions of barrels of oil and oil products in storage floating at anchor in supertankers from Rotterdam, the Mediterranean, to the Eastern Seaboard and beyond.

Combine this with the inane comments of the Executive Director of the International Energy Agency Nobou Tanaka, whitewashing OPEC's manipulations, complimenting them for keeping output "steady" while OPEC was making it clear that their current intended price target is $75/$80/bbl by saying, "Our message to OPEC is they made a sound decision." No mention here that Saudi Arabia alone has shut in 4.5 million barrels a day of production capacity and the rest of OPEC some millions more.

An escalation in price of this magnitude for a commodity this basic to our economy is untenable. And you can be sure if OPEC and its denizens get away with achieving their goal of $75-$80/bbl, after a short hiatus $100/bbl will be their next target. It is imperative the administration take action now otherwise they and the economy will be rolled over by oil interests both here and abroad.

First, where is our Department of Energy? What steps are being taken to alert the public to the dangers the economy will face by these speculation-driven prices? Where is the bully pulpit confronting oil interests and OPEC? Mr. Steven Chu, Nobel Laureate and all, is a fine gentleman, but is he up to the rough and tumble of the oil patch? His focus on alternative energy is and should be a high priority, but here we are dealing with the beginnings of a real time crisis calling for real time solutions. Who are the people around him? Much of the Energy Department and the Interior Department was staffed under the Bush administration with oil patch cronies. What kind of advice is he getting and from whom?

Second, speculation and psychology go hand in hand. The Department of Energy has it within its powers to change the temper of the marketplace. It can forcefully signal its displeasure with the current ratcheting up of prices that are risking the wellbeing of the nation's economy by simply stopping all purchase for the Strategic Petroleum Reserve (STP) until prices come down significantly. Oil storage throughout the world is filled to bursting and adding more oil to the SPR is just helping to further push up the price of oil. Stopping purchases would send a powerful message to the market, to the psychology of the market makers, and even to OPEC that this government is not sitting idly by while oil interests bleed us dry.

Third, to go the extra mile by deeming the steep and current price of oil as a strategic threat to our economy, and actually releasing measured quantities of the STP back into the market at intervals that would upset the current one way direction of oil prices. If speculators knew they had releases from the STP to worry about they wouldn't be so game to play what has recently been a one-way winning ticket.

Fourth, it is imperative for the Department of Energy and the new management team of the Commodities Futures Trading Commission (CFTC) to liaise closely to determine the nature of oil speculation on the commodity exchanges. It is the exchange driven prices of virtual oil contracts that are the key driver in the current oil price environment. The price of virtual barrels on the commodity exchanges have lost all relationship with the fundamentals of the actual wet barrels being consumed. An intense study needs be undertaken to bring transparency to the commodity exchanges. Who is doing the trading, under what auspices and to what end?  This, to ascertain  some definitive data on the level of speculation and the determination of whether the markets have been manipulated, how and by whom. Certainly the wherewithal is there by large trading houses and banks, not to speak of sovereign wealth funds who have the means and among oil producing nations the keen incentive to willfully, either directly or indirectly, move these markets.

Fifth, given the level of distortion and the strong potential for manipulation, one might go so far as to close down the oil exchanges altogether. Though seemingly draconian, oil was traded some years ago on a wet barrel, contract and spot market basis. Yes, there were spikes and valleys but at least one knew where all the bodies were buried. The march to $147/bbl oil last summer was a clarion call that the current pricing mechanism is deeply flawed. Perhaps it needs to be done away with altogether.