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Why are We Paying $50 a Barrel for $20 Barrel Oil??

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An especially revealing article in the New York Times on Thursday, "Oil Prices Resist The World's Recession Trend," took cognizance of the following, "In recent months oil prices plunged as consumers curtailed use...with some analysts predicting that dire economic circumstance would cause oil to fall to $20 a barrel or less". I repeat, "...$20 a barrel or less." Then it goes on, "While prices may have fallen by two-thirds from their peak last summer, oil remains expensive by historical standards."

Then, in the inestimable fashion of the New York Times to rationalize each and every price distortion in the oil patch, it goes on to instruct us that oil is once again being traded as a refuge against a slumping dollar (please see "A Short Tutorial on the High Price of Oil and the Falling Dollar," October 19, 2007) and rising inflation. Rising inflation? Really? Please check out Spain's and the U.K.'s economy, among others.

The article continues, "Oil which peaked above $140 a barrel in July, tumbled to $33/bbl in December. But oil futures in New York have since rebounded and have been fluctuating between $45 and $50 a barrel... this week, despite a broad market swoon, oil never fell below $45 a barrel. As a result American drivers should expect to see higher prices at the pump this summer..."

This in the face of the World Banks' forecast that the global economy will shrink by 1.3% this year, with the Chinese economy sputtering, Europe is stagnant and Japan is contracting. In turn the International Energy Agency is predicting a fall in world oil consumption of 2.4 million barrels a day this year. The Times article goes on, "serious questions loom over the global economy that would suggest lower, not higher prices."

But then the New York Times goes on enlightening us that "The action of oil producers has been critical in providing a floor for prices. Members of the Organization of the Petroleum Exporting Countries have shown uncharacteristically strong discipline in recent months in sticking with their pledges to reduce output." He continues, "OPEC's success has provided an opening for investors to renew their bets on oil prices", or as termed by the talking heads on CNBC, seeking out a "safe haven."

Really? These must have been the same investors who went long at $140/bbl in July. Brave souls, they have not taken into measure the fact that oil inventories have hardly ever been higher and certainly not for the last 19 years. No mention is made that OPEC is producing less, not because they have become more disciplined in this over-supplied market -- Saudi Arabia alone pumping 8 million barrels/day, while shutting in some 4.5 million barrels/day of their production capacity (cartels always work far more effectively in a market that is in short supply -- be it real, induced or perceived -- than, as is the case currently, in a market in significant oversupply). Together with sharply curtailed refinery operations, there just is no place to store the oil. Sorry, there are the likes of Morgan Stanley chartering VLCCs to store millions of barrels at sea (Please see "Your Tarp Money is Being Used to Prop Up the Price of Oil," January 23, 2009). Question: What role did MorganStanley's oil trading/storage operations play in its sharp quarterly loss announced this past week?

What is given occasional lip service, but not touched upon seriously unless markets get totally out of hand as they did last summer, is the manipulation of oil prices on the commodity exchanges. That it is not "investors" who are providing support to current prices "...expensive by historical standards," but the producing countries themselves (please see "Oil at $111 a Barrel: We Are Being "Sovereignly Screwed," March 17, 2008).

One too often loses sight of the fact that oil prices are determined not by the actual trading in wet barrels (realtime -- "spot" -- purchase/sale and delivery of product), but by a broadly unregulated market trading in virtual paper barrels on interconnected commodity exchanges around the world. The price for oil as traded on the commodity exchanges in London, Dubai, Singapore, Tokyo have an almost immediate effect on prices traded on the New York Mercantile Exchange (NYMerc). And where the CFTC may be trying to get a handle on the oil pits at the NYMerc, where there is little enough transparency, in turn there is virtually no transparency in any of the other markets.

It stands to reason that producers the likes of Russia (please see "High Oil Prices: Is That The 800 Pound Russian Bear Dancing In the Trading Pits," July 8, 2008) and Saudi Arabia, with a single product economy and a Sovereign Wealth Fund holding reserves directly or indirectly in the trillions, would be tempted to use its economic might to "direct" the price of "paper" barrels which, after all, directly determine the price and value of their very real "wet" barrels. As Saudi Oil minister Ali al-Naimi told reporters on Saturday at the 3rd Asian Ministerial Energy Roundtable, that it would be "nicer" if the price of oil were above Friday's New York close of $51.55/bbl. (Also, please see "'The 'Nightmare Scenario'": Thank You Saudi Arabia For Looking After Our Future," February 14, 2009)

Do they, don't they? I do not know. But that is the CFTC's job and possibly even the CIA's. Oil trading on commodity exchanges can be readily rigged (please see "Oil Trading : The CFTC Brings 'Duh!' to a New Level," August 21, 2008, and "The Trade That Brought Us $100 Oil Teaches Us to be Afraid, Very Afraid," January 2, 2008).

The thirty-dollar difference between $50 and $20 bleeds $600 million dollars a day from the American economy alone into the pockets of oil interests both here and mostly abroad. That makes it not only an issue of grave economic concern, but national security as well.

Would lower prices result in greater consumption? Almost certainly. And it is here that government leadership is essential. Fossil fuel consumption needs be curtailed through imaginative policies be it carbon taxes, gasoline taxes, alternative energy programs, and possibly even engaging that word viewed by all too many with a degree of horror, "rationing."

But to continue transferring our wealth and well-being in these times of crisis to the oil industry and to the petro despots is madness.