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TV show targets wrong element of '08 oil price leap

Bob Tippee
Editor

An "investigation" by a popular US television news show has uncovered information about oil prices that anyone familiar with the market knew months ago.

Teasers by CBS News for the Jan. 11 edition of "60 Minutes" promised to surprise viewers with disclosure that last year's high oil prices were not, after all, the handiwork of ExxonMobil Corp. or Saudi Arabia.

Instead, "60 Minutes" concluded, the fault lies with oil speculators.

The show dredged up the usual evidence: the high share of futures positions held by speculative traders; the large multiple of paper barrels traded on futures exchanges over barrels of oil actually delivered; the inability of market fundamentals to explain a huge, single day's leap in the crude price.

Was manipulation involved? The program didn't exactly say.

It did suspiciously note that Goldman Sachs predicted the crude price would reach $200/bbl, as though a forecast destined to be proven wrong had been an attempt to excite trading and elevate prices.

The program pointed to Enron's support for free oil markets, suggesting that the discredited trading juggernaut wanted to manipulate oil prices the way it gamed electricity.

And it interlaced its observations with regret for the absence of "oversight" and implications of blame for "deregulation."

None of this required an investigation. An unusual rush of speculative money into futures markets for oil and other commodities is a matter of record. Investors were seeking shelter as the financial crisis developed and other assets lost value. The activity was thoroughly reported.

In the opinion of many observers, the surge did help push oil prices to levels market fundamentals could neither explain nor sustain.

Perhaps amplifying the effect of the capital influx was unusual weakness of the dollar. "60 Minutes" didn't mention currency effects.

The program seemed more intent on regretting deregulation than on fully explaining price pressures that were well recognized while in play and largely deemed ephemeral.

The problem last year wasn't deregulation, which happened long ago. The solution isn't more regulation.

To use a "60 Minutes" analogy, Enron's electricity mischief occurred along an arbitrage frontier created by overregulation in California.

(Online Jan. 16, 2009; author's e-mail: bobt@ogjonline.com)


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