'Get the Usual Suspects'

Sam Fletcher
OGJ Senior Writer

On the defensive shortly into his reelection campaign because of high gasoline prices, President Barak Obama had Atty. Gen. Eric Holder form yet another task force to “round up the usual suspects,” the alleged villains manipulating and defrauding the oil markets.

In an unusually broad pledge under the circumstances, Obama said, "We are going to make sure that no one is taking advantage of the American people for their own short-term gain."

Of course, practically every politician running for office in recent years has pledged to return energy prices to the low levels of decades ago. Each time retail fuel prices spiked at the pump, politicians launched another investigation into price fixing and market manipulation, only to announce months later as prices fell in the cyclical market that no financial hanky-panky was uncovered.

While speculators are an element in any oil price rally, they’re only reacting to government policy influences. “It was not the speculators but [government] policy makers that decided to launch a new war on an oil-producing country (Libya),” said Olivier Jakob at Petromatrix, Zug, Switzerland.

When speculators accumulated long market positions after Ben S. Bernanke, chairman of the Federal Reserve board of governors, launched the second phase of the Fed’s “quantitative easing” program to stimulate the economy, it was because the Fed “was afraid of deflation and embarked on a program of providing $30 billion a week to financial participants with the aim of sponsoring some inflation,” Jakob charged.

He also noted Saudi Arabia recently made a massive production cut in a period of near-record oil prices, “making it hard for short traders not to lose faith.” He said, “We believe there is a political side to the Saudi Arabia cut in oil production, and if they are trying to barter oil against support for their Bahraini military operation then we are in a bit of trouble. Saudi Arabia seems today more focused on saving its political regime than saving the world economy.”

Hurricane factor
The National Hurricane Center recently tracked a tropical low off Puerto Rico that never developed into a storm threat, but it was a reminder that the annual hurricane season is approaching in an environment where US inventories are being reduced. Officials at AccuWeather.com said Apr. 25 some economists are projecting gasoline prices to hit $6/gal at the pump on economic factors alone by the end of summer, the most active part of the Atlantic hurricane season.

Thanks to a drastic slowing of drilling permits issued since the Apr. 20, 2010,Macondo well blowout in the Gulf of Mexico, there won’t be many rigs at risk to hurricanes in those waters this year, a fact that is driving up oil prices that in turn are clouding the president’s chances for reelection.

But a major storm that disrupts gulf production and shuts down Gulf Coast processing and refining as Katrina and Rita did in 2005 will make a bad situation even worse. Nearly 3 months of production were lost that year to those storms. The government’s post-storm investigation called in the usual suspects but eventually found no proof the industry actually caused the back-to-back hurricanes or purposely put their fixed platforms and refineries in their paths.

Two hurricanes, a tropical storm, and a tropical depression in 2008 shut in production of 62 million bbl of oil and 408 bcf of natural gas in the gulf. “How long the spike in price lasts is usually a byproduct of the damage that was done. If there is no long-term damage, [the price] corrects itself relatively quickly,” said AccuWeather’s Senior Meteorologist Ken Reeves. "Hurricanes do have an effect, but it's mostly short term. Economic and political influences are the overriding factors."

AccuWeather.com is predicting a higher-than-normal number of tropical systems with direct hits on the US in the 2011 Atlantic hurricane season. The area of greatest concern, of course, is the Texas and western Louisiana coastlines with a high concentration of refineries and platforms.

(Online Apr. 25, 2011; author’s e-mail: samf@ogjonline.com)

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