Neff Zone Column -- June 7, 2008

Print Edition: June 7, 2008

THE OIL GAME

For the next couple of columns we’re going to be talking about the oil game. Make no mistake, the price of oil and gasoline is one big casino game. Economists may tell you that prices are being set by supply and demand, but they are wrong and I can prove it.

This journey to realization begins in the upstairs bedroom I shared with my brother, Big Rob, on Genesee Street in Flint. During the 60’s we used to stay up late at night listening to rock and roll on giant clear channel radio station WBZ out of Boston, 1030-AM on your radio dial. After the music programming ended around midnight talk shows would take over the airwaves and people from all over America would call in to discuss the latest topic.

One night Rob and I were enthralled by a show dealing with gas mileage. The moderator was convinced cars could get more miles to the gallon than they were delivering and he asked his listeners to call if they had proof that he was right. For at least three hours inventors called in and virtually all of them had a similar story. They had invented a new carburetor or some other engine component that could double or triple gas mileage. In each case they had applied for a patent. In each case rights to that patent were bought by a major oil company. The inventions never made it to the marketplace, the inventors signed non-disclosure agreements and got rich, and the oil companies made sure they kept getting top dollar for their oil and gas.

Now, I don’t know first hand if any of this was actually true or all those inventors were a few screw drivers short of a full tool set, but from that day on Big Rob and I have been interested in the maneuverings of "Big Oil." This brings us to what’s happening with the current prices of crude oil and gasoline today.

You’re probably thinking, there Neff goes again. Who does he think he is? Harvard educated economists are certainly smarter than this yahoo. Okay, so don’t take my word for it. Here’s what "experts" from around the world are saying about the current situation. Then you decide if you agree with me that oil pricing is a giant casino game being run by a bunch of con men or if you are in the supply and demand camp of the oil industry economists.

From Fadel Gheit, an analyst at Oppenheimer & Company: "There is no reason why oil prices should be above $60. The physical supplies do not justify the price; it just doesn’t make sense."

That opinion is seconded by Shokri Ghanem, the chairman of Libya’s National Oil Corporation: "There is plenty of oil on the market. Oil prices are disconnected from the fundamental changes in supply and demand."

Additional affirmation is provided by Mike Wittner, head of oil research for London’s Societe Generale: "There’s various signals out there saying for right now the markets are well supplied with crude."

An example of this is Iran, which is now storing 25 million barrels of crude because, in the words of Hossein Ardebili, their oil governor, "there are simply no buyers because the market has more than enough oil."

Finally, the Wall Street Journal observes: "Since early 2007, U.S. demand for petroleum has fallen by 1 percent and world demand has risen by 1.3 percent. Supplies of crude are so plentiful traders of physical crude oil say their market is suffering from too much supply, not too little."

So, if these observations are true why does the price of crude keep going up on the world market and hence the price for a gallon of gasoline? The answer is that speculators, the same bunch who brought you the dot-com fiasco, the savings and loan meltdown, and most recently the housing implosion are now playing roulette on the world’s oil market.

Says Deborah Fineman, president of New Jersey’s Mitchell Supreme Fuel Company said in a Politizine.com article: "Energy markets have been dictated by…speculators who artificially manipulate the numbers for their own benefit. The current market isn’t based on the sound principles of supply and demand but it is being rigged by companies and speculators who are jacking up prices for their own greed."

Gerry Ramm, president of Inland Oil told the Senate Commerce, Science and Transportation Committee this week: "Excessive speculation on energy trading facilities is the fuel that is driving this runaway train in crude-oil prices."

Now, how does this relate to gasoline prices? Well, we’ve been told that as the price of crude goes up so exponentially must gas prices. Plus, we’ve also been told that we lack the refinery capacity to deliver gasoline to the marketplace. How many times have you heard that no new refineries have been built in the United States in decades because environmentalists have blocked new construction at every turn? The economists tell us that gas costs more because demand is high and the capacity to deliver more supply does not exist.

Oh really? From the New York Times on May 14: "Refining utilization rates…slumped to 81.4 percent in the second week of April, compared with 90.4 percent at the same time last year, Earlier this month refineries were running 85 percent of their capacity."

Ahem, ahem…at your job has the boss ever said, "Even though there’s a demand for what we make, I’d prefer you work at about 81 percent of your capacity and sleep the rest of the time." I didn’t think so.

So, who are these speculators? How are the prices being manipulated? Is there any evidence that Americans have had just about enough of this con game? Tune in next week for more about "The Oil Game."

Jim Neff is a local columnist. Comments to neffzone@gmail.com. Read Neff Zone columns online at www.neffzone.com/cadillacnews.