What's All This Then?

commentary on the passing parade

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Monday, June 16, 2008

I had planned to stay away from blogging for a couple of months following my laminectomy surgery on May 7, but the continuing idiocy of the passing parade keeps tugging at my inner ear, urging me to resume commenting on anything and everything as I’ve done here for the past five years - and much as I try to resist, its’ winning the battle. Here I am, 40 days post-op, still in serious pain - Friday the 13th fell on a Friday this month - and much as I want to spend my time and thoughts on R and R, I'm back in front of a seductive blank screen, crying out to be filled with words of wisdom.

A week or so ago, my surgeon gave me the O.K. to do some local driving as long as I’m not taking any narcotics. Well, I am taking narcotics on a fairly regular basis, so I handle it by doing whatever small driving I need to do - such as taking my wife to work in the morning - and then take whatever pain killer I think I need - and thereafter don’t drive for a few hours or until the effects of the narcotic have worn off. I’m grateful for the O.K. to be independently mobile again, but of course it has its downside. I’ve been isolated from the outside world for a few weeks - but driving stripped away the veil of isolation and reintroduced me to the cruel cruel world outside by way of having to confront what I knew I would have to confront - more than FOUR bucks a gallon at the pump. For regular yet!! Which of course is an abomination on which I have to comment.

I have no particular expertise on the crude oil industry or on its first born - the gasoline industry, ( petrol to British influenced nations.) But there are a couple of things of which I’m slightly more than reasonably sure. One is that Saudi King Abdullah didn’t wake up this morning, get on the phone to a couple of his OPEC buddies and come up with today’s price for crude oil. More likely he overslept and had breakfast in bed - which is the prerogative of a king. The other is that this morning, in the United States and in the United Kingdom and in Russia and in China and in a whole host of other countries where people drive cars, anyone who wanted to buy gasoline did so. They may have muttered under their breath at the price they had to pay - but as long as they had the money to spend, the gasoline was there for them to buy.

We keep hearing how much the price of oil is determined by supply and demand - but supplies have been sufficient to meet world wide demand, so it’s difficult to see how that aspect of the crude oil industry can be blamed for the run up in crude oil futures. Evan the Saudis say that the price is way too high and are calling for a summit of oil producing and consumer countries to discuss the problem - a summit that will produce zero results. The problem, as more and more people are beginning to acknowledge, is described by the word I just used - futures - and resides at the New York Mercantile Exchange where those futures prices are determined, day by day, hour by hour, often minute by minute.

The run up in the price of crude oil futures - which in turn affects the price we pay for gas at the pump - is the result of trading in those futures. Traders who will never take delivery of a thimble full of crude oil - whose only interest is in making a profit, either by buying or selling futures contracts - are setting the price of the commodity, enriching the oil producing nations - and, if they guess right, themselves - and in the process, determining what we pay for gas at the pump and a great deal of what we buy at the super market. And there is no end in sight. Why should there be? No one is stopping the trading - and unless there is a sudden massive wave of selling, the trend will continue to be in the up direction. Can anything be done about what amounts to a runaway steam engine? It’s a good question and one that somebody needs to answer.

What we hear from the government is that we can do nothing. We can hold worthless hearings in the House and Senate during which we can haul oil company CEO’s up to the hill to chastise them and to listen to their insistence that it’s not their fault and their profits are not obscene and that they are pouring all kinds of money back into research and development. And we can propose a federal tax holiday, which gimmick will shave a few cents a gallon from the four plus dollar price for a limited time - and then only if the oil companis don't raise their prices by those same few cents. And our president can do something totally inane by asking that the Saudis increase oil production - which isn’t necessary and would only provide more speculation on the futures markets.

But of course there are things that can be done to lower the price of crude oil futures and subsequently of gasoline. The CFTC - the Commodity Futures Trading Commission - and the Federal Reserve and the NYMEX itself all have powers. The obvious thing that can be done is substantially increase the margin needed to trade crude oil futures - or even do away with margins completely for a while. Make it a cash product. At the moment, it takes only a small percentage of the futures price to control a single crude oil contract - one thousand barrels of oil. Under ten grand. Tripling or quadrupling that requirement would certainly drive many speculators out of the market - and anyone who doesn’t believe that speculation is what has driven the market to its current highs is living in a dream world.

There are even more drastic things that could be done. When the Hunt brothers tried to corner the silver market in the 1970’s , the regulators stepped in and stopped the purchase of silver futures by everyone except legitimate users of industrial silver and those with short positions who were buying back silver they had previously sold. By 1980, silver - which today is trading in the mid teens - had dropped from the stratospheric price of more than $50 an ounce down to less than $10 and in the 1990’s it was down to around $3.50 an ounce. The Hunt brothers went broke and the silver - and stock markets that were affected by the debacle - quickly righted themselves.

I’m not saying that the CFTC or the Fed should take the same kind of drastic action that they took with the silver market. I’m just pointing out that they have powers that for now they have declined to use. But the price of oil, if it continues to go up, will have an increasing negative affect on the world’s economy and if the regulators continue to stand by and let "market forces" rule, then they, in my opinion - will be guilty of criminal negligence.