The Price of Oil. A Moment of Truth for the Bush Administration

by Raymond J. Learsy

Since BP announced the temporary closing of one of its pipelines in Alaska the price of oil has spiked by more than $ 1.82 /barrel touching $77/bbl as of this writing (with many analysts predicting $80 plus in short order and its consequent impact on gasoline prices). The pipeline closing is due to a small leak and severe corrosion in a portion of the pipeline keeping some 400,000 bbls of crude oil a day off the market.

This will be a temporary shutdown. Probably days or a few weeks at most. Yet given their hypersensitivity it is having an irrational impact on oil markets that are otherwise well supplied, and with commercial stocks near all time highs.

The administration sits on some 700 million barrels of oil in the Strategic Petroleum Reserve. Would the administration announce today that the SPR would be available on barrel by barrel basis to cover any shortfall because of the BP cutoff, the price spike would abate immediately and some semblance of reason would return to the market. A proviso could be added that should the Alaska cutoff continue for more than a month the issue could then be revisisted.

After all, among various considerations to be taken into account:- the oil in the SPR belongs to us, the citizens who paid for it- It should be used meet our needs and interests when they can be cogently defined.

As currently constituted the SPR has virtually benefited only one sector of the economy- the oil patch. The oil in the reserve is oil that has beenpurchased from the oil companies at ever higher prices, oil that hasbeen taken off the market and thereby contributed to the heady escalation ofoil prices. What better usage for this reserve than to substitute for atemporary supply interruption ( remember the oil not being producedis not going away. It remains in the ground to be pumped at a later date)and to bring a modicum of rationality back to the marketplace.

This, in its way is a moment of truth for the administration. If the Administration continues to hide behind its usual public stance of “we can’t interfere with the market” read this as “we have close ties to the oil industry and those ties are more important to us than the general welfare of the nation”

Two closing questions. Given BP’s aggressive futures trading, having settledwith the New York Mercantile Exchange on accusations of manipulatingoil futures trading, and currently under investigation by the CommodityFutures Trading Commission accusing BP of scheming to manipulate the priceof propane, it would be interesting to know whether BP’s Trading desks went long on oil futures contracts before the announcement of the Alaskan pipeline shutdown? If so, then that raises the ever more meaningful question, if insider information which is not condoned when trading stocks, should it be condoned when trading futures contracts?