Time to Get Contrary on Oil? - Bush Tries to Talk Down the Market

By Dr. Duru written for One-Twenty

April 26, 2006

All the fundamentals are aligned to push oil prices ever higher (sorry pundits who say the exact opposite!). Hedge funds and institutional investors continue pouring millions and even billions into the oil market. Demand for oil continues to increase around the globe. No large new supplies of oil have been found and still no new oil refineries are being planned in the U.S., much less built. The media reminds us everyday how much higher gas prices are. The media, like CNBC, sometimes even reports on hourly changes at the pump. Forecasters are warning us of $4 per gallon gas sometime this summer. As politicians start planning election strategies, high gas prices have become an easy target for soapbox material that allows politicians to "demonstrate" that they are care for and are working for the common working American. There can be no doubt that oil prices are going to keep soaring, right? Well.....while I have been a bull on oil for some time now, I am beginning to get wary as I see the larger consensus finally get acclimated to the reality of a high-price world. Oil prices had been stubbornly increasing while the majority continued to re-assure us that oil would soon fall back to more "normal" levels - like $40 a barrel, and then $50 a barrel. Now that even these folks are joining the alarm bells over oil, I have to wonder whether the oil party is near an end for now. Oil has been going practically straight up for over 5 weeks, so it is easy to understand how folks can quickly start pulling out the good ol' extrapolators now and project imminent prices of $80 and $100 a barrel for oil. Even if oil continues its upward trend, as I think it will as long as the fundamentals stay in place, now sure would be a good time for a steep correction. This would be the kind of correction we typically see in commodities, and the one that looked ready to start when commodities took a sharp beating at the end of last week...only to bounce back again sharply.

Yesterday, Bush did his best not to sound like the oil man that he is and try to speak up against high gas prices and talk down the market. I highly doubt his oil buddies are truly concerned about the President's laundry list of initiatives, but I do have to give him credit for presenting a well-thought out and clearly structured strategy. His talking points were also very clear and explain to the American people what problems exist. The media seemed very focused on three points - a pending investigation into price-gouging, a change in gas blend requirements, and a halt to additions to the Strategic Oil Reserve - so I had to be my usual self and look deeper and get the full story for myself. I highly recommend you read the President's full speech. Anyway, I scoff at the price-gouging investigation. When Bush says "This administration is not going to tolerate manipulation. We expect our consumers to be treated fairly...We owe it to the American people to be aggressive on price gouging now," all he is doing is stating the obvious. Heck yeah - we expect our government to have this attitude. But what has been missing so far is any evidence or even implication of such illegal activity except that prices are higher than we like. The President does not explain how tight supply and demand are although he does explain that a lot of our oil now comes from nations that "...have unstable governments, or agendas that are hostile to the United States. These countries know we need their oil, and that reduces our influence, our ability to keep the peace in some areas. And so energy supply is a matter of national security. It's also a matter of economic security." Sadly enough, his only solution here is to link in our determination to continue fighting the war on terror, and, in particular, to keep pounding away at trying to "fix" Iraq. The President even made his detour clear: "Before I talk about energy, I do want to share with you some thoughts about the war on terror."

Now, you faithful readers know that I was never fooled into believing the invasion of Iraq would address terrorism or was even about fighting terrorism. But Bush's slight of hand to (indirectly?) link in the war on terror on securing oil supplies (you have to read the speech VERY carefully to catch the link!) is pure messaging mastery. Securing oil supplies was part of our real agenda in Iraq in the first place...even we still have done absolutely nothing to control the price of oil for the past three years. But now gas prices are hurting so much, Americans are probably more likely to accept the madness if they can be convinced it will help get prices lower. We will see whether this messaging works. The President's poll ratings keep tumbling to new lows, so it may be too late anyway (and sorry America...you get NO sympathy from me! You got what you paid for with Bush!). Finally the biggest thing missing from Bush's speech is any plan for how we will deal with those oil-rich countries who are either using oil to "threaten" us and/or who are struggling with instabilities. For example, it is no wonder that Iran has chosen this time to rattle the nuclear sword. We have them surrounded with military operations in Iraq and in Afghanistan. It makes Iran look like a natural "next target" for the U.S. And even though France, Russia, and China all have large economic interests in Iran, they cannot rely on this fact to save them. After all, depp economic ties did not help Iraq in the end!

Regardless, Bush's sabre-rattling against high oil prices will likely do very little to truly help the situation in the near-term. But we can only hope that his apparent understanding of the situation, and his laundry list of initiatives, plans, and ideas will eventually get into the hands of people who can and will do something real and constructive. And most of all, let us all hope and pray that we do not need to start more wars in more attempts to secure lower prices at the pump.

Be careful out there!

DrDuru, 2006