Guest Post: Oil Price Could Doom Obama

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Submitted by Llewellyn King of

Oil Price Could Doom Obama

Like death and taxes, the price of oil is always with us. And like
taxes, it may be President Barack Obama’s worst nightmare at election
time next year.

Among forecasters, there is a sharp division between those who see an
inexorable rise in the price of oil and those who believe it will
stabilize about where it is now.

The hawks see gasoline streaking ahead to $4-a-gallon this year and $5-a-gallon in 2012.

Others say demand will collapse and it won’t go that high. The Energy
Information Administration is very conservative in its forecasts and it
gives very high prices only a 10-percent chance of coming about.

Adding to the confusion is a nasty little spat between the
International Energy Agency in Paris and the Organization of Petroleum
Exporting Countries over price, inventory and what OPEC calls “technical
factors,” such as pipelines down for repair or the loss of the Deep
Water Horizon rig in the Gulf of Mexico last year. IEA is saying that
OPEC is keeping its production quotas low to jack up the price—currently
just over $90 a barrel and the highest grade Brent crude from the North
Sea as high as $99 a barrel—and it is endangering the global recovery
with its actions.

But OPEC Secretary General Abdalla Salem el-Badri has taken issue
with the IEA for roiling the markets with weak data and speculation.
“Supplying the world’s media with unrealistic assumptions and forecasts
will serve only to confuse matters and create unnecessary fear in the
markets,” he said.

OPEC, which drastically cut back its targets for production in 2008
with the collapse of the global economy, has, in fact, increased its
production by 2.3 million barrels a day while formally not changing its
declared targets. OPEC controls about 42 percent of the world’s oil

What is certain is that world is slurping up more oil than ever. The
latest IEA prediction is that daily consumption is increasing and will
reach 89.1 million barrels a day as the recovery proceeds. Emerging
markets and China in particular are held responsible for the surge.

With the exception of two of the savants of the oil industry, the
legendary T. Boone Pickens and former Shell Oil Company chief John
Hofmeister, comment in the United States has been muted. When asked why
the price of oil was so high despite the recession, White House Press
Secretary Robert Gibbs brushed aside the question, recommending the
reporter ask the secretary of Energy, a physicist who has not spoken on
oil pricing.

Jack Gerard, president of the American Petroleum Institute, did not
offer an explanation when he was asked the same question at a meeting in

The fact is that the price of oil is not determined only by simple
supply and demand but by complex premiums and market sensitivities. It
is a market that is roiled by wars and rumors of wars and, because oil
was the first truly globalized commodity, the premiums can have their
genesis far from the futures markets of New York and London.

Uncertainty in Russia, turmoil in Central Asia, the ongoing suspense
of Iran’s nuclear plans and even corrosion in the Trans Alaska Pipeline
System are cranked into the price. No wonder so many hedge funds are
involved in oil. Instability is mothers’ milk to hedge funds.

There are left-wing blogs that maintain that the price of oil and its
occasional spikes are created by elaborate speculative plays on the
futures markets in New York and London. The left is traditionally
paranoid about oil and oil companies, but who is to say they are not
right this time? The memory of Enron is still fresh.

One way or another, two things stand out: The chances are that the
summer driving season will put pressure on gasoline prices this year,
after an extremely cold winter all over the Northern Hemisphere. The
conservative (10-percent chance of happening) scenario by the Energy
Information Administration says $4-a-gallon gas would come at the end of
the summer.

The second reality is that the world thirst for oil has not been slaked; as the world prospers, the greater that thirst.

In 1974, the heads of 23 democracies lost their jobs because of surging energy prices. Obama, beware.