Op-Ed: Recession? Oil at $94, China raises domestic fuel 10 per cent

Those nice guys in the futures market are at it again. The oil prices are being driven by hedge funds, who are making money for jam by just buying oil futures and watching them rise. This isn't the old oil crisis supply and demand thing.

One possible explanation for the enthusiasm for oil price rises would be cartel buying of futures. People don’t want to pay top dollar for oil. They pay that when they have to pay those prices. There is a sort of pretense of competitive practices, but my bet would be that there’s an anti trust suit in there somewhere, based on a shared monopoly on futures prices among investors. The futures market is based on buying a commodity at a given date, hoping that the price of that commodity will be higher on the date than the price you’ve contracted to buy. So the preference is for price rises. A few years ago oil was $28 per barrel. This price is roughly a 340% increase over that period. It affects the cost of moving anything anywhere. By rights, the solution is for the oil users to buy their own futures and lock in lower prices, but of course the way to make money on the futures market is to do the exact opposite, and hope the prices keep rising. Most of the futures aren’t owned by consumers, but by investors. No surprise what the result inevitably has to be. The markets play along for that sort of money, any gust of wind in the Gulf of Mexico is enough to drive oil prices. If Magellan had had the benefit of the amount of hot air that supports every oil price move, he’d have gone around the world in about 12 hours. From the New York Times we get this breathless account: “The market is clearly reacting to the larger than expected 3.9 million barrel drop in crude oil inventories, including a stunning 3.1 million barrel drop at the Cushing, Okla., delivery point for the Nymex (crude) futures,'' wrote Tim Evans, an analyst at Citigroup Inc. in New York, in a research note.” Gargle, gargle. Nothing like a bit of mouthwash as a basis for a price increase on a commodity. A 3.9 million barrel drop in inventories means what? A desperate need for 3.9 million barrels, or someone not buying 300 million bucks’ worth of something they don’t immediately need? “Waal gosh, Hirem, we’s 3.9 million barrels short,” said ol’ Zeke, riding his Labrador majestically. Whereupon Hiren pedaled frantically on his tricycle to fetch the 3.9 million barrels, his elegant hemorrhoids flailing in the breezes of high finance. The downside to this happy little excursion into pure artificiality in pricing is that as the food supplies dwindle, and freight prices increase, every cent of cost is passed on to the consumer. Not necessarily directly, but the result is nothing but inflation. That’s ironic given the endless refrain of “possible recession.” Just about everything is pointing to a recession, from mindless pricing to China’s sudden increase in fuel prices by ten per cent as described by Xinhua, which will affect the entire planetary economy. This will be a recession in everything but name: higher prices, lower net incomes, infrastructure and freight costs sky high. The US bottom line for products from China will be hit by increases in every possible price, and someone will have to absorb those hits. This also comes at a time when the US dollar isn’t feeling very well. It’s just that nobody will call it a recession. Their credibility depends on it. A decade of monetarist manipulation couldn’t possibly lead to a recession, now could it? They’ve somehow managed to do everything wrong, and this will be the payoff. Pick a parasite. Fire a spitball in any direction, and you’ll hit about ten of them.