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CBS Slips on Oil Speculators


60 Minutes report misses the point entirely.

CBS News (CBS) -- the folks who brought you the fake documents purporting to show President Bush's effort to dodge Vietnam -- recently took a swing at those evil oil speculators.

The results were about as enlightening as the report that ended Dan Rather's career. As it turns out (at least according to 60 Minutes), rising prices are a conspiracy, and little-old-poor-dumb us are the victims.

The price of a barrel of oil peaked last July at $147.27, and recently fetched $37.54 - a 75.5% decline. Some conspiracy.

Apparently, the ace reporters and producers at CBS failed to notice that the price of oil soared when demand was strong, and collapsed when demand fell.

Tomorrow's news today: The price of oil will climb when the economy rebounds!

In the report, CBS correspondent Steve Kroft got right to the point when trying to unmask the mendacious speculators: "They're trying to make money on the market for oil?" he asked. Golly, who knew folks participate in markets to make money?

Oil is a commodity traded worldwide. How can you rig a worldwide market - especially when some entrepreneurial soul can make a killing by taking an afternoon (or an hour) off from the skullduggery by failing to participate? CBS would have us believe in a conspiracy that's more widespread (and sillier) than the Protocols of the Elders of Zion (a stridently anti-Semitic tract probably concocted at the behest of the Czar's secret police).

The analogy isn't specious: CBS's view of markets is silly, but it's also dangerous.

If we're all victims, the typical response is that only government can save us - never mind the illegal roundup of Japanese-Americans ordered by President Roosevelt during World War II, or the government-mandated economic atrocity of your choice.

But if the crude-oil market is controlled by speculators, there's an easy way to squash them: Increase supply. The expectation of increased supply would undercut future prices and cause contracts to decline, squeezing the speculators.

But don't expect Congress to punish the so-called speculators by opening Alaska's Arctic National Wildlife Refuge or sections of the continental shelf to oil exploration. Instead, we get endless blather about major oil companies not developing current leases. Failure to do so suggests the cost of developing the sites outweighs the benefits of doing so. If Congress seeks to lower the price of oil, does it make sense to require oil companies to drill where it's expensive to do so?

The conspiracy theorists also overlook the fact that producing oil is a tough, nasty business, and major reserves are in unstable parts of the world - the Middle East, Venezuela and Nigeria, for example. OPEC can reduce supply in an effort to boost the price of oil.

If the cost of producing oil rises, if the risk of drilling increases, and if sites that could be easily developed are put off-limits for political reasons, anyone (except CBS) can foresee the result: The price goes up.

A good deal of the solution is political, not technical. The Arctic National Wildlife Refuge is a plain, and as such no more interesting than Kansas or Nebraska. Coastal states such as California and Florida have blocked off-shore drilling on what seem to be aesthetic grounds. Apparently, the politicians have overlooked new technology that greatly reduces the risk of the kind of blowout that fouled beaches in Santa Barbara, California in 1969.

But don't hold your breath waiting for CBS or Congress to master Economics 101 - just unbuckle your wallet each time you fill your tank in the future when the economy is robust.

One more thing: There's a reason prices at the pump immediately increase on word of higher crude oil prices - replacement cost.

Gas-station owners, most small businessmen, must pay for the next shipment of fuel out of current revenue. That means they've got to boost prices immediately to cover the higher cost of the next delivery.

That's simple - unless you're a reporter, or a member of Congress.
No positions in stocks mentioned.
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