Oil: Don't Bet Against Congress and the Crown Prince...

The interminable Congressional hearings into the oil market are over, and the conclusion is clear cut. In a letter to President Bush today, Nancy Pelosi, the Congressional Speaker, called for emergency action by the CFTC to curb speculative excess. 'While several factors play a role in this unprecedented rise in price, including global supply and demand as well as the weak U.S. dollar, experts have testified this week before Congress that excessive speculation in the oil futures market may be responsible for inflating prices $20 to $60 per barrel.' I've discussed the self serving Peak Oil mania in a previous post, and think a $40 premium is about right, and that's leaving in a chunk of geopolitical risk premium. Now the President is a man of, how shall I put it, limited bandwidth, but the signal he is getting on oil is clear and it's coming not just from Capitol Hill but from Riyadh, which counts for a lot more in the Bush family. The oil 'summit' in Jeddah last weekend was a humiliating failure for Crown Prince Abdullah and the Saudi Royal family, their increased production and accelerated investment plans met by jeers in the futures markets and sniping by other OPEC members.

The Saudis and indeed OPEC at large, have consistently claimed that financial speculation has outweighed tight fundamentals in driving oil over $100, and their demands that Western consuming nations take action are growing increasingly strident. At a time when GM and Ford are flirting with Chapter 11, airlines are mothballing fleets and shredding their schedules, US gasoline demand is in historic decline, and India and China are finally reducing subsidies on fuel, it is testament to the sheer weight of investment funds flooding the energy markets that we are still at record highs. A suspension of new indexed investment in energy futures would quickly resolve the debate as to how important financial investors are in supporting current price levels and must surely now be imminent. In terms of economic impact, we are past a destructive tipping point for the US and indeed global economies, and the downside risk to financial markets from surging energy driven inflation is ominous. The path of oil in coming months will determine that of most other asset classes from US real estate to emerging market equities. Looming Congressional elections, combined with the dangerous loss of face the Saudis now face in the Middle East, may conspire to finally force a reluctant Bush administration to take pre-emptive regulatory action within weeks. Let's hope so, because this is the most dangerous asset bubble of the many that have inflated over the past decade and to simply wait until it implodes under the weight of its own excess would risk a destabilising crisis of confidence in global markets. Time is running out.

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