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2. Speculations Versus Fundamentals

Every increase gasoline price increase renews the debate of just what the "proper" price should be and just how much of the price of oil is caused by speculators. Nearly everyone in Congress would love to find that indeed someone is manipulating oil prices or that some large share of recent price increases can be attributed to speculators. There is little the Congress can do to increase oil supplies in the short run and they are loath to institute what would be highly unpopular measures to restrict consumption. Hence the continuing interest in exposing and restricting speculation as the only avenue to show their constituents they are doing something.

Last week the US Senate held yet another hearing on the role of speculation in raising energy prices. Carefully chosen witnesses for the most part told the hearing that indeed high prices arose from speculation. Only George Soros and a few others got off the reservation and opined that supply and demand had more to do with the problem. Much of the hearing was devoted to how the US’s Futures Trading Commission could regulate trading in London and Dubai.

Despite frequent and fervent assurances from the US Treasury and Energy Secretaries and the head of the futures trading commission (CFTC) that high prices are primarily caused by tight supply, Congress shows no indication that it will let go of the issue. The CFTC continues to investigate and Congress continues to threaten legislative restrictions on futures trading.

3. Growing Shortages

Despite endless repetition of the mantra "the markets are well supplied" from OPEC and occasionally senior international oil company officials, reports of actual shortages of petroleum products continue to increase across the globe. Reasons for these shortages vary from country to country, but most seem to stem from the cost of petroleum on the world market or efforts by governments to keep retail prices affordable. In the last week we have reports of retail shortages from China, the Indian sub-continent, numerous countries in Africa, Latin and Central America, parts of East Asia, and even from the poorer countries in the Middle East.

In China, the world’s number three importer, retail shortages seem to have reappeared as the government keeps price caps in place at least until the Olympics. The government’s newest plan is to turn the small private oil companies that were shutting down because of the high cost of crude into "contract refiners" who simply refine oil for the state companies without any price risk. China, with $1.6 trillion in reserves, can afford oil at any cost. It is still not clear just how much their imports have increased in recent weeks.

In a few countries, the shortages may be temporary such as in Malaysia where a 40 percent price increase was accompanied by hoarding and a run on the pumps. In a few countries, national oil companies can no longer afford to sell products at government-mandated prices. In still others, the local importers simply do not have enough liquidity to pay for the products.

This situation is unlikely to improve. Except for countries producing enough oil to cover their own needs, and the very wealthy, all others are likely entering an era of permanent shortages.

4. Air Travel

Hardly a day goes by without reports of more problems for the airline industry. Last week the International Air Transport Association warned that its members will collectively lose $6.1 billion should oil continue to trade at over $135 a barrel for the rest of the year. During the last six months 24 airlines went bankrupt and more bankruptcies are expected soon.