Price Spike Follows Self-Serving Prediction of $150 a Barrel, Israeli Threat Against Iran; U.S. Government Must Speed Market Regulation

Santa Monica, CA — The price of crude oil jumped $11 a barrel on Friday to $138, mostly on the ginning up of news that has nothing to do with current supply and demand, said Consumer Watchdog. The spike followed a prediction by investment bank Morgan Stanley that oil would reach $150 a barrel by July 4, and an Israeli cabinet minister’s warning that Israel would attack Iran if Tehran did not stop developing nuclear weapons.
 
“In the actual physical market for oil, nothing changed between yesterday and today,” said Judy Dugan, research director of Consumer Watchdog. “Morgan Stanley knew full well that making the prediction would spike prices, especially by calling for $150 oil in less than a month. As for the Israeli statement, traders instantly grabbed it as a reason to spike prices, even though it appeared to be a calculated warning, not a signal that bombers are about to take off. Obviously, diplomatic nuance means nothing to speculators.”
 
Early in the day, a smaller price rise in crude oil was blamed on a weaker dollar and oil demand in Asia. But, said the nonprofit, nonpartisan Consumer Watchdog, ever-bleaker economic news in the U.S., including rising unemployment, should have pressed the price downward.
 
“The bottom line of this oil price feeding frenzy is that drivers in the U.S. are likely to suffer $4.50 gasoline, while in California and some other states may hit $5.00 a gallon for regular this summer,” said Dugan. “Inflation will keep spiking the price of groceries as well as gas. Congress and the White House have to stop talking and put some emergency regulations on trading markets, including electronic markets that are completely unregulated.”
 
Consumer Watchdog’s recommendations include: 

• White House action to sell some of the Strategic Petroleum Reserve, which contains the highest-demand oil known as light, sweet crude.

• Closing the Enron Loophole in commodity trading regulation. A regulatory measure in the federal farm bill (S.2058 by Sens. Dianne Feinstein and Carl Levin) would help stop speculative oil pricing. The huge omnibus bill was returned to Congress to fix an error in the version that president Bush vetoed last month. Now the repaired bill has to be passed by the House and Senate again, Bush has vowed to veto it again, and then the House and Senate must override the veto, wasting yet more time. (See more on Enron Loophole and farm bill amendment here.)

• Increase in margin funds that traders must put up in energy markets to help suppress speculation. Currently, traders only have to put up 5% to 7% of the worth of the purchase, instead of the 50% required on stock trading. This makes it cheap to speculate.

• Senate approval of an alternative fuels bill funded by withdrawing $1.8 billion a year in unjustified taxpayer subsidies to oil companies. This measure, passed by the House, was not taken up in the Senate, where opponents used a filibuster tactic to require 60 votes for passage. A similar House measure was removed from the federal energy bill by the Senate last year under pressure from the oil lobby. (Find text of HR 5351 here.)

• Oversight of refinery operations, including regulation of national gasoline supplies. In the last decade, the average on-hand supply of gasoline has dropped from 30 days’ worth to about 22 days. This makes prices increasingly sensitive to any cuts in production. Only government regulation to control the supply of gasoline, nationally and regionally, will keep supplies adequate to control prices.

– 30 –