Oil: The Return of Hype—and High PricesEd Wallace
When Jon Stewart took CNBC's Jim Cramer to task in March over numerous bad calls on the state of the economy and certain unfortunate stock picks, that wasn't the first time I had heard Cramer's type of apology and answer. No, that came in an NPR interview with Kai Ryssdal of Marketplace. The radio host was asked how the business media had gotten so many things wrong about what has happened to America's financial system and why the best on the beat had missed so many obvious warning signs. Ryssdal replied: "We've got to do a better job connecting the dots."
What does that mean, exactly? It was never a question of connecting dots; it was always a question of finding out which business stories were true and which were not.
In contrast, the response to that same question by BusinessWeek Economics Editor Peter Coy, also on NPR, was clearly much more factual. Coy stated that many media outlets, including BusinessWeek, did carry the accurate stories on these troubling financial issues and did so early—but by and large the mainstream business media didn't pick up the ball and run with it.
Instead, it appeared they bought into the hype.
What is troubling in today's uncertain business climate is how many in the media are still doing it. You need not look far for proof: The price of oil and gas and the potential for future pricing are as badly hyped today as they were over the past four years.
Still No Gas Shortage
Doubt that? Let's start off with a few facts. Since January of this year, we have gone from 325,419,000 barrels of oil in our inventories to 366,743,000 barrels. We've now set a record for the most oil in inventories since late 1990. The same holds true for Europe, and recently it was announced that China has finished filling its reserve inventory system—although China did import slightly more oil this March than last.
Most have already forgotten the extreme contango ("contango" is an oil industry term used to describe when spot oil prices are less than the contracted price on the date of delivery) in the oil market that started off 2009. That situation forced oil traders to lease large numbers of supertankers to store oil offshore, hoping that the spot price for crude would rise so they could recoup losses on their contracted prices. Last week our refineries ran at barely over 80% of capacity, yet today we have 1 million more barrels of gasoline on hand than we did at this time last year (216,505,000 vs. 215,751,000). There are now discussions about shutting down refineries for good because gasoline demand has been falling for the last 18 months.
So as my columns last year stated, once again there is no gasoline shortage. Yet the Energy Information Administration claims that gasoline prices will go up to $2.23 this summer. Why? There's nothing to justify that position based on supply and demand. As analyst Steven Schork said, "You can't swing a cat without hitting a barrel of oil in the U.S."
The media still maintain that OPEC's production cuts are legitimately raising the price of oil. Yet OPEC has again slashed its projections for oil demand for 2009, now totaling a drop of 1.4 million barrels per day, called a "devastating contraction." Meanwhile, the International Energy Agency slashed estimates for oil demand down to 83.4 million barrels per day.
Stretch your memory a bit more: When Asia had its financial crisis in 1997, it dropped the price of oil to around $10 a barrel at the bottom. But today the financial crisis is bigger and worldwide, and yet oil has gone from $33 a barrel in mid-February to at one point more than $53.
Another fun fact: So much less is being shipped in this slowdown that, according to an article in Newsweek, if you hooked up every idled railcar in America, the resulting train would stretch from New York past Salt Lake City. Then we find that new rail loadings were down by a further 20% in the first week of April. Airline travel continues to plummet; and even with our refineries running at 80.3% we're still stockpiling gasoline that nobody's buying at retail. All three are major factors in the oil/fuel use/cost equation, and not one of these figures suggests a turnaround is near. Yet we've watched the price of gasoline rise from 84¢ a gallon on the futures market to $1.41 as of this writing.
Sounds All Too Familiar
Of course, there have been numerous stories reporting that gasoline demand is picking up, hence the price increases. But, though a slight uptick in gasoline demand from early January to March is normal, the overall year-on-year demand figures don't support the 75% increase in wholesale gasoline prices.
Last year when I reported on the hype behind the oil and gas prices, there was tremendous debate on whether it was speculators or supply and demand causing the catastrophic rise in prices. On Sept. 10, 2008, months after my columns ran, the International Energy Agency published its figures for North American gasoline use; they showed that gasoline demand destruction caused by pricing started in September 2007 and fell off a cliff starting in May 2008. That's right, gasoline demand was falling in North America for nearly a year, and while that was happening gasoline prices jumped to the highest level on record. But many in the business media couldn't quote enough analysts who claimed the exact opposite was happening.
More troubling is the new movement afoot to rewrite last year's history of oil. Yes, vested groups are trying to suggest that there really was a serious oil shortage in 2008.
What Fact Isn't Clear?
So far this year, foreclosures in America are up 24%; forecast dockings at the Port of Los Angeles as compared with last April will be down 25.1%; as stated, rail loading fell by 20% in the first week of April; 5.1 million Americans have lost their jobs in this downturn, and more than 6 million are receiving unemployment, while many more have had their wages cut; the second-largest mall operator in America has gone bankrupt, and numerous stories nationwide report a massive wave of closed retail stores in strip malls. Jet-fuel demand fell 14.35% in the first 60 days of this year; housing starts continue to disappoint; car sales are down 38%; and the only good news is that we might be close to the bottom. Or at least we hope that is the case.
Which one of those scenarios suggests to you that an oil boom is just around the corner and justifies the actions of the market? Exactly: none.
Don't misunderstand me. I'm not suggesting that oil at $50 is unfair, or for that matter even $2-a-gallon gasoline. Oil-producing countries need money for their economies just as desperately as we do for our oil-consuming one. Likewise, taking more than a one-year view of things, oil companies have to make supersize profits to reinvest so that we have a constant supply of oil in the future. To me, the best news this year from the oil patch was ExxonMobil's (XOM) commitment to continued future exploration by not cutting those expensive budgets. As CEO Rex Tillerson said, "We're still hiring."
A Well-Oiled Machine
So why is it that so many in the national business media are still covering a fairly simple industry, oil, by repeating the same tired old rhetoric—OPEC's oil cuts, weak dollar, gasoline demand is up, rising prices are justified because of the belief that a turnaround in the economy is coming soon, and so on? Not one of the easy-to-find facts justifies any of that.
However, a few journalists got the oil-price issue right by claiming it's rising in sympathy with the equities market. That's true, but it also makes a mockery of the concept that "the market" is there to determine the fair price of commodities based on supply and demand. Translated into English: The market is there to pour unwarranted money into commodities because then prices rise and big profits are made—even if the "market" price does not represent real-world usage.
Last week I read a BusinessWeek article from April 2000, "Wall Street's Hype Machine." It was published long after the bank and S&L failures of the late 1980s and after the Internet bust, but before Enron, WorldCom, Global Crossing, and other financial disasters (including our current troubles), and certainly prior to the oil hype in 2006-08. It should also be noted that one of the first articles BusinessWeek published discussed the same issues on Wall Street—just before the Great Crash of '29.
Nine years after publication of the "Hype Machine" article and 80 years after BusinessWeek's first warning, it is disappointingly obvious that, despite the warnings of some, nothing has changed. And to quote that 2000 article, "The bull market has caused a revolution in the role of the analyst, who is fast becoming less of a researcher than a celebrity pitchman."
Guess what? They're not just back; they never went away.