The Oily Bird Gets The Worm

July was not kind to the energy bulls. The spot price of crude fell from a high of $145 in mid-month to close at $124 by month end, a decline of over 14%.


Today the markets took another dip, as the Street, with its customary concern for the commonweal, noted sourly that Tropical Storm Edouard was not likely to wreak havoc in the refinery-laden Houston area. Crude plunged under the benchmark $120 for a while, and looks poised to close around $121.

There are many factors that explain the decline. Normal profit-taking is always a factor. Scrutiny by the feds regarding speculative manipulation may be dampening enthusiasm in the trading community. Consumers are reacting to high prices and curbing consumption, which has had an effect on the closely watched inventory figures. The concern over the value of the dollar does not seem to be as acute as a couple of months ago. The hype about the inevitable rush to $200 crude is beginning to look like a summer mirage.

We are not out of the woods yet, as oil is a volatile commodity that is uniquely exposed to political events. But the myth of the inelasticity of demand has been exposed. Demand for oil is elastic. Push the price high enough, and there is pushback. Both businesses and consumers curtail consumption. Obviously, this is painful. If prolonged enough, it could shove the economy into outright recession, and at the very least curtail economic growth. The Wall Street mavens who moved massive quantities of cash into energy futures as a substitute for the easy bucks they had been making in mortgages and CDO’s have discovered a nasty truth. In the long run, the price of oil is as subject to economic reality as the price of everything else.

The moguls may not be the only ones getting the worm. The Democrats may be partaking of the feast as well. Recent energy price shocks have broken the Green Fever. The voters have discovered a most inconvenient truth: there is a connection between government policy and what we pay. And thus a connection liberal antagonism towards energy production of all kinds and the dilemma of white elephant SUV’s, shaky job prospects, high food prices and a host of other unintended, harmful consequences. To top it off, a look at smoggy Beijing during the Olympics and how China practices the Kyoto mantra may finally render Obama, the Goreacle and policymakers of their ilk poison in an election year. Proving that there is justice in this world!