My friend and colleague Don Francis is fond of saying “to a hammer everything looks like a nail.” The interminable US presidential campaigns have turned that saying on its ear. Currently we have a number of hammers in search of a nail — McCain, Obama, Clinton and a host of lesser players. One of the biggest nails they have found, and one that they are hammering really hard, is the price of oil. Ah, and the arguments and remedies they have come up with.

For instance, Senator Clinton has vowed to go after OPEC. There is a kind of dogged determination in her statement. Maybe I missed something, but I haven’t noticed that OPEC has done anything that they need
to be “gone after” about. In fact, OPEC has been a
model of restraint in the whole “oil price affair.” But she’s a hammer and she and her fellow candidates
have made oil prices a big nail.

Not to be outdone, Senator McCain pledged not long ago to institute a holiday on gasoline taxes. Clinton waded in in agreement. They both whacked at that nail for a while until someone pointed out that a holiday on gasoline taxes would lower prices and increase consumption, exacerbating the oil and gasoline price problem. To his credit, Obama pointed out what a noodle-headed idea it was.

All candidates have promised to act against “big oil” at one time or another. The political season is open on this issue and the windfall profits tax is the weapon of preference to bring down the menacing miscreants.

All in all, the incessant din of the babbling politicians and their misdirected efforts to ameliorate high oil prices gets more and more tiring. They, somehow, just don’t get it.
Two factors are at work in high oil prices, neither of which is within the realm of remedy by politicians. The first is the speculation factor. Many believe, myself included, that the true price of oil in today’s supply and demand scenario is no more than US $80 per bbl. That means that $40 or more of the price of oil is speculation caused by fear of disruption and increased prices. I have acquaintances that have hedged at over $100 per bbl. It is hard to blame them, given tensions in many parts of the world, the growing rounds of nationalization of resources, the consequent use of oil and gas as political weapons and, perhaps most importantly, the rise and probable expansion of oil mercantilism. But it is hard to say that speculation isn’t a significant part of the high oil price.

Will it get worse? Most probably as more and more energy-poor, expanding economies — principally China and India — increase the practice of oil mercantilism. What is at work here? Basically, nations such as China and India are locking up oil supplies on long -term, bilateral contracts in which, for example, Angola will supply China with 200,000 b/d of oil for 10 years at $60 per bbl or the Sudan will supply China with 300,000 b/d of oil. This practice, or course, locks in supply but it also limits the supplies available to trade on exchanges such as NYMEX, which ensure that all consumers pay about the same price. Those left to trade oil on the exchanges, having less oil to trade, will most certainly pay more.

Energy analyst Jeff Vail rightly points out that energy mercantilism can also be used as a method of embargo (as Russia did with Eastern Europe gas supplies last year) making it an ideal political weapon. If Vail and others are right, at least 65% of the Middle East’s production will shortly be tied up in these sorts of long term contracts for delivery to nations not particularly friendly to Western countries.

All told, it is a frightening scenario. Throw in a serious supply disruption in any of the number of troubled regions worldwide and the price of oil may be off the charts.

And, that is something an American presidential candidate, or an American president, can do nothing about. Neither, in fact, can the much maligned international oil companies.