Consumers pay as oil shoppers battle

October 04, 1990|By Jon Morgan | Jon Morgan,Evening Sun Staff

NEW YORK -- As Albert H. Helmig Jr. exchanges his green traders' blazer and Nikes for a blue suit coat and a pair of black wing-tips, he undergoes a metamorphosis.

The president of Energex, a petroleum brokerage firm, serenely smokes a cigarette as he contemplates what he and dozens of other traders in the "oil pit" of the New York Mercantile Exchange have just done. Using frantic hand signals and wildly scribbled notes, the traders pushed the price of crude oil to a new high.

A week later, the same traders would send the price of oil tumbling, then back up, with little or no change in supply or demand to explain the fall. For Americans clutching their wallets as they watch the zig-zagging prices, it appears that the world's largest cash commodity is bought and sold in a noisy casino.

But Helmig and other experts say the means by which oil and gas prices are determined has a logic of its own. On its way from the oil fields of Texas and Saudi Arabia to the gas tanks of U.S. drivers, oil follows a confusing economic pathway. Some experts criticize the role of speculators, but defenders of the system say it is rational, and that the recent increase in prices demonstrate how a free market allocates resources and prevents shortages.

"Once you step into the pit you throw out your aggregate economic theory . . . You have to be trendless. You have to let the market tell you where to go," Helmig said of his role as a trader.

Long influenced by the Organization of Petroleum Exporting Countries, the oil business has been gripped by fears of war since Aug. 2 when Iraq invaded oil-producer Kuwait. Crude oil prices have become a barometer of global tensions, rising when ominous sounds are heard from the Persian Gulf, or from Washington, and falling when conciliatory words are exchanged at the United Nations.

Over the past few months, demand by consumers for petroleum products has remained fairly stable and supply has been more than adequate. Private and public reserves of oil, built up during earlier gluts, have barely been dented. Yet the price of crude, or unrefined, oil has soared from $15 a barrel in July to more than $40 last week. It closed just over $37 yesterday.

"It is totally rational," said Steve Hanke, professor of applied economics at Johns Hopkins University and chief economist for Friedberg Commodity Management Inc. of Toronto.

"Everyone wants a little more inventory now than they had before, but in the short-run they cannot get more output," Hanke said.

Generally, the world uses about all the oil it produces. A major disruption, such as a bombing of oil wells, would restrict supplies until repairs can be made, new wells dug or production from other sources increased.

But big oil users -- such as the refiners that make gasoline and other products from crude oil -- cannot afford to be without stock. So they build up their inventories in times of uncertainty, fighting over a limited amount of oil and driving up prices.

"The market is making a prediction that Bush is going to pull the trigger," Hanke said.

Art Benson, a senior vice president at Louis Dreyfus Energy Corp.'s marketing headquarters in Bel Air, compares the forces driving the oil market to the motives of a typical shopper zTC preparing for a winter storm. "Forget Econ 101," he said. "If you have 10 loaves of bread in the freezer and it starts to snow, what does she do? She buys another loaf."

"You've got a bunch of people out there that are buying what they don't need," Benson said.

At the pump, gasoline prices soared within days of the invasion, even though the gasoline had been refined from oil pumped from the ground months before. Oil companies say they have to pay prevailing prices to buy more crude, and they note the increase in pump prices has not been as steep as the rise in oil costs.

But observers point out that the reverse takes much longer because companies, seeking to maximize profits, are more reluctant to lower prices than to raise them. When oil drops, it can take weeks or months for competition to pound down the prices that consumers pay.

In the event of war, Hanke predicts the price of oil will skyrocket. Some experts have said it could go as high as $60, or even $100. But, when the shooting stops, the price should fall fairly quickly, to the mid-teens, Hanke said.

Even if some oil production is disrupted, other sources eventually will be developed and supply will again rise.

For example, the embargo of oil from Iraq and Kuwait has effectively removed from the market about 4.7 million barrels of oil a day, or about 8 percent of world consumption. But other OPEC members increased their output, and OPEC production is now at nearly the same level as before the Aug. 2 invasion.

Although he blames Bush for not using the national petroleum reserves properly to push down prices, Hanke said that "the pricing system has worked perfectly in this situation."

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