Oil: The Return of Hype—and High Prices

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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.

Ed Wallace received the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at UCLA, and is a member of the American Historical Society. He reviews new cars every Friday morning at 7:15 on Fox Four's Good Day, contributes to BusinessWeek.com with some regularity, and hosts the top-rated talk show, Wheels, 8 a.m. to 1 p.m. Saturdays on 570 KLIF. Visit his highly respected Web site, InsideAutomotive.com, to read all his work. E-mail: wheels570@sbcglobal.net.

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