In his first major TV role, the actor Peter ("Columbo") Falk played a truck driver who was hauling a load of tomatoes to market.  Like a good Samaritan he picked up a hitch-hiking lady (Inger Stevens) who just happened to be "with child" (as we "Suthreners" euphemistically say when we mean "pregnant").  I forget the details but one thing led to another and Falk's tomatoes began to become less marketable as the lady's delivery time drew near.  An economist might observe that, as the price of those particular tomatoes decreased, the overall price of "good" tomatoes increased, their supply having been "marginally" diminished . . . my point being that the supply of things, and thus their prices, depend on many indirect factors.  Sometimes prices increase for very human reasons.

So, why is the price of gasoline increasing so rapidly in recent months?  Well, for one thing (the purist might say) demand has increased, and that would certainly be the case given the modernization of the economies of China and India.  Those "backward" nations now have automobiles, millions of them.  But surely, the demand brought about by increased demand has not suddenly spiked; the far-eastern economies have been gradually "progressing" over the past few decades and the price of oil has, for the most part, followed along in an orderly fashion.  There must be something else going on that has caused the recent spike.

Four other price drivers, peculiar to oil, come to mind.

Trouble in the middle-east.  As war and rumors of wars circulate around the places where oil is mined, the perception that the supply of oil might be diminished becomes all too real.  And, as is reasonably clear to all but a few myopic souls, we are experiencing what might be termed a mite of trouble in the middle-east.

Monetary exchange rates.  Oil is traded on the world market and for the most part, regardless of where it is sold, is paid for in U.S. dollars.  This became the custom because the dollar had a "golden" reputation as a solid currency whose value remained relatively strong versus other currencies.  But beginning around 2001 the U.S. government instituted a weak dollar policy, designed to increase the purchasing power of foreign currencies for American made products.  But the U.S. does not export oil; we import it.  Consequently, as the dollar weakened the price of oil on the American market had to increase.  This is not a function of supply and demand of oil, but rather a function of the supply of and demand for dollars.  As the dollar lost value it took more of them to buy any product, especially thoseproducts that were imported to America.

Speculation.  Like many commodities, oil is traded on the futures market.  Ideally, this market permits major consumers to hedge their risks.  By acquiring a contract for future delivery at a fixed price (determined by the competitive sale of "futures") the consumers can adapt their own methods and prices around the contracted price.  The contracts are traded minute-by-minute, with their prices changing on the basis of perceived market forces that directly affect the commodity being traded.  At least, that's how the futures market was designed, but those who trade futures contracts for a living -- i.e., they're not direct consumers of commodities -- react to more than mere supply and demand.  They take into consideration all the forces that might conceivably affect the price.  Normally, the speculators in commodities (other than money) would not be tooconcerned with the price of money (the monetary exchange rate), but when the hallmark currency of a particular commodity begins dramatically to weaken, the market becomes (in the case of oil) "dollar sensitive."  That is, as the dollar fluctuates, so does the price of oil futures.

Market turmoil.  The recent debacle in the mortgage industry (banking) has produced a genuine concern for the future value of the dollar. This precipitent weakenng threatens the solvency of the entire banking industry, not only in America but in "progressive" foreign banks as well, those that regularly trade in mortgage-backed bonds.  Without going into too much detail on such bonds, just see that their value is not based on the good faith of the banks issuing the bonds, but upon the soundness of the mortgages underlying the bonds.  If the mortgages fail, the bonds fail, and when the bonds fail, those holding them face huge losses.  But when banks lose money the entire economy is threatened, by which is meant, the future of the currency that flows like blood through the veins and arteries of the nation.  The dollar may "die" as a viable currency, and ifthe dollar collapses, rampant inflation takes over, and the prices of all goods, not just imports, increase by unmanageable amounts.  And the speculators -- who are honor bound not to a nation but to their bottom line -- are the first to become aware of this possibility.  Hence, the recent rise in the price of oil futures contracts.

So far, the Federal Reserve has managed to talk the dollar through its recent illness.  But talk is only effective when those listening remain convinced of the integrity of the person speaking.  When real-world events contradict the words coming out of the mouths of "trusted" officials, talk no longer works and the worst happens.  So, what might the future hold for such words as are coming from the mouths of the central bankers, and what real-world events might happen to destroy their believability?

Take a look at the so-called "Enron loophole."  I honestly do not know the details of how this loophole is being exploited by speculators to give them an advantage they would not enjoy in a well-regulated market.  I know that the simple words of the loophole remove all forms of governmental regulation from commodities traded on electronic platforms, e.g., via the Internet.  Somehow this freedom from normal regulation permits the speculators to manipulate the market in ways that would not otherwise be possible.  I can guess that by taking positions on both sides of the market, long and short, and by pouring news into the media and money into the market, the prices of commodities (oil) can be made to work in ways that even monetary exchange rates, supply and demand, and other actual forces could not bring about.  The speculative price of oil becomes a force all on its ownwithout regard to real-world facts.

But now arises a deadly problem.  As we speak, the Congress is working to close the Enron loophole.  When and if if they do, trillions of dollars of futures contracts will suddenly suffer unbearable depression.  The same bankers who bought and sold those mortgage-backed bonds are now holding futures contracts that will lose huge amounts of their "value" (in quotes, because their value was already largely artificial).  Morgan Stanley, for example, is said to hold fifty some-odd percent of all the futures contracts in oil.  If those contracts lose their value, Morgan Stanley will go belly up.  Other bankers are holding similar amounts of contracts in other speculatively inflated futures contracts, so if and when Congress acts to correct the unjust Enron loophole, it may, by its action, destroy the American banking system . . . and thus the nation'seconomy.  Life's a bitch.

Peter Falk dealt himself a bad hand by doing a good deed.  (Actually, he may have gotten to the market on time; I forget.)  The mortgage-backed bonds were put into play by well-meaning (i.e., profit-making) institutions who did so within the rules of the system  The Enron loophole -- written by lobbyists and imbedded into an agriculture bill by Senator Phil Gramm -- became the law of the land just in time to work in tandem with trouble in the middle-east, the weakened dollar, and speculative zeal to bring this nation to the brink of an economic abyss.

We now find ourselves in a damned if we do and damned if we don't paradoxical bind, the way out of which might very well be for the American people to, once again, pay the price for the ignorant mistakes of those who ought to have known better.  It looks like we're just going to have to ride with high oil prices for a while until something of a mystical nature -- say, a leader who can inspire belief -- comes onto the scene.  So be it.

I'll probably be able to bear this better than many of you since, at milady's urging, I just last February bought a new Prius.  Damn but that lady's smart!

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