A Sloppy 60 Minutes Segment on Oil Prices

by: Tim Iacono

I happened to catch this 60 Minutes segment last night on the subject of the role speculation played in oil prices over the last year and kept waiting for them to tell something other than the Michael Masters version of the story.

They never did.

In what was just an awful omission of critical elements of a major story (including the fact that their key "expert" has a major conflict of interest), this is just one more example of how the mainstream media has utterly failed to provide anything of real value in their reporting and why, increasingly, those seeking information are turning to alternate news sources.

At The Big Picture, a dismantling of the report has already been completed by the ever-alert Barry Ritholtz, in whose estimation, about 90 percent of the story remained untold.

Here's what was left out:

  1. Oil is priced in US Dollars. Since 2001, the Dollar fell 40% (from 120 to 72); Oil rose nearly 5 fold over the same period. And Oil’s collapse occurred over a period when the dollar formed a short term bottom; it has certainly had its most significant rally in years (72 to 88).
  2. Over the same period that Oil prices were rising, the US was fighting two major wars in the Middle East, Iraq and Afghanistan. These impact prices via psychology and risk of supply disruption — especially at a time when producers were running flat out.
  3. Energy prices rose during an economic expansion (fueled by low rates and cheap money); Oil fell during a period of US recession and a global slowdown.
  4. Since 2001, Commodities of all sorts rose significantly: Steel, aluminum, cement, foodstuffs, precious metals, etc. Were they all driven by speculation, or was something else going on?
  5. Since the 1% Fed funds rate of 2003, inflation has had a dramatic impact on ALL prices — from medical costs to insurance to education to health care to housing to food and energy. That 60 Minutes failed to even mention inflation in a piece on Oil prices is a terrible oversight on their part.
  6. Throughout the 1990s and 2000s, cars were increasingly replaced with SUVs and trucks. These got appreciably worse gas mileage, as the total US miles driven rose. Hence, increased US demand for energy accompanied increasing prices.
  7. Since gas prices hit $4 a gallon and the recession began, total US miles driven fell significantly, by several billion miles. As expected the drop in driving was followed by a fall in prices.
  8. 60 Minutes interviewed Mike Masters, a hedge fund manager who had testified before Congress that speculation was driving prices. They omitted to mention he was talking his book. His holdings in energy sensitive stocks — with large positions, the vast majority in call options, in AMR Corp (AMR), the parent of American Airlines, Delta Air Lines (NYSE:DAL), General Motors (NYSE:GM), UAL Corp (UAUA) and US Airways (LCC) — were responsible for his fund losing 35% of its value before the Fall 2008 market collapse.
  9. China boomed, they also spent a ton of money building out the nation leading up to the Olympics. (India boomed too). China, like the US, also began filling its Strategic Petroleum Reserves.
  10. The rise of extremist terrorist groups like al-Quaeda, the hostility of Iran towards the West, supply and political disruptions in places like Nigeria, and overt hostility to the US by oil producers like Venezuela President Hugo Chavez also contributed to drive prices up. The political factors were also omitted.
To this could be added the very real supply/demand picture of early-2008 in which, every day, world-wide inventories were being drawn down by two million barrels a day because the world was consuming more than it could produce.

The 60 Minutes segment kept saying that there was no "fundamental" reason for rising prices, but, until the wheels fell off the global economy, there was a major fundamental reason.

Steve Kroft might also have consulted with the International Energy Agency, the Paris-based energy watchdog group, that recently issued their 2008 World Energy Outlook in which they "sounded the alarm", characterizing current production trends as "unsustainable" and called for action in the form of an "energy revolution" to offset the expected declines in output.

The group predicted that the oil price will quickly "shoot back through $100" when the world economy returns to normal, going on to note that the "era of cheap oil" is over.

How could the 60 Minutes crew have missed all of these things?