Almost all of the financial discourse this week has included mention of Freddie Mac and Fanny Mae. This column aims for a much higher standard, but the constant references to Mac and Mae rendered inspiration for this week’s perspective. After hearing Fannie Mae mentioned over 1000 times, I could think only of one of the favorite characters from my black and white TV youth - - Ellie Mae Clampett.

   Ellie was of course a member of The Beverly Hillbillies, the nouveau riche family that struck black gold more than 45 years ago. During the series’ run, crude oil prices were around $2.75 bbl in absolute terms and just over $20 bbl when adjusted against say 2007 inflation. My petroleum use in those days was pretty much limited to baby oil, but the entire decade of the 60’s saw absolute price variation of no more than 20-30cts per barrel.

   The true inspiration for the show comes from Ellie’s cousin, Jethro Bodine, played with panache and subtlety by Max Baer. In an ironic contemporary twist, Max (forever Jethro in my mind) is currently battling with Nevada officials over the sign he wants to put up on his Beverly Hills Mansion and Casino. He originally wanted to hoist a huge oil derrick, but when that was denied, he replaced the design with a tulip, but regulators still turned Max/Jethro down.

   I digress. However, in the true spirit of Jethro Bodine and his fifth grade education, I have crunched some recent numbers in the oil patch and arrived at some interesting conclusions. Jethro would have never merely “crunched” numbers - -he referred to all things mathematical as “cypherin’ and gezinta’s.”   (You know: five gezinta fifty ten times . .. six gezinta sixty ten times, etc.)

If EIA Is Right

   If the prognostication released by the Energy Information Administration this week is on the money, it points to an annual 2008 U.S. gasoline bill of about $543-billion this year, and about $572-billion just for gasoline in 2009. I based that on EIA’s prediction that retail unleaded gas will average $4.21 gal in the third quarter, $4.23 gal in the fourth quarter, and something similar to that next year.

   Note:  Today’s price of just under $4.10 gal nationally will be exceeded by next Tuesday based on market action in the last three days. Wholesale gasoline prices moved up 15-20cts gal in less than 20 hours of trading on Thursday and Friday. Analysts call it “volatility” but I prefer the term chaos.

   OPIS estimates that we spent about $397-billion on gasoline in 2007. Entering this second weekend of July, the daily bill is about $1.607-billion.

   I think EIA has quality people who deliver quality analysis. They tend to deliver temperate forecasts, and this is an intemperate market. My hunch is that retail prices may peak well above the $4.21 gal number cited in the outlook, and the most likely peaking window is next month. Congress will be on vacation; America will be watching Olympic coverage and erroneously concluding that the Chinese are about to issue free cars to a swath of humanity; and there will be swirls in the tropics that push intrepid sellers to the sideline.

  But unlike EIA, I sense that the second half of 2008 will be front-end loaded. I suspect we’ll see higher gasoline prices in the next 60 days, but I would be shocked if we don’t see prices ease from the apocalyptic levels of July, August, and September.

Demand Worries

   U.S. gasoline demand last week was estimated at 9.347-million bbl per day, or just shy of 393-million gallons per day. Last Summer we regularly saw many days where motorists used more than 400-million gal/day but it has been nearly eleven months since we have seen demand at that level or higher. If I were an odds’ maker at a Las Vegas sports book (perhaps Max Baer’s casino), this might be an interesting over/under proposition: will we see an EIA gasoline demand report this summer or during the rest of 2008 that tops 400-million gal/day?

Supply Worries

   Crude oil inventories in the U.S. fell by nearly 6-million bbl this week and are at 293.9-million bbl, or almost 59-million bbl below the same week last year. That’s one way to look at it, but let me look at it from the Jethro Bodine perspective. A little cypherin’ determines that the dollar value of the current crude is about $42.6-billion higher than the same week last year. Less is more.

   The incredible capital requirements of running refineries or distributorships or even single gasoline stations contribute to lower inventories.

Lunatic Fringe Goes Mainstream . ..

   When some traders bought $150 bbl or $200 bbl options on crude futures last December, I would have suggested (if asked at the time) that those purchases represented catastrophic insurance, or perhaps the dreams of the lunatic fringe.

   Well, the lunatic fringe has become mainstream.  The 2007 price rally was spectacular in that it produced a 50% gain for crude over twelve months. It took six months and three days to produce a 50% gain in 2008, and many analysts believe that a further 50% gain could be seen in the next 90 days. 

   I think that still reflects lunacy, but the lunacy of the crowd never ceases to amaze. Right now, we see very liquid trading in options (the right, but not the obligation to buy crude at a specified price) for $150 bbl December crude; $200 bbl December crude; and even $300 bbl December crude.

   It will cost you about $5200 for that $150 option at the moment; or you can pay about $1,000 bbl for the December $200 bbl option; or go bargain shopping for a $300 bbl option at about $250. All of these positions give you leverage on 1,000 bbl oil.

The Questions about Speculation

   The upcoming week will produce more scrutiny about the role of financial traders - - whether they be hedge funds, commodity pools, or index funds with purchases spread among a basket of commodities.

   I expect to see lots of scapegoating. I believe that Boone Pickens has his own agenda, much like Mr. Drysdale in The Beverly Hillbillies. But he is right when he suggests that there are a myriad of factors behind the $95 bbl surge that has occurred in less than 18 months.

   But speculation is certainly a factor – and it’s always been a factor. Anyone who suggests that the 2008 oil market has moved up merely in response to fundamental supply & demand metrics probably believes that Pamela Anderson and Cher represent “natural” women.

   I suppose that Cher provides the perfect metaphor. At some point, mother nature will take its course and fundamentals may dictate performance. But in the meantime, it’s quite frightening.