Opening Bell: Happy Summer Driving!

Oil inventories down, prices up; air travel to get much worse; time to pull Pfizer’s antismoking drug?; etc.

The price of oil continues to rise like an uncapped gusher, soaring 3.3 percent to more than $133 a barrel yesterday—just in time for Memorial Day and the start of what promises to be the worst summer for road trips since the horse and buggy.

The Wall Street Journal, Financial Times, and Bloomberg blame Wednesday’s spike on a much-worse-than-expected report showing U.S. oil inventories dropped more than 6 percent from a year ago when analysts had projected a small increase.

The politicians hauled Big Oil before Congress for some well-timed questioning and posturing, as The New York Times reports on its Business Day front:

Such showdowns between lawmakers and oil titans have become a familiar routine on Capitol Hill. But with gas prices nearing $4 a gallon, and lawmakers headed home for a weeklong Memorial Day recess where they expect to get an earful from angry constituents, there is added urgency for Congress to appear active.

The NYT and the Journal on A3 write that Democrats are planning legislation that would tax “windfall profits,” and the Times also notes they want a measure cracking down on speculation. Dana Milbank of The Washington Post, in the midst of comparing the show on Capitol Hill to “The Price Is Right”, reports that the White House fanned out an e-mail during the proceedings threatening to veto renewable-energy incentives. Nevertheless, the House passed the $57 billion measure by a wide margin.

The WSJ and the FT write that the market for oil contracts deliverable in 2016 has risen even faster in the last few weeks. With oil prices up 11 percent since May 5, long-term oil prices are up 27 percent to $142 a barrel, something the FT attributes to an influential Goldman Sachs report that predicted prices rising to $200 a barrel. The Journal says a worldwide shortage of diesel is pushing prices, too.

The outlook isn’t any better.

The Journal reports on A1 that the International Energy Association, “the world’s premier energy monitor,” is slashing its estimates of global oil supply. It has said for years that supply would rise to 116 million barrels a day by 2030, but now thinks it might “struggle to surpass 100 million.”

The NYT on C1 writes that oil prices are reviving coal mining in several countries.

As if airline service wasn’t lousy enough

The impact of the sky-high prices continues to be felt throughout the economy. American Airlines yesterday said it would slash service and start charging extra to check a bag—$30 roundtrip on many domestic flights. Bring two bags and it’ll cost $80 total. The Journal, FT, and NYT all put the news on A1.

American also said it would cut the number of total seats it flies by 12 percent to eliminate unprofitable routes and to put pressure on prices. Flights are already more packed than they’ve ever been, so air travel will only get more fun. Forget about flying standby. Other airlines are looking at following American’s lead on charging for checked bags, the papers say, but the Times notes that it could backfire on American if they don’t, and the FT reports that Delta already says it won’t.

The Journal on D1 gets the P.O.’d Traveler Quote of the Day:

“Maybe we should just FedEx our bags,” she says.

However, a fifty-pound bag transported by FedEx Corp. or United Parcel Service Inc., using next-day delivery, costs more than $200.

And travelers better get used to the fact that airfare is about to go way up, like their gas bills have been doing for a few years now. The airlines have already gone through wrenching years of cost slashing and they’ve cut into muscle, as seen by the maintenance scandal, and they can’t continue to lose $3 million a day, as American has been doing.

Litany of bad economic news sours market

The oil markets helped send stocks down big again, with the Dow Jones Industrial Average off more than 220 points on the day to 12,601.19. Stocks were also weighed down by pessimistic news out of the Federal Reserve, which sharply lowered its growth estimates for this year on concerns over inflation and the credit crisis, the papers say.

The Fed now projects the economy to grow as little as 0.3 percent this year, a full point lower than it’s previous estimate, and raised its inflation estimate by a point. It says unemployment could reach as high as 5.7 percent, up from the current 5 percent, the WSJ reports on A3.

Here’s the NYT:

In the minutes, Fed officials also noted that banks and mortgage lenders had tightened lending standards and “credit conditions were seen as remaining tight.” They said that the housing slump appeared far from its nadir and that the problems in that market would continue to weigh on the overall economy.

Wages also stagnated in April, and several officials said they believed that the weak labor market would keep salaries low. Average salary growth has failed to keep pace with inflation.

Moody’s smacked around after computer-bug story

Moody’s shares plummeted 16 percent yesterday on the FT’s excellent scoop that a computer bug caused it to overrate certain debt securities, something the credit-rating firm discovered last year and proceeded to cover up. That means investors fear severe repercussions from the news.

The FT fronts the fallout from its constant-proportion debt obligations story, writing that Senator Chuck Schumer of New York is calling for an investigation by the Securities and Exchange Commission and that Moody’s has hired a law firm to investigate it. The Journal on C12 says the SEC is “reviewing the situation,” but the NYT says the SEC chairman told reporters it doesn’t have jurisdiction over the matter. The NYT also says the Connecticut attorney general is investigating.

The WSJ says midway through its story that “data integrity has been an issue before,” quoting a former Moody’s analyst who says it found a similar problem with a deal in the 1990s but decided to cover up the problem rather than downgrading the securities like it should have.

The NYT says the Moody’s CPDO news “raises new questions about the credibility of its assessments.”

Until now, the major criticism of ratings firm was that they were not skeptical enough in how they rated mortgage securities and that they used flawed assumptions in evaluating the investments.

“This is a whole different thing entirely,” said Janet Tavakoli, a financial consultant who raised concern about the types of securities Moody’s rated earlier this year. “Now it makes you wonder what else was going on.”

You’ll stop smoking, but you may have a heart attack!

A Pfizer antismoking drug called Chantix came under increased scrutiny after a nonprofit group linked it to a thousand “serious incidents.” The Food and Drug Administration promptly banned its use by pilots and air-traffic controllers. The Times says there are 150 pilots and thirty air-traffic controllers the FDA knows are using the drug, comforting news to those of us who have to fly this weekend.

The serious incidents “include accidents and falls, potentially lethal heart rhythm disturbances, heart attacks, seizures, diabetes and various psychiatric disturbances,” the NYT says on C3, and the drug has already been linked to increased risk of suicide. The Journal reports on B1 that the FDA says its staffing shortage means it can’t investigate all the problems and is just focusing on the psychiatric ones.

It may be time to just yank this one, though we wonder how this compares to other quit-smoking drugs:

After just months on the market, Chantix broke into the small group of medicines with more than 100 reports of serious injury. In the 2007 fourth quarter, with nearly 1,000 reports, it topped the group’s list of 769 drugs examined in the U.S. for serious side effects. By contrast, the median number of serious-injury reports for other drugs is five. Most medications that came close to Chantix carry the FDA’s most-serious “black box” warning, the study says.

Criminal charges likely in Jefferson County mess?

Bloomberg goes very long with a look at the Jefferson County, Alabama, story, which only gets more interesting.

The county got screwed financing debt for its sewer system in the auction-rate securities market, which plugged up several months ago and is now threatening to send it into bankruptcy. It bought derivatives to protect it from interest-rate swings, but those tanked after its bond insurers collapsed. The feds are investigating, and bankers at Bear Stearns and JPMorgan Chase may be charged criminally, Bloomberg says. The SEC sued a former county commissioner (now Birmingham mayor) for being on the take to the tune of $156,000 in the debt financing.

JPMorgan, Bank of America, Bear Stearns, and Lehman Brothers Holdings Inc. charged Jefferson County about $50 million above prevailing prices for 11 of the interest-rate swaps the county bought between 2001 and 2004. None of the fees were disclosed to the commissioners, records show.

Porter, White & Co., the Birmingham-based financial advisory firm later hired by the county to analyze its swaps, said the banks raked in as much as $100 million in excessive fees on all 17 of its swaps…

The turmoil in Jefferson County might be just the beginning of a new, painful chapter in the subprime debacle.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.