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Friday’s spike in the July contract for light crude on the New York Mercantile Exchange marks the largest single-day increase in oil prices on record. The contract hit an intraday record of $139.12, breaking the previous trading record of $135.09.

“The bulls are running rampant and the bears have panicked,” said oil industry analyst Stephen Schork, editor of the Schork Report. “It’s pure hysteria, absolute panic,” he added.

The rally highlighted concerns that retail gas prices, which have surged near a nationwide average of $4 a gallon, will continue to crimp consumer spending and fuel inflation.

Stocks fell more than 400 points Friday due to the rally in crude prices and a report from the Labor Department that showed the unemployment rate rose to 5.5% in May from 5% in April, the biggest monthly jump in more than two decades. The economy lost 49,000 jobs, marking the fifth straight month of job losses.

Meanwhile, the dollar continued its slide versus the euro on the weak jobs report and comments Thursday that the European Central Bank could potentially raise interest rates. The dollar also tanked versus the yen.

Concerns about instability in the Middle East flared after hawkish comments from Israeli Deputy Prime Minister, Shaul Mofaz, about possible attacks on Iran.

Also contributing to the surge: Morgan Stanley (MS, Fortune 500) analyst Ole Slorer released a report saying that he expected a “short-term spike in oil prices,” as high as $150 a barrel by July 4.

Softening dollar

The dollar began its slide Thursday after European Central Bank president Jean-Claude Trichet said the bank might raise interest rates, which would strengthening the value of the euro. If the euro gains, oil becomes cheaper, European investors buy more oil, raising the price of oil in U.S. dollars, according to Phil Flynn, senior market analyst at Alaron Trading.

The “European Central Bank pulled the rug out from under us,” said Flynn.

Trichet’s comments came the day after Federal Reserve Chairman Ben Bernanke said he wanted to try to support the dollar to bring energy prices into check. “The two central banks are out of step with each other,” he said.

Global demand, especially for gas and distillates in emerging markets, supported the record build in crude prices.

Consider the following: Since January 2007, global crude oil prices have risen by 109%; gasoline prices in the U.S. have risen by 77% (roughly apace); gasoline prices in China have risen only 9%.

Gasoline in the U.S. now sells for around $4 per gallon, but it sells for $2.49 per gallon in China. Beijing last raised domestic gasoline prices in November 2007, by 9%, and that was the first and only hike since January 2007, when crude was $87 per barrel. A recent rumor that China was about to lift its gasoline-price controls was quickly dismissed by Beijing.

China’s energy sector, regarded as “strategically vital,” is dominated by three giant state-owned enterprises. If Beijing wants anything in energy, it is control. But as China becomes more integrated into the global economy, global rules–not China’s rules–are increasingly intervening.

So here is where it gets really crazy. China National Offshore Oil Corporation, largely an exploration and development driller, sells its output at roughly the globally-set crude oil price to the state-owned refiners, primarily PetroChina and Sinopec. CNOOC’s earnings were up 56% in the first quarter of this year, in a global bull market for oil. No surprise.

Sinopec, conversely, with little drilling capability, buys crude at the global price and sells at the state-controlled retail price, taking a giant bath on every gallon of product they sell. During the first quarter of 2008, their earnings were down 81%. Ouch.

Then there is PetroChina, which has considerable domestic production but also must buy some oil at world prices and sell at the below-market state-set price. PetroChina’s earnings were down 56% in the first quarter.

Beijing will subsidize the domestic gasoline retailers, mostly Sinopec and PetroChina, about $40 billion this year for the price-cost squeeze just described. The oil bureaucrats in Beijing mean well, but what a tangle! How can global investors make any sense of this?

At some point, the domestic oil price in China must rise to the world price, but, at present, that would unacceptably lift inflation. So Beijing watches and waits with a price system that is not functioning. Beijing can afford this massive subsidy to China’s oil consumers with its current favorable budget situation.

The terms of the impending deal, details of which have been leaked to The Independent, are likely to have an explosive political effect in Iraq. Iraqi officials fear that the accord, under which US troops would occupy permanent bases, conduct military operations, arrest Iraqis and enjoy immunity from Iraqi law, will destabilise Iraq’s position in the Middle East and lay the basis for unending conflict in their country.

But the accord also threatens to provoke a political crisis in the US. President Bush wants to push it through by the end of next month so he can declare a military victory and claim his 2003 invasion has been vindicated. But by perpetuating the US presence in Iraq, the long-term settlement would undercut pledges by the Democratic presidential nominee, Barack Obama, to withdraw US troops if he is elected president in November.

The timing of the agreement would also boost the Republican candidate, John McCain, who has claimed the United States is on the verge of victory in Iraq – a victory that he says Mr Obama would throw away by a premature military withdrawal.

America currently has 151,000 troops in Iraq and, even after projected withdrawals next month, troop levels will stand at more than 142,000 – 10 000 more than when the military “surge” began in January 2007. Under the terms of the new treaty, the Americans would retain the long-term use of more than 50 bases in Iraq. American negotiators are also demanding immunity from Iraqi law for US troops and contractors, and a free hand to carry out arrests and conduct military activities in Iraq without consulting the Baghdad government.

Payrolls fell by 49,000 after a 28,000 drop in April, the Labor Department said today in Washington. The jobless rate increased by half a point to 5.5 percent, higher than every forecast in a Bloomberg News survey, partly because an influx of teenagers into the workforce exceeded jobs available.

The ratings were lowered two levels to AA, New York-based S&P said in a statement today. S&P said it would keep the ratings under review pending “clarification of ultimate potential losses as well as future business prospects, the outcome of strategic business decisions, and potential regulatory developments.”

Ambac, which pioneered municipal bond insurance in 1971, and MBIA, which followed three years later, are succumbing to a loss of confidence after straying into backing securities linked to subprime mortgages and home-equity loans that are now defaulting at record rates. The companies, which have raised $4.1 billion combined in the past six months to cover potential losses, said yesterday they were unlikely to meet demands for more capital.

“The rating agencies have been plain that capital ratios are a moving target, and with economic and spread conditions getting worse, these downgrades shouldn’t be a surprise,” said Matt Fabian, a managing director at Concord, Massachusetts-based researcher Municipal Market Advisors. “It’s the end of an era.”

Including gains in the previous floor session, that put oil more than $8 higher than at the middle of the week.

The dramatic reversal in what had been a weakening market came after ECB President Jean-Claude Trichet suggested the bank could raise interest rates and the euro climbed against the dollar. When interest rates rise in Europe, or fall in the U.S., the dollar tends to weaken against the euro. Many investors tend to buy commodities such as oil as a hedge against inflation when the dollar is falling.

Also, a weaker dollar makes oil less expensive to investors dealing in other currencies, and analysts believe the dollar’s protracted decline has been a major reason why oil prices have nearly doubled in the past year.

Meanwhile, the dollar held relatively steady against the yen, changing hands above ¥106 yen in Tokyo’s currency market. The euro was trading at levels near $1.56 after dropping back some from the day before.

Mr. Trichet spoke Thursday after the bank left a key interest rate unchanged amid concerns about inflation. While Mr. Trichet said a change in rates wasn’t a certainty, he said some of the bank’s governors favor an increase.

Light, sweet crude for July delivery rose $5.49 overnight — its biggest single-day price increase in the history of the New York Mercantile Exchange crude contract — to settle at $127.79 a barrel. Larger one-day percentage jumps have taken place in the past.

Late afternoon in Singapore, the contract was up $2.64 at $130.43 a barrel in electronic trading.

Earlier this week, Federal Reserve Chairman Ben Bernanke indicated that more interest rate cuts are unlikely in the U.S., sending the dollar higher and pushing oil prices lower.

On Wednesday night Contact Energy took its Otahuhu B gas-fired power station near Auckland offline to repair a fault, which may take four days. The 10-year-old station has a capacity of 400 megawatts.

National hydro lake storage is down to 53 per cent of average and is likely to fall further because Otahuhu is out of action. Low lake levels have driven wholesale electricity prices to record levels.

Big power company bosses are due to meet on Monday to decide if a public power savings campaign should start, possibly by the middle of the month. Without significant rain, it is possible “ripple control” hot water heating may be cut back by early July, sources said.

National’s energy spokesman Gerry Brownlee said Otahuhu’s failure should be the cue for Energy Minister David Parker to announce “the crisis measures he’s been trying so hard to avoid”.

The southern hydro lakes would be using water that would otherwise be held in reserve for winter.

The set the government doesn’t talk about is the audited financial statement produced by the government’s accountants following standard accounting rules. It reports a more ominous financial picture: a $760 billion deficit for 2005. If Social Security and Medicare were included — as the board that sets accounting rules is considering — the federal deficit would have been $3.5 trillion.

Congress has written its own accounting rules — which would be illegal for a corporation to use because they ignore important costs such as the growing expense of retirement benefits for civil servants and military personnel.

Last year, the audited statement produced by the accountants said the government ran a deficit equal to $6,700 for every American household. The number given to the public put the deficit at $2,800 per household.

A growing number of Congress members and accounting experts say it’s time for Congress to start using the audited financial statement when it makes budget decisions. They say accurate accounting would force Congress to show more restraint before approving popular measures to boost spending or cut taxes.

“We’re a bottom-line culture, and we’ve been hiding the bottom line from the American people,” says Rep. Jim Cooper, D-Tenn., a former investment banker. “It’s not fair to them, and it’s delusional on our part.”