When Secretary of State James A. Baker III uttered the word "regrettably" Wednesday, oil trader Tom Bentz recounted, "I was trying to buy ... and the market was bid up in front of me."

"There were just no sellers. The market traded up five bucks in a matter of minutes."

Nothing had happened to the world's supply of oil. No cartel had raised the price of oil. But with Baker's disclosure that his talks with Iraqi Foreign Minister Tariq Aziz had been fruitless, the world suddenly was a step closer to war -- a war potentially endangering the Persian Gulf's oil fields.

Within minutes, oil traders, scrambling to line up supplies, had bid the price up nearly $8 a barrel. "Somewhere between a speeding bullet and the speed of light was the speed at which it moved," said Peter Beutel, a longtime trader who is director of Pegasus Econometric Group Inc. in Hoboken, N.J.

Yet an hour later, as fears ebbed and some traders cashed in their profits on the run-up, the price retreated.

Wild oil price swings, which can have overnight impact on consumers, have been going on ever since Iraq invaded Kuwait on Aug. 2, and they are likely to be repeated until the military impasse with Iraq is resolved.

The price has moved dramatically even though oil is plentiful, and many political leaders and oil industry executives say there is no justification for the sudden shifts in price.

But this is the new world of the "Wall Street Refiners," where traders and brokers working for corporations with names little known to the public exert far more influence over the price of oil and gasoline than Exxon or Mobil or the Organization of Petroleum Exporting Countries.

The Wall Street Refiners are men like Bentz and John Azarow, the ponytailed senior energy trader at Smith Barney & Co. in New York, who makes deals by telephone and computer in offices cluttered with computer screens, market charts and dirty coffee cups. Watching the price of oil as it moves second by second, Azarow uses the several telephones on his desk to fire off orders to the boisterous trading "pits" of the New York Mercantile Exchange, or Nymex, in lower Manhattan.

"Our customers are the people who have oil or need it," Azarow said. "We execute the orders for transportation companies, users of oil and oil companies."

Despite the power they exert over the price of oil, many of these traders have never seen a drilling rig or stepped aboard a supertanker. But as a group, they buy and sell contracts for three times as much petroleum in a day as the world consumes.

Anticipating Disruption Over the past five months, the Wall Street Refiners have been making minute-by-minute judgments about whether there would be a war in the Persian Gulf, when it might happen and whether it would choke off supplies from the world's richest fields, in Saudi Arabia.

The market's anticipation of supply disruption, the so-called war premium, is what has led anxious traders to bid up prices as high as $41 a barrel last October; today, it keeps the price about $8 or $10 above what it might have been in the absence of a crisis -- about $18 or $20 a barrel, by most estimates. To motorists, the war premium is adding 20 cents or more to the price of a gallon of gasoline.

In the past decade, the Wall Street Refiners have changed the way that oil is bought, sold and priced throughout the world, replacing the historic system of long-term, fixed-price contracts negotiated in secret between producing nations and the giant international oil companies with an open market system.

The participants in this world include oil companies large and small, major consumers such as airlines, crude oil producers, including some OPEC members, and several major Wall Street investment houses and their clients.

Today, old-line investment banking firms own oil refineries, keep fleets of tankers on charter and sell gasoline, even though consumers never see their names on the pump. They also trade oil for clients who are not in the oil business at all but consider it just another financial commodity for wagering, like stocks, gold or foreign currencies.

Cargoes of oil now can change hands dozens of times while still at sea. Traders' analyses of the latest news from the Middle East can send the price of oil soaring or skidding in moments, resulting in millions of dollars in trader profits -- or losses.

Millions of barrels of oil may be bought or sold based on what some people might consider insider trading about companies' oil supply needs, or at the behest of esoteric computer-generated "technical" charts bearing exotic names like "Japanese candles" or "Elliott waves."

As the standoff between the United States and Iraq is played out over the next few days, some experts believe the oil market could briefly bid the price of oil as high as $100 a barrel. If there is peace, the price could come crashing down from its current level of about $28 a barrel, perhaps to $15 or less.

The abrupt swings in oil prices of the past few months are a sharp contrast to a few years ago, when the price of oil was stable for months or years at a time and controlled by OPEC -- two of many ways the existence of the new oil market has made this crisis different from the two energy crises of the 1970s.

"What we don't have now is a hidden or controlled market. This is a free market," said Beutel.

The price, he said, "isn't made in Riyadh {Saudi Arabia} or Tripoli {Libya} anymore, or Vienna or Geneva, where 13 {OPEC oil ministers} would get together in a smoke-filled room. It's right there where you can see it."

"Side letters, kickbacks, hidden rebates and similar distortions of the market system, once common in the industry, have been relegated to some dim memory of a monopolistic past," according to Alan H. Levine, an oil broker with Shearson Lehman Brothers Inc. in Bethesda.

The new oil market actually is two markets: the traditional, unregulated "spot" or "cash" market in oil and petroleum products, a worldwide bazaar in which oil producers, refiners and users barter privately among themselves for supplies for immediate or future delivery; and the regulated "futures" market, in the frenetic trading pits of the Nymex, in which the arcane practice of buying and selling agricultural commodities for future delivery at a guaranteed price has been adapted to the oil business.

By playing these two markets off against each other, traders seek the best possible deals for their employers or clients, buying what amounts to insurance, or "hedging," against future price fluctuations, and wringing opportunistic profits from wrinkles in the market.

Because of the hedging ability the dual market provides, said Andrew M. Scott, head of Chevron Corp.'s East Coast oil trading operation in Stamford, Conn., "if George Bush says we're going to war or we're signing a peace treaty, I'm protected if the price moves $5 to $10" a barrel.

Traders' computer screens list crude oil and petroleum products being offered for sale all over the globe, a Home Shopping Network for traders whose agents prowl the world's oil fields and tanker ports seeking the best price and quality.

A trader in New York can know within minutes that Nigeria or Norway is offering oil for sale next week or next month. With a couple of phone calls, he can buy that oil and then resell it at a profit to a refinery in Louisiana or Japan that needs a load of crude. He can trade 50,000 gallons of gasoline in a California pipeline for 50,000 gallons in a pipeline in Virginia. He can establish a price today for jet fuel that won't be refined for months to come.

The Rise of the Market Industry experts say the creation and rapid expansion of the current system of trading oil over the past decade was a natural response to several developments.

Oil producing countries such as Iraq and Saudi Arabia nationalized their oil fields, freeing them to sell their oil to whomever offers the best deal. Major oil companies such as Chevron and British Petroleum Co. that previously had owned the oil fields were cut loose to bid for crude oil wherever they could find it.

That turned the traditional "spot" market for oil on its head. Where previously 90 percent of the world's oil was sold under long-term contract based on prices set by OPEC and the other 10 percent was bought and sold informally between companies, by the early 1980s, 90 percent of the world's oil was available on the spot market to whomever wanted to purchase it at the most favorable price.

At the same time, the very high interest rates of the early 1980s, which made the storage of oil an expensive proposition, encouraged the formation of the oil futures market, in which it was much cheaper for a refiner or other user to acquire oil "on paper" by buying a contract that assured delivery when needed than it was to purchase and store oil in liquid form, or "wet barrels."

Long used in the agricultural trade to limit the economic risks of unpredictable harvests, futures contracts are binding agreements to buy or sell a commodity for delivery at a certain time at a specified price.

Futures contracts for products ranging from wheat to frozen orange juice to Eurodollars are traded on exchanges in New York, Chicago and elsewhere, under rules that ensure that the buyers and sellers carry out their obligations.

Actual delivery is almost never made on futures contracts; instead, they usually are bought and sold over and over again, often many times in the same day, as financial instruments that provide a form of price and supply insurance to users and producers of the commodities they represent.

An oil refiner, for example, might purchase futures contracts for the sale of gasoline at a certain price some time in the future to lock in, or ensure, the price the firm will receive for gasoline some months hence. The refiner might then trade the contracts over the intervening months to adjust to changes in the market.

Although formal oil trading markets existed briefly before John D. Rockeller's Standard Oil Trust monopolized price-setting in the early 1900s, it was not until 1978 that the New York Mercantile Exchange, then a relatively small exchange trading in agricultural and metals futures, began offering futures contracts on heating oil. That was followed in 1983 by crude oil contracts and then trading in unleaded gasoline futures.

Since then, trading volume has grown exponentially.

In 1983, the average daily volume of crude oil traded on the Nymex was 1,700 contracts, with each representing 1,000 42-gallon barrels of oil. In 1990, the daily average was nearly 100,000 contracts, or 100 million barrels a day -- plus contracts for more than half again as much gasoline and heating oil.

By comparison, total world oil production is about 65 million barrels a day. Crude oil futures are more heavily traded than almost any other futures contract -- including such agricultural staples as wheat, corn and soybeans.

Because the price of oil is publicly posted as it is traded on the Nymex floor, the futures market provides a visible, immediate gauge of oil's value to everyone in the market, from producers in the Middle East to refiners in Singapore to heating oil distributors in New England and airlines in the Midwest.

Because the price of futures contracts is set in open trading and is immediately known to everyone in the market, traders have accepted it as the benchmark from which almost all other prices are calculated. In buying or selling "wet barrels" on the worldwide telephone and computer network of the spot market, traders use the New York futures price as the basis for negotiation, much as bankers use the prime rate for negotiating interest due on loans.

For example, an oil producer might agree to sell 20,000 barrels of crude to a refiner at the five-day average closing price of the March futures contract on the New York exchange -- plus or minus a premium based on the quality or location of the oil.

Similarly, the price of oil that Saudi Arabia sells to U.S. refineries it owns jointly with Texaco Inc. varies according to the price of Alaskan crude, which in turn is keyed to the benchmark New York futures price. Even the prices of the few remaining long-term oil supply contracts usually are based on the futures price.

Brokerages as Oil Brokers Almost every big-name brokerage on Wall Street deals in the oil markets, both spot and futures. Salomon Brothers Inc.'s Phibro Energy Inc. arm and Goldman, Sachs & Co.'s J. Aron & Co. division are among the biggest participants; Morgan Stanley & Co. and Bear Stearns & Co. also are major oil buyers and sellers. Other prominent Wall Street houses, such as Smith Barney and Shearson Lehman, have become involved as brokers for clients.

These new players may not own any oil wells, tankers or refineries, but some of them trade oil and gasoline in quantities exceeding those of the well-known major oil companies.

As they did with mergers and acquisitions, junk bonds, foreign currencies and mortgage-backed securities during the 1980s, the big brokerages have seized on oil trading as yet another way to offer their clients a variety of financial services in exchange for profitable fees.

These traders and futures brokers have designed ever more complicated combinations -- known as "swaps," "spreads," "exchanges for physicals" and "arbitrage" plays -- to provide clients with profit insurance. Many also have expanded to trading on the oil spot and futures markets for their own accounts.

"Anybody that has an expertise is going to be in what's hot. That's the bottom line," said Rande Leonard, a financial consultant and former commodities trader. "None of the trader types care what the commodity is."

Oil Firms Lesser Players As they move deeper into the market, some of the Wall Street firms are becoming oil companies in their right: Phibro Energy is the nation's fourth-largest independent oil refiner, has more than 1,200 tankers a year under charter and handles 15 million barrels of oil a day -- nearly equivalent to total U.S. consumption. J. Aron stores oil in salt domes and transports it in leased tankers as it tries to match producers and users. Morgan Stanley actively is looking to purchase a refinery, which would greatly expand its flexibility in disposing of the oil it acquires in trading; other trading companies have processing contracts with refineries.

By contrast, most of the major American oil companies whose brand names are familiar to motorists are not considered significant players in the oil futures market, although they generally participate in it to some degree and trade regularly on the spot market. Most notably, Exxon Corp., the biggest oil company in the United States, says it has chosen to stay out of the futures market because it believes its corporate pockets are deep enough to absorb the risk of gyrating oil prices in the spot market.

But others have found considerable success attempting to beat the Wall Street Refiners at their own game. Some oil executives have boasted privately of using the futures market to sell their supplies for the next few months at the inflated prices of last fall. And in an unusual public release of trading results, Amerada Hess Corp., an oil company that is a particularly aggressive user of the futures market, recently disclosed that it made a profit of $213.9 million on its trading activities in the third quarter of 1990 -- far more than it made on its more traditional oil business.

Among other players, Phibro Energy's third-quarter profit increased six-fold over the previous year. And one relatively small-scale trader said he sometimes boasts to colleagues at the end of a particularly good day that he made "three Porsches."

But there probably have been spectacular losers, too. These are much harder to identify in the secretive world of oil trading, but senior traders at one of the biggest Wall Street trading houses say that some banks and investment firms lost so heavily after entering the market that they have dropped out. A major international oil company is said to have curtailed its trading activities after major losses last fall. And some speculative traders temporarily have given up trying to predict the market's wild swings.

As the market has become ever more volatile in recent months, many traders say, fortunes can be won -- or lost -- on the latest news headline, a hot rumor, a prescient chart or one word out of the mouth of the secretary of state. So participants in the market do everything they can to stay on top of news and information that might move prices.

NEXT: Is the market fair?