The NewsHour with Jim Lehrer

JIM LEHRER: Good evening. I`m Jim Lehrer.

On the NewsHour tonight: the news of this Friday; then, as the fighting continues in the Middle East, we have reports from Lebanon and Israel; excerpts of Secretary of State Rice`s news conference, detailing her weekend trip to the region; and analysis of her announcement and the day`s events; plus, a Paul Solman look at the volatile price of oil; and the weekly words of David Brooks and Tom Oliphant, substituting tonight for Mark Shields.

(BREAK)

JIM LEHRER: Israel amassed forces near the Lebanese border on this, day 10 of the Middle East crisis. It was a possible prelude to invasion.

Larger numbers of tanks and troops began concentrating. Israeli news reports said several divisions could be in place by Monday. The reports said the goal would be to push Hezbollah north to the Litani River, some 20 miles back from the border. The Israeli army chief of staff said the military is ready to do whatever it takes.

LT. GEN. DAN HALUTZ, Chief of Staff, Israeli Army (through translator): We will fight terror wherever it is, because if we do not fight it, it will fight us; if we don`t reach it, it will reach us. We will also conduct limited ground operations as much as needed in order to harm the terror that harms us.

JIM LEHRER: As the crisis continued, Israeli warplanes kept up the assault on southern Beirut, a Hezbollah stronghold. Air strikes also destroyed part of a major bridge on a highway into Syria.

In Israel, Hezbollah rockets hit Haifa again and smaller towns near the Sea of Galilee. At least six people were hurt. Since the fighting began, 345 people have died in Lebanon, mostly civilians; 15 Israeli civilians have been killed, along with 19 soldiers.

Secretary of State Rice announced today she`ll go to the Middle East on Sunday. She`ll meet with Israeli officials, but not with anyone from Syria or Hezbollah. Later, she`ll meet with Lebanese leaders at a conference in Italy.

Rice defended her decision not to go before now and not to push for a quick cease-fire.

CONDOLEEZZA RICE, U.S. Secretary of State: A cease-fire would be a false promise if it simply returns us to the status quo, allowing terrorists to launch attacks at the time and terms of their choosing, and to threaten innocent people, Arab and Israeli, throughout the region. That would be a guarantee of future violence; instead, we must be more effective and more ambitious than that.

JIM LEHRER: Before leaving on Sunday, Rice and President Bush will meet with Saudi Arabian diplomats. We`ll have excerpts of Secretary Rice`s briefing later in the program tonight.

Amid the fighting today, Lebanese civilians streamed into Beirut from the south. Taxi drivers charged up to $400 for the trip.

The exodus of foreigners continued, as well. Hundreds of American citizens left on U.S. military helicopters and ships. U.S. officials said they`ll evacuate more than 8,000 Americans by the weekend.

Also today, Israel said it will ease its blockade of Lebanon to allow shipments of humanitarian aid.

Across the Muslim world, thousands of people protested Israel`s actions in Lebanon after Friday prayers. In Amman, Jordan, at least 2,000 people marched to shout support for Hezbollah. And in Karachi, Pakistan, crowds burned an effigy of President Bush and U.S., Israeli and British flags.

In Egypt, protesters condemned Arab leaders for not speaking out in support of Hezbollah. Police beat some of the demonstrators with batons. We`ll have more on the crisis in the Middle East right after this news summary.

In Iraq today, at least 18 people died when gunmen attacked two Shiite neighborhoods south of Baghdad. It happened in Mahmoudiya, the same town where Sunni attackers killed 50 people earlier this week.

To the north today, U.S. forces in Baquba killed five people in a raid, including two women and a child. The U.S. military said the troops were fired on from the buildings. It said the people inside ignored warnings to leave.

And a U.S. Marine died in western Iraq. He was the 24th American killed this month.

Police in India today made their first formal arrests in last week`s deadly train bombings. Three suspects were taken to a court in Mumbai, formerly known as Bombay. A lead investigator said they could be involved with larger networks across South Asia.

K.P. RAGHUVANSHI, ATS Chief Joint Commissioner (through translator): We have definite evidence that these people are linked to terrorist activities. The bomb blast is a big conspiracy with many other players. Until the other accused are arrested, I cannot give any further details.

JIM LEHRER: The train bombings killed 207 people and injured more than 800 others.

Islamic leaders in Somalia called for a holy war today against Ethiopia. Witnesses reported Ethiopian troops had deployed in Baidoa. It`s the only city in Somalia where the U.N.-backed government has any control. Islamic militia forces have been spreading their control across Somalia.

The city of St. Louis got a little relief today from days of stifling heat. Temperatures eased slightly, but more than 300,000 homes and businesses still had no power after heavy storms on Wednesday. National Guard troops moved in to help yesterday.

On Wall Street today, the Dow Jones Industrial Average lost more than 59 points to close at 10,868. The Nasdaq fell 19 points to close at 2,020. For the week, the Dow gained more than 1 percent; the Nasdaq lost nearly 1 percent.

And that`s it for the news summary tonight. Now, the Middle East fighting; and the Rice mission; the oil markets; and Brooks and Oliphant.

(BREAK)

JIM LEHRER: The tenth day of the fighting in the Middle East. We have two reports. The first is from Julian Manyon of Independent Television News. He traveled from Beirut south to Tyre, Lebanon, today.

JULIAN MANYON, ITV News Correspondent: The roads we took were deserted and dangerous. In normal times, Tyre is an hour`s drive from Beirut, but now virtually all the bridges are smashed by the Israeli air force and we had to make a detour deep into the mountains.

As we drove further south, the roads emptied. Not far away, a cloud of smoke rose from an Israeli air strike. Normally bustling Nabitir (ph) was a ghost town. No one was traveling in our direction. But as we approached Tyre, car loads of refugees were flooding out.

At the entrance to Tyre, a giant bomb crater almost severed the road. Beyond it, a city under siege by the Israeli air force. Columns of smoke rise from attacks on nearby villages, and one of the city`s largest buildings has been blasted by an Israeli bomb.

Today, the Lebanese authorities took drastic steps to deal with the number of corpses overwhelming the city`s morgue. Army lories brought some 80 dead to a hastily dug mass grave. The normal tradition of family burial could not be observed, though each coffin was marked with the victim`s name so the bodies can be recovered and reburied later. The small coffins were those of children.

Every day, the human cost of this Israeli operation is becoming more apparent. The Israelis insist that they choose their targets carefully, but the dead and injured are overwhelmingly civilians.

At the city`s hospitals, doctors are struggling to deal with casualties streaming in from the surrounding areas.

DR. BASSAM MTREK, Jabal Amal Hospital (through translator): I`ve seen just civilians, children and women, most of them children and women, around 60, 65 persons are children.

JULIAN MANYON: Overcome by grief, a woman whose husband was killed in an air strike. She has not yet found the courage to tell her children that their father is dead.

The Israeli air force is dropping bombs just outside the city of Tyre, but it`s also dropping leaflets like this one, warning local people to leave their homes and go beyond the Litani River to the north over there.

They say that their homes and villages here in the south are being used as staging areas for terrorist attacks; they say their lives are in danger. The leaflet is signed quite simply, "The state of Israel."

Many have fled, but some are refusing to leave. In a bomb shelter in Tyre, 40 people from seven different families hide together in stifling heat with no running water and no toilet. Normal life is breaking down in this city. And with the Israeli forces striking ever fiercer blows, no one knows what the future will bring.

JIM LEHRER: Next, an ITN report from Israel from Juliet Bremner.

JULIET BREMNER, ITV News Correspondent: Israel can`t stop the damage being inflicted on it by Hezbollah. Another volley of Katyusha rockets lands in Haifa. Another 19 of its people are injured, a clear signal from the militant fighters that they`re still a force to be reckoned with.

The Israeli response was to put its impressive military machine into top gear. Columns of tanks headed to the border. Thousands of reservists are being called up, all indications they`re getting ready for a big push on the ground.

Even for a country used to defending itself, Israel feels particularly under siege at the moment, being attacked from all sides. Its security forces are having to fight off Hezbollah in the north, Hamas on the Gaza Strip, and trying to stop suicide bombers coming in from the West Bank.

The funerals of six soldiers lost in the last three days are a stark reminder of the cost of fighting on all fronts. The men were killed as they tried to destroy Hezbollah bunkers across the border. There will be more mourning like this if they push further into Lebanese territory.

The Israeli government is anxious to stress incursions into Lebanon don`t amount to an invasion.

MARK REGEV, Foreign Ministry Spokesman, Israel: No one in Israel wants to reoccupy Lebanon. No one in Israel claims an inch of Lebanese soil. On the contrary, we want to be surgical. We want to deal with the terrorist threat posed by Hezbollah, and then we want to leave.

JULIET BREMNER: Opinion polls show that a staggering 95 percent back the response to Hezbollah`s attacks. I discussed the crisis with lawyer Sefi Melamed and his friends in a liberal suburb of Tel Aviv.

KARIN MELAMED, Tel Aviv Citizen: So we`re going to fight until the end. I have three boys. I have two boys and another one, and I want to finish it. I want not to going to be a war in this country. It needs to finish.

SEFI MELAMED, Tel Aviv Citizen: Of course it`s right, because the situation right now is not very good for us, and we have to put an end for it for once and for all.

JULIET BREMNER: Politicians must hope their people stay as resolute if more coffins start to return from the frontline.

(BREAK)

JIM LEHRER: Now, the United States prepares to get involved. Ray Suarez has that part of the story, beginning with the day`s diplomatic developments.

RAY SUAREZ: After two days of meetings with United Nations officials in New York to discuss the ongoing crisis in the Middle East, Secretary of State Condoleezza Rice returned to Washington to outline U.S. strategy and her trip Sunday to the region. The first stop is Israel.

CONDOLEEZZA RICE, U.S. Secretary of State: It is important to remember that the cause of the current violence was Hezbollah`s illegal attack from Lebanese territory. It is unacceptable to have a situation where the decision of a terrorist group can drag an entire country, even an entire region, into violence.

RAY SUAREZ: Fighting continued to rage between the Israeli military and Hezbollah, as the U.N. Security Council met again today to discuss the crisis.

CONDOLEEZZA RICE: Today, the United States renews its call for the immediate release of the abducted Israeli soldiers. And as Israel exercises the right of any sovereign nation to defend itself, we urge Israel`s leaders to do so with the greatest possible care to avoid harming innocent civilians and with care to protect civilian infrastructure.

We do seek an end to the current violence, and we seek it urgently. More than that, we also seek to address the root causes of that violence so that a real and endurable peace can be established.

RAY SUAREZ: Secretary Rice says she plans to meet with Israel`s prime minister and, in Rome, with members from the U.N. Security Council and Arab states. She defended her decision not to meet with any Syrian or Hezbollah officials.

CONDOLEEZZA RICE: First of all, Syria knows what it needs to do, and Hezbollah is the source of the problem. The issue here is that, in Resolution 1559 and ever since, the world has spoken to the need of Lebanon to be able to function as a sovereign government without the interference of foreign powers. That`s why Syrian forces were told to leave Lebanon.

The resolutions have insisted that the government of Lebanon needs to be able to extend its authority over all of its territory, and you can`t have a situation in which the south of Lebanon is a haven for unauthorized, armed groups that sit and fire rockets into Israel, plunging the entire country into chaos, when the Lebanese government did not even know that this was going to be done.

RAY SUAREZ: The secretary also acknowledged that other world leaders, like U.N. Secretary General Kofi Annan, had called for an immediate cease- fire, but she said that would not be good enough.

CONDOLEEZZA RICE: ... I can guarantee you, if you simply look for a cease-fire that acknowledges and freezes the status quo ante, we will be back here in six months again, or in five months, or in nine months, or in a year trying to get another cease-fire, because Hezbollah will have decided yet again to try and to use southern Lebanon as a sanctuary to fire against Israel.

RAY SUAREZ: Hezbollah not only has a well-armed militia based in Lebanon, it`s also a political party. Hezbollah members hold cabinet and parliament positions in the Lebanese government. Secretary Rice said those members failed to act responsibly.

CONDOLEEZZA RICE: If, indeed, Hezbollah went without the authority of the Lebanese government, violated every conceivable international norm -- not to mention a number of international U.N. Security Council resolutions -- and didn`t bother to tell the members of the Lebanese government. So, obviously, they didn`t act in a responsible way in their political cloak.

JAMES ROSEN, FOX News Correspondent: Madam Secretary, as you mentioned, a key element of Resolution 1559 calls for the dismantling of terrorist militia groups inside Lebanon by the sovereign authority of that government.

What have you heard from your discussions with the Lebanese that would explain why they have made so little progress on that up to now? And what you think would change in the next week or two in the political framework that would suddenly allow them to make progress on that?

CONDOLEEZZA RICE: Well, clearly, this is a young government that does not have the capacity to do everything that was anticipated in 1559; it`s just the case.

What we have to do is to help create a framework in which, first of all, the end to the violence would push forward the sovereignty of the Lebanese government and the deployment of Lebanese forces southward, with some kind of international assistance, perhaps significant international assistance. And then we have to continue to work with this government on the political front.

But what I said, James, is that -- in answer to Lisa`s question -- is that it is now clear why 1559 anticipates a circumstance in which you cannot have people with one foot in politics and one foot in terror, because that Hezbollah sitting within the Lebanese government, as ministers within the Lebanese government, would launch an attack without the knowledge of the Lebanese government, that then plunged the Lebanese people into the circumstances that they are, unfortunately, now in.

That`s why 1559 has wisdom, but we will work on a political framework to help the Lebanese to fulfill those terms.

RAY SUAREZ: Rice said the Syrian government, which has long backed Hezbollah, must make a move.

CONDOLEEZZA RICE: The Syrians have to make a choice. Do they really wish to be associated with the circumstances that help extremism to grow in the region? Or are they going to be a part of what is clearly a consensus of the major Arab states in the region that extremism is one of the problems here?

In this sense, I would just ask you to look back on what is being said by some of these Arab states. Everybody wants the violence to stop; there is no difference there. But this is different than times in the past when there has been a reflexive response from the Arab states.

This time I think you`re getting a very clear indication of where people think the problem is, and Syria has to determine whether it`s going to be a part of that consensus or not.

QUESTION: Madam Secretary, aren`t you concerned that the delay in halting the fighting and the loss of many civilian lives in Lebanon will hamper your efforts to win the hearts and minds of the Arab world?

CONDOLEEZZA RICE: I`m concerned about civilian casualties, because I`m concerned about civilian casualties. Nobody wants to see innocent civilians caught up in this kind of fighting.

And it`s why we are very determined to do more about the humanitarian situation. It`s why we have talked so determinedly and so frequently with the Israelis about restraint in their operations. It`s why we`ve worked to get the humanitarian corridors opened.

This is a terrible thing for the Lebanese people. The unfortunate fact is that, if we don`t do this right, if we don`t create political conditions that allow an end to the violence, to also deal with the root cause, deal with the circumstances that produced this violence, then we`re going to be back here in several months more.

RAY SUAREZ: Before she leaves for the Middle East, Secretary Rice and President Bush will meet Saudi officials to discuss the crisis.

Some analysis now from Martin Indyk, who was assistant secretary of state for Near Eastern affairs and twice U.S. ambassador to Israel during the Clinton administration. He`s now director of the Saban Center for Middle East Policy at the Brookings Institution.

And Robert Malley, who was special assistant to President Clinton for Arab-Israeli affairs and also served on the National Security Council staff, he`s now the Middle East program director at the International Crisis Group, which promotes conflict prevention and resolution.

Mr. Ambassador, what`s your overall assessment of the new Rice initiative to head over to the region and start trying to straighten things out?

MARTIN INDYK, Saban Center for Middle East Policy: Well, I think it`s about time. I think it was a mistake for the secretary of state at least not to send some special envoy out there earlier than this, because it was important to show that the United States is engaged in the effort to try to shape a cease-fire package.

We can get into what the package should be, but it`s more than the cease-fire as she suggests, but we needed to be out there and engaged early on. In previous administrations, all the way back to the Reagan administration, we would send, when the Lebanon crisis blew, we would send a special envoy out or an assistant secretary, just like we had U.N. envoys in the region.

But now that she`s engaged, I think that it`s very important that she put together that package. I think there`s a consensus that is forming in the international community, and even between the Israeli and Lebanese governments, that would put together a credible package that would link American concerns, Israeli concerns, and the concerns of the Lebanese government.

RAY SUAREZ: Robert Malley, what do you make of what you heard this afternoon?

ROBERT MALLEY, International Crisis Group: Well, I mean, I agree that it was about time that we involved, because the United States, frankly, has been missing in action, not only in the region as vital to our interest, but at a time when the conflagration is about as bad as it has been in many, many years.

The one thing I would emphasize, though, is for the secretary of state to go there and not say that reaching an immediate cease-fire is a priority is getting things backwards. I understand the concern that, if you have a cease-fire, and nothing else happens, then you may go back to the status quo ante.

But if you don`t have a cease-fire now, all the risks that we`re seeing, more civilian casualties, Hezbollah getting stronger, not weaker, the Lebanese central government getting weaker, not stronger, the Arab world as a whole -- forget about the governments who really don`t represent their people on this -- but the Arab world as a whole turning more anti- American, more anti-Israeli. All of that will happen.

You get a cease-fire, then you roll up your sleeves and you try to get to the roots causes, as Secretary Rice said, to try to make sure this doesn`t happen again.

RAY SUAREZ: Well, you heard the secretary refer to the cease-fire as a false promise which can guarantee future violence. And here we are on the tenth anniversary of the last Hezbollah-Israeli border conflict, where a cease-fire was reached, and maybe she had that in mind when she said those words.

How important is that cease-fire, when you think that what you really need to do is settle the whole thing, as one of our Israeli men on the street said, once and for all?

ROBERT MALLEY: The notion that you could settle this once and for all, and quickly, within the time span that`s going to be important for the civilians on both sides who are dying, I think is an allusion.

I would say, let`s distinguish between two things: Number one, cease the fire, and that is critical for all of the reasons I said before, the most important, of course, being that civilians are losing their lives everyday.

But then you need, yes, to get to the deeper roots of the conflict. It`s not just the fact that Hezbollah is an armed organization, although that`s a very important piece of it. It has to do with the makeup of the Lebanese political system, because Hezbollah is a representative of the largest constituency, the Shiites, and they don`t feel represented, which is part of hwy they have rallied behind an armed organization.

It has to do with the role of Syria, with the role of Iran, with the lack of Arab-Israeli peace. Those are the root causes. So I`m all in favor of that, but let`s get the cease-fire in place, and then there`s no reason to abandon the field. The United States should be more active diplomatically at that point and see whether we can get to those root causes, which would ensure that we don`t have the recurrence of the violence a year down the road.

RAY SUAREZ: How do you respond to Robert Malley`s criticism of the rejection of the Bush administration of short-term measures?

MARTIN INDYK: Well, I think it`s unrealistic to get an immediate cease-fire. I think that it is going to be important to put the elements together, which includes a cease-fire, the deployment of the Lebanese army to the south, so that Lebanese government`s authority will be extended there, and the friction between Israel and Hezbollah will be removed, and an international force put in place to back that up, plus a whole lot of other things like donor fund for the reconstruction of Lebanon, dealing with some of the longer-term issues, like the Shebaa Farms territorial dispute, and of course there`s the question of the kidnapped soldiers.

But all of those things have to be put into a package. And while that package is being put in place, I think realistically what`s going to happen is that the Israelis are going to be moving into the south and trying to push what`s left of the Hezbollah cadres out of the south, beyond the Litani River, about 20 miles north, and to destroy the infrastructure that Hezbollah has put in place in the last six years since Israel withdrew.

That will create a kind of vacuum which the Lebanese army, backed by an international force, could then enter, and I think that would lay the basis for a cease-fire.

RAY SUAREZ: But it`s been hinted at by various people in the Lebanese government that, if Israel mounts a land offensive into southern Lebanon, they`ll throw in their lot with Hezbollah. They won`t just sit aside and let their territorial integrity be compromised.

MARTIN INDYK: Well...

RAY SUAREZ: Doesn`t that threaten a wider war?

MARTIN INDYK: Their territorial integrity is already compromised. It`s in particular compromised by the fact that Hezbollah seems to feel free to operate as a state within a state, particularly in southern Lebanon.

I don`t think the Lebanese armed forces are going to really engage. If they do, it`s for the sake of their own credibility, which is not a bad thing anyway.

And I don`t think the Israelis are going to launch a massive ground invasion. I think they`re going to go in, in selected places, with large numbers of troops to try to deal with the situation, and then get out, as we heard in your earlier piece.

But the critical problem here is we can get the Lebanese government, and the Israeli government, and the international community behind a cease- fire with these kinds of elements in it. How do we get Hezbollah to go along with what the secretary of state is talking about?

Because there the challenge is that they are going to have to leave the south and agree not to come back in, stop the rocket fire which can go over the southern buffer zone, and agree to implement 1559, which calls for their disarmament. In other words, this whole effort is going to depend on Hezbollah cooperating in its own demise as a, quote, "resistance operation," and I don`t see how that`s going to happen.

RAY SUAREZ: Well, Robert Malley, you have sources inside southern Lebanon. What are you hearing about Hezbollah`s intentions, its strategic goals at this point in the conflict?

ROBERT MALLEY: Well, first let me react to what Martin said, because I think in what he described is the answer to his own question. If before you get a cease-fire, you need to have in place the deployment of the Lebanese army to the south, an international force, the release of the prisoners, discussion of the Shebaa Farms, people are being to be dying for a very, very long time. So I think that`s what is unrealistic, if you really want to try to move this relatively urgently, as Secretary Rice herself said.

Now, what we`re hearing -- and of course, we do have people, the International Crisis Group has people on the ground -- Hezbollah right now is not at all feeling that it has to surrender or in any way accept the terms that Secretary Rice has put on the table.

They feel that their ability to fight has not at all been affected; they feel that public support for them is growing; they`re waiting for the day that Israeli troops are going to come in.

Now, all of this could be part of the bravado and sort of the self- delusions of an organization that`s under attack and is waging attack, but it`s important to look at how they`re looking at it and how they see things. Because if they see it that way, that means that all of these things we`re talking about -- getting them to disarm, allowing the Lebanese army in -- and, by the way, that Lebanese army has a lot of Shiites who are not about to attack Hezbollah.

So they don`t feel that they`re under pressure. They think time is on their side. And we need to keep that in mind if we`re thinking about solutions that, on the one hand, will address the root causes, but on the other hand put an end to the violence very soon.

RAY SUAREZ: Robert Malley, very quickly, can there be a regional solution, a cessation of conflict, without the destruction of Hezbollah as an armed force?

ROBERT MALLEY: If there is not, as I said, we`re going to be waiting for a very long time. I think we need to first let`s stop the violence and then let`s tackle the issue of Hezbollah`s future, its demilitarization, the future of Lebanon, and of course the future of the Arab-Israeli peace process, which has been abandoned for far too long.

RAY SUAREZ: Robert Malley, Ambassador Indyk, thank you, both.

ROBERT MALLEY: Thank you.

(BREAK)

JIM LEHRER: Now, what the Middle East crisis is doing to the price of oil on the future markets this week. NewsHour economic correspondent Paul Solman has our report.

PAUL SOLMAN: Bedlam as usual at midtown Manhattan`s Man Financial, one of the world`s top commodity brokers.

FUTURES TRADER: Give me that. I`ll give him a shout. I`ll get him rolling.

PAUL SOLMAN: In the Middle East, Hezbollah versus Israel. Hanging on every headline, it seemed, the oil futures market, which, opened for electronic trading Sunday night at 6:00 p.m., would start trading on the exchange floor in less than an hour on Monday. We asked Andy Lebow for recent prices.

ANDREW LEBOW, Man Financial: Yager (ph), what was last night`s range?

FUTURES TRADER: It was from $77.74 to $75.60.

PAUL SOLMAN: That`s a $2 difference within minutes, a 3 percent plunge, about 300 points if this were the stock market.

And that was because the Israelis said what right over here at 6:00 in the morning?

ANDREW LEBOW: That they may very well wrap up the military offensive in a couple of days.

PAUL SOLMAN: And then that was denied?

ANDREW LEBOW: Came to here. It`s up here now. There`s a refinery on fire in Venezuela right now, so the market has rallied up further.

PAUL SOLMAN: And that chart only went up to 6:00 a.m. What`s the price right now?

ANDREW LEBOW: It`s about the same.

PAUL SOLMAN: The same, unless, of course, the Mideast crisis spreads and drives the price up above last Friday`s record $78 bucks a barrel. And that gets us to the key question of this story: What moves the oil market? Lebow`s answer: the usual suspects.

ANDREW LEBOW: It`s supply and demand, lack of spare production capacity, lack of spare refinery capacity, geopolitical fears.

PAUL SOLMAN: In short, a familiar story: the geopolitics of the Middle East; too few refineries; surging demand for oil in China and India; supply problems in Iraq, Nigeria and Venezuela.

But before we take things further, either here or at the actual futures market itself, an even more basic question: What are futures for? Why not just buy and sell oil in the present, like you do mittens or melons? Well, imagine you bought a million barrels of oil at $76 a barrel and the tanker toting it is a week away from port.

ANDREW LEBOW: If I`m worried that the price of oil in that boat is going to go down, then I am going to want to sell futures in order to protect against my downside.

PAUL SOLMAN: The downside that the price will sink by, say, $5 a barrel to $71 before the boat docks. With a million barrels, that would cost him $5 million. But on the futures market, he can make a side bet, which will pay him the difference between $76 and the lower price -- in our made-up example, $71 -- the price on the day his ship comes in. So he locks in $76 with this so-called futures contract.

ANDREW LEBOW: And if the price goes down, I`m going to profit on the futures markets. If the price goes up, I`m going to lose money on the futures, but my physical barrel is going to be higher.

PAUL SOLMAN: So Lebow would be hedging, protecting the price of the physical oil he`s already paid for. But, of course, he can only buy oil at a price in the future if someone`s willing to sell at that price.

And that`s why there`s a futures market: the NYMEX, the New York Mercantile Exchange, where traders like those in the pit match up orders from oil suppliers and users with investors and speculators willing to take risks. What`s new these days is the flood of investment and speculation money flowing through this floor.

Half of Man Financial`s trades are done for oil users and suppliers, called commercials. They phone folks like Lebow; he relays their trades to the Man men on the floor, the ones in blue and red jackets.

But the other half of Man Financial`s clients are now investors and short-term speculators, who`ve jammed an extra $100 billion into the market in just the past few years, often investing your and my money via mutual funds. Some think these investors are driving up the price, but not Lebow.

ANDREW LEBOW: Ultimately, the price will respond to supply and demand. And speculators don`t control supply and demand; the commercials do, and the end users do, and governments do.

PAUL SOLMAN: Ultimately. But what about now, with the Middle East again in flames right there on TV? Dave Shapiro had been on the desk for 16 hours straight.

Are investors and speculators driving these huge swings?

DAVID SHAPIRO, Man Financial: Oh, without question.

PAUL SOLMAN: Economic theory says the more investors in a market, the more stable it is. Shapiro doesn`t see that these days in oil.

DAVID SHAPIRO: Any time you get a piece of news like this, that is a market-moving piece of news, these moves get exaggerated because people are like, "I`ve got to get out. I`ve got to get out, and, you know, damn the price." And they`ll just sell into it, if they feel they have to get out. If they sell it hard now, and they think it`s going to go down another dollar in the course of a day, they`ll hit it hard now and, you know, damn prices. "I got to cover my positions."

PAUL SOLMAN: What do investors themselves say? Eric Bolling, tossing a completed trade into the pit, makes side bets for his own account, based on, among other factors, geopolitics. But though a rocket had just hit Haifa in Israel, neither he nor the market took much notice.

ERIC BOLLING, Energy Trader: Although terrible, a building hit in Haifa has really no impact on the price of oil. There`s no oil in Haifa; there`s no production, per se.

Iran produces probably in the top-four producing nations in the world. They produce oil that the world needs, and it`s such a tight supply-and- demand situation going on right now that any sort of supply disruption from the Iranians would cause prices to spike.

PAUL SOLMAN: While Israel versus Hezbollah wasn`t disrupting supply, yet. And how much of today`s price is driven by investors, does Bolling think?

ERIC BOLLING: My guess would be somewhere around 10 percent of the barrel, $7, $8.

PAUL SOLMAN: And if you shave that $7 off today`s price? Subtract another $15 or so for geopolitics -- Iraq, Nigeria, Venezuela -- says Bolling, and yet another $7 to $10 due to fears of a terrorist attack on America, you`re left with a long-term base price of oil of $40 to $50.

At the NYMEX show-and-tell exhibit, oil analyst Larry Goldstein agreed with the $40-to-$50 range. How much does he attribute to speculation?

That guy behind you is presumably taking an order from some investor somewhere to buy or sell a futures contract in oil. How much are those investors behind that guy driving up the price of oil?

LARRY GOLDSTEIN, Petroleum Industry Research Associates: We believe, in the short term, they`re having a dramatic impact on driving up the price of oil. But the price of oil, with or without them, would be historically high.

PAUL SOLMAN: But by how much is just a guess. Meanwhile, back in the pit Monday, it was 3:00 and trading had ended.

ERIC BOLLING: We`re closed.

PAUL SOLMAN: And what happened?

ERIC BOLLING: Well, we`re down about $1.80 right now. The final price hasn`t come up yet. There we go, $75.30. So it`s $1.75 lower on the day.

PAUL SOLMAN: Even though war is possibly raging in the Middle East?

ERIC BOLLING: Right. Well, again, it has less to do with Israel and Lebanon and more to do with the Iranian response to Israel and Lebanon, and the Iranian response to the U.N. Security Council asking them to back off that uranium enrichment program.

PAUL SOLMAN: On Monday, and in the days immediately after, the Iranian response wasn`t that bellicose, so the price subsided, said Eric Bolling, and...

ERIC BOLLING: .. and that`s a very good thing. It`s a good thing for the world. It`s a good thing for the price of oil. It`s a good thing for the economies in the world.

PAUL SOLMAN: A good thing, for the moment.

(BREAK)

JIM LEHRER: And finally tonight, the analysis of Brooks and Oliphant, New York Times columnist David Brooks and columnist Tom Oliphant. Mark Shields is off tonight.

Tom, did you know all about the oil futures market?

TOM OLIPHANT, Columnist, Boston Globe: Some of it. It is amazing how many people will tell you that as much as a third of the price in the market is the result of speculative activity. I mean, it makes you wonder where the government is.

JIM LEHRER: Yes. Well, the government is totally out -- this market is completely free, is it not, David?

DAVID BROOKS, Columnist, New York Times: Well, it certainly is, though oil in fungible. You know, it is affected by politics, and that`s why we talk about politics and not just economics. They are kind of ruthless about the war in Israel, by the way.

JIM LEHRER: I know, to listen to them discuss the war, they discuss it in very, very clear economic oil-price terms. Yes, yes, not that we were not going to talk about it.

And speaking of that, David, what kind of marks would you give the Bush administration, and particularly Secretary Rice, for how they`re handling this situation in the Middle East?

DAVID BROOKS: I think they and she are actually doing quite well. I think they have two priorities. The first is to make sure Hezbollah is the loser in all of this, and that has to be if the Lebanese government is going to survive. And so they`re waiting. They`re letting Israel hammer. And we`ll see whether that military effectiveness works, which is the key.

But then their second strategy, which really hasn`t been talked about that much, though if you talk to them on the phone privately this is all they`re doing these days, which is to make sure the Lebanese government comes out the long-term winner. So you don`t just have a Hezbollah loser, you have a winner, and that winner is the democratically elected government.

And they`re doing a bunch of things to try to make that the case. The first thing they`re doing -- and they`re on the phone all the time these days -- is to get the moderate Arab governments, the Saudis, the Jordanians, and the Egyptians, together with the Europeans and us to create a Security Council resolution that can send in international force, and then that international force will retake control of the south of Lebanon.

The second thing they`re doing is setting up the financial packages that will allow the Lebanese government to have something to offer the people of south Lebanon when the military thing is all over.

And then they`re trying to work out some -- what they call outside issues. And I think Martin Indyk earlier talked about Shebaa Farms and other things, which would give the Lebanese government a chance to say...

JIM LEHRER: Explain what that is.

DAVID BROOKS: Shebaa Farms is a very small bit of disputed territory between Lebanon and Israel. And the Israelis -- and, indeed, the U.N. -- says it`s a totally bogus issue, but that`s not the point right now. The point is to give the Lebanese some chance to say, "We delivered for you," so to give that government some legitimacy. And so they are working both sides, the military side and the coalition side.

JIM LEHRER: Do you agree the administration has done a good job?

TOM OLIPHANT: Not entirely. In fact, tonight when we don`t know whether or not Israel will be going over the blue line in force, the question is whether the military operations get in the way of the larger political purposes and whether they end up being self-defeating.

What I find a little interesting about this crisis at this point is that the polling data is starting to come in, and President Bush does not appear to be holding a very strong hand. You would expect normally to have a very sharp spike in approval for what he is doing, but it`s not showing up.

Gallup is showing almost a 10 percentage-point difference, in favor of disapproval, in terms of how he`s handling this. Lebanon makes Americans unusually worried because of its history, which is not favorable.

And I think it`s very interesting late today to begin to see Democrats taking independent actions in this crisis, compared to what was going on in Congress earlier this week when you get these routine resolutions that pass overwhelmingly. Joe Biden, the ranking Democrat on the Senate Foreign Relations Committee, possible presidential candidate, Harry Reid, the Democratic leader in the Senate, and interestingly enough, even Bill Clinton himself beginning to make noises about things like special envoys. How does it help this process...

(CROSSTALK)

JIM LEHRER: Yes, Biden sent a letter late today asking for a special envoy.

TOM OLIPHANT: I don`t mean to be cynical about this, but I have a sneaking suspicion that some of those Democrats are aware of the polling data, and that may be why this was a late-breaking development.

JIM LEHRER: What about this issue -- do you want to pick up on any of that, David?

DAVID BROOKS: Well, I guess I`d just say quickly that the Biden letter I don`t understand, because there is a strategy. They`re work on it. Joe can call them up, and they`ll explain it to them, I`m sure.

The second thing on the polls is kind of interesting. I think that`s partly Bush. You know, he`s down, so anything he`s associated with is going to be down, partly the images. But partly -- and I think this is a post-Iraq...

JIM LEHRER: Images meaning...

DAVID BROOKS: Like we saw on the top of the program.

JIM LEHRER: Absolutely.

DAVID BROOKS: But partly a post-Iraq effect, that fighting terrorists is futile. They seek into the ground, and you can never fight them, which is a difference behind the way people used to see Israel.

People used to see the Israeli army as something super-effective. They could take care of terrorists, and they could win whatever they set out to do. I think that image in the U.S. and, actually more importantly in the Arab world, has been hurt by Iraq.

Now the fact is, Israel has had a pretty effective war they`ve just won against Hamas, so they might be able to succeed, but people expect people to fail now.

JIM LEHRER: On the issue of Lebanon specifically, David said a while ago that that is part of the administration`s unseen policy at this point, mostly unseen, and uncommented upon, that they really are trying to stabilize Lebanon. But the Lebanese government is saying just the opposite. "You`re killing our people. You`re letting"...

TOM OLIPHANT: That was part of my earlier point. Another way to focus on it, I think, is to look at two dates that are coming up very, very quickly. One of them is next Wednesday in Rome, where this group of friends of Lebanon or Lebanon core group, Secretary Rice will be there, the Lebanese will be there, a very important gathering.

And then, a week from Monday, the mandate for the UNIFIL force...

JIM LEHRER: That`s the U.N. force that`s already there, small force, yes.

TOM OLIPHANT: That`s right, just observing the carnage, basically. But the question of what kind of a new mandate all in this period has to be done.

And I think the question that`s being asked a little bit more frequently in the last 24 hours is: How are you supposed to achieve these political tasks, involving goodwill at some point, if there has been a sharp escalation in the fighting starting tonight?

DAVID BROOKS: But the Israelis and the Lebanese government have the same long-term interests. They both want to get Hezbollah out of the south. They`re not going to get them out, obviously not going to totally disarm them, but to get some sort of assertion of government authority in the south. They both want that.

But then, as Tom was saying, the trade-off between the force it takes to weaken Hezbollah and how much you alienate people, that`s the crucial calculus.

JIM LEHRER: But you agree with Tom that the real issue now is, if Israel goes in there on the ground with an invasion in the next 24 hours or whenever, that could change all of the equations?

DAVID BROOKS: A lot of this depends on the effectiveness. I`ve been studying Ha`aretz. There`s a very good defense correspondent there. Ha`aretz is the Israeli paper.

JIM LEHRER: Israeli newspaper, yes.

DAVID BROOKS: And there`s a defense correspondent there named Harel, and he seems to know what he`s talking about. And I would say his reports have been sober, suggesting that the Israelis talk about degrading 50 percent, but it`s not clear how much they`re doing.

JIM LEHRER: Degrading 50 percent of Hezbollah`s capabilities.

DAVID BROOKS: Right. But that`s the crucial precondition.

TOM OLIPHANT: And I just think, though, that one of the reasons there is an increasing -- it`s not skepticism or -- there`s no question about Israel`s justification here. That`s not at issue. The question is: What is wise and what is prudent?

And I think, for a lot of Americans, there`s a question of deja vu here. I mean, when you`re hearing that we`re going to have an invasion that is directed at evil, and that the success in confronting that evil can transform the region, the tendency of Americans is to say, "Wait a minute. I`ve heard that line before, haven`t I?" And that`s where Iraq plays in.

So I just think it`s remarkable this early in a crisis that Americans are not flocking to support President Bush, and they are not flocking to support Israel. Opinion in this country is sharply divided, not on whether Israel is justified, but on whether the military operation should continue or whether there should be cease-fire and an attempt at negotiation.

DAVID BROOKS: I mean, that`s significant. I would just say, if there`s a cease-fire now, then Hezbollah wins. And then they`ll be so emboldened. And we`re in a weird position, in that we have a policy, but we don`t have any military control.

JIM LEHRER: Yes, yes, we have the power of persuasion, you`re saying, but that`s it?

DAVID BROOKS: To some extent, but it`s up to Israel to fight this war. And their long-term interests and ours do not necessarily go together.

JIM LEHRER: David, some of your good friends in the neo-conservative movement suggested today that this was a good opportunity to launch a couple of military strikes against Iran. What do you think of that idea?

DAVID BROOKS: Well, I disagree with the idea. I think it would be rash. I`ve become very incremental these days. I think I have a long-term interest, the same as my neo-conservative friends, and Bill Kristol is the most prominent...

JIM LEHRER: Yes, he`s the one who wrote the editorial in the Weekly Standard that started this.

DAVID BROOKS: Right. And so I want to do things one thing at a time. On the other hand, I think one of the things that Bill recognizes is that Iran is an aggressive, imperial, long-term threat to the country.

And how would this week look if Iran already had a nuclear bomb, a regime that`s stated as its goal the desire to wipe Israel off the face of the map? The world passions are inflamed. Iran has this bomb. We would be terrified that Iran would use that bomb against Israel and that would drag the whole world into the conflagration.

JIM LEHRER: Tom?

TOM OLIPHANT: From my perspective, what has been most interesting about this little flare-up is not that there is still a hard core of opinion from this camp, whatever you call it, but that it has evoked sharp reaction and almost a resurgence in another camp within the conservative world that claims to have learned the limits of America`s power and learned that this kind of ambitiousness in the world can turn out to be reckless, even though the motives are right.

And so, you know, while a lot of Democrats I think are content to maybe hold the coats of these people who are at each other`s threats...

JIM LEHRER: Let them go.

TOM OLIPHANT: ... yes, let them go -- it`s interesting that the other point of view in the conservative world, not merely Pat Buchanan -- it goes a lot further than that; Francis Fukuyama would be another example -- who believe, as conservatives often have taught us over the years, that we should be aware and respectful of the limits of government power.

DAVID BROOKS: These are the ancient two branches of foreign policy conservativism, the one -- and George Will is another on that side -- goes back to Edmund Burke who says societies are extremely complicated. We don`t really know much about them. If you try to do something dramatic, you`re probably going to lead to all sorts of intended consequences, and that`s Burke.

And then the other side, you could say it`s Churchill. You`ve got evil in the world; you`ve got to stand up to that evil; and you`ve got to defeat that evil. And these are two strains, and they`re just playing out.

JIM LEHRER: And we`re about to play out of time here, but before we go, quickly, Tom, you first, why did the president choose stem-cell research to exercise his first veto as a president?

TOM OLIPHANT: He had no choice, because this ran right up against his position. But I think what we saw last night -- this week, rather, was the end of President Bush`s involvement in this issue. It`s now part of this year`s politics. It will be part of `08. If John McCain had been president this week, we`d have had a signing ceremony in the East Room.

JIM LEHRER: What do you think is going on?

DAVID BROOKS: I agree. There`s no question where the majority is. It`s against the president. But he did it on a matter of principle. He believes you don`t create life to destroy it, but it is the minority position in the country.

JIM LEHRER: OK. Gentlemen, thank you both very much.

(BREAK)

JIM LEHRER: And, again, the major developments of this day. Israel amassed tanks and troops near the Lebanese border for a possible ground campaign against Hezbollah. Lebanese civilians streamed into Beirut from the south, and the evacuation of foreigners continued, as well. And Secretary of State Rice announced she`ll go to the Middle East on Sunday.

(BREAK)

JIM LEHRER: And, once again, to our honor roll of American service personnel killed in Iraq and Afghanistan. We add them as their deaths are made official and photographs become available. Here, in silence, are 12 more.

"Washington Week" can be seen later this evening on most PBS stations. We`ll see you online and again here Monday evening. Have a nice weekend. I`m Jim Lehrer. Thank you, and good night.