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March 29, 2012

The real reasons for high gasoline prices

By Gregory Patin

Blame Wall Street for soaring gasoline prices, not President Obama.

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The real reasons for high gasoline prices

By Gregory Patin, Madison Independent Examiner (originally posted here)

With gasoline prices approaching $4 per gallon , there are many factors that have been blamed by politicians and so-called analysts in the corporate media. Among those are tensions in the Middle East, supply and demand, OPEC policies, the Obama administration's policies, etc.

While many factors can be considered in placing the blame for rising gasoline prices, the primary cause of the price increase is rarely mentioned - speculation on Wall Street. Wall Street is betting on higher oil prices in the future and that betting is causing prices to rise.

A recent article by Robert Lenzner, writing for Forbes , concludes that speculation adds $23.39 to the price of a barrel of crude oil, which translates to a $.56 increase in the price of gasoline at the pumps for Americans. In other words, relatively few players in the Wall Street casino with very deep pockets are placing huge bets on oil -- and you are paying.

The market for gasoline is currently in contango, meaning that either demand is expected to outstrip supply and/or prices are expected to rise. Wall Street banks, energy corporations and companies such as Koch Industries employ a contango strategy by buying up oil and storing it in massive containers both on land and offshore to lock in the oil for sale later at a set price. This practice, more commonly known as commodities speculation, artificially increases gasoline prices regardless of free market fundamentals by withholding supply until it can be sold at the futures price.

Another factor that is causing rising oil and gasoline prices can also be attributed to Wall Street and the private central bank, the Federal Reserve. In order to compensate for the billions of dollars in losses by the big banks on Wall Street since 2008, the Federal Reserve has been flooding the market with newly printed money and borrowing it to Wall Street banks at low interest -- a policy known as "easy money." That reduces the purchasing power of the dollar by creating inflation. Since most oil is traded in petro-dollars, that means it takes more dollars to purchase a barrel of oil, which accounts for part of the price increase.

According to Nathan Lewis, also writing for Forbes in a piece entitled "Oil Continues to Rise Because the Dollar Continues to Fall":

Our political discussions tend to focus on that one commodity that we all use daily, and which is standardized across the country -- gasoline. People as a whole know that they are being slowly devalued into poverty by the Federal Reserve's "easy money" policy. However, this topic is much too complex for most individuals, so they focus on something -- gas prices -- which seems more direct. Before this is all over, I expect to see oil prices north of $1000 per barrel -- perhaps in 5-8 years.

Other factors considered to blame for rising prices feed into speculation rather than account for the price increase of gasoline. According to Robert Reich , who has served in three national administrations and is currently Chancellor's Professor of Public Policy at the University of California at Berkeley:

The Street is laying odds that unrest in Syria will spill over into other countries or that tensions with Iran will affect the Persian Gulf, and that global demand will pick up as American consumers bounce back to life. These bets are pushing up oil prices because Wall Street firms and other big financial players now dominate oil trading. Financial speculators historically accounted for about 30 percent of oil contracts, producers and end users for about 70 percent. But today speculators account for 64 percent of all contracts.

Free market fundamentalists who insist that gasoline prices are on the rise due to supply and demand are overlooking some simple facts. Demand for crude oil is decreasing and supply is adequate. According to Reich, over 80 percent of America's energy needs are now being satisfied by domestic supplies. In fact, the U.S. is starting to become an energy exporter.

The International Energy Agency (IEA) reports that the world oil supply rose by 1.3 million barrels a day in the last three months of 2011 while world demand increased by just over half that during that same time period. Gasoline usage is down in the US by 8%, Europe by 22% and has even fallen in China.

Recession across much of the European Union, a deepening recession in the United States and slowdown in Japan have reduced global oil demand while new discoveries are coming almost daily. Countries like Iraq are increasing supply after years of war. A brief spike in China's oil purchases in January and February had to do with a decision last December to build their Strategic Petroleum Reserve and is expected to return to more normal import levels by the end of this month.

While the Obama administration's energy policy is not to blame for rising gas prices, part of the blame for failure to effectively regulate the oil commodity market can be placed on both the current administration and Congress. In recent years, a Wall Street-friendly (and Wall Street financed) U.S. Congress has passed several laws to help the banks that were interested in trading oil futures.

The Commodity Futures Modernization Act of 2000 (CFMA) was drafted by the man who today is President Obama's Treasury Secretary, Timothy Geithner. The CFMA, in effect, gave financial institutions free reign over derivatives trading in energy futures, absent any government supervision, as a result of the financially influential lobbying pressure of the Wall Street banks. Oil and other energy products were exempt under what came to be called the "Enron Loophole."

In 2008 during a popular outrage against Wall Street banks for causing the financial crisis, Congress finally passed a law over the veto of President George Bush to "close the Enron Loophole." As of January 2011, under the Dodd-Frank Wall Street Reform and Consumer Protection Act , the Commodities Futures Trading Commission (CFTC) was given authority to impose position caps on oil traders beginning in January 2011.

These limits have not yet been implemented by the CFTC because a conservative majority on the CFTC has refused to implement a mandate from the Dodd-Frank Wall Street reform bill to close oil trading loopholes and provide more transparency. While CFTC Chairman (and former Goldman Sachs executive) Gary Gensler has spoken publicly of trying to close loopholes, enforcement of the Dodd-Frank bill remains non-existent.

In a recent column for the Huff Post, Senator Bernie Sanders of Vermont stated that the CFTC doesn't "have the will" to enact these limits and "needs to obey the law." He adds, "What we need to do is"limit the amount of oil any one company can control on the oil futures market. The function of these speculators is not to use oil but to make profits from speculation, drive prices up and sell." (See video in the original posting here).

The bottom line is that consumers are paying more at the gas pump because of futures trading on Wall Street, inadequate regulation of the oil market and the ability of speculators to drive gasoline prices up every time the drums of war beat in the Middle East. With access to "easy oil" supplies dwindling and new supply sources becoming increasingly more difficult and costly to extract, all possible measures must be taken immediately to keep prices down.

The moment it becomes clear that the Obama administration is serious about market reforms and acts to prevent wars in the Middle East by pursuing diplomatic channels, the price of oil will plunge. Until then, the top 1% will be laughing all the way to the bank at the expense of the other 99%.