Gasoline prices can be curbed: Here’s how

April 29, 2011

The U.S. Government already has a steel truncheon to curb high oil and gasoline prices. It’s called Dodd-Frank.

Petrochemical companies, banks, Wall Street and hedge fund speculators, though, don’t want to see real policing of this financial reform law to go into effect. They make billions with the status quo — at your expense.

In a classic red-herring tactic, House Republicans blame the federal budget deficit, EPA regulations and President Obama for high gas pump prices. Who’s really to blame? Let’s follow the numbers.

You can make a minor argument that increased demand for crude oil — and to some extent reduced supply — has some bearing on gasoline prices. There is a modest economic recovery going on here, in Europe and in developing countries like China and India. Everyone’s continuing to demand more black gold.

Yet there’s a huge disconnect between actual rise in demand and prices. According the American Petroleum Institute, gasoline demand rose 6.1 percent (year over year) in March while the pump price rose 22 percent during that period.
The prices of all grades of gasoline rose 5.3 cents in one week (ending April 20), which was the highest level since August, 2008.

Gas prices are up 133 percent since the Wall Street meltdown gob-smacked the world economy in December, 2008. Is it possible that demand has risen that much in a sluggish period coming out of the largest economic downturn since the 1930s? Highly unlikely. You can blame slack production and Middle East crises for some of the price disparity, but certainly not all of it.

“There is no question that speculation is playing a role in the rise of gas prices,” said Rep. Barney Frank (D. Mass.), the ranking member of the House Financial Services Committee and key author of the Dodd-Frank law.

Commodity traders know the sky’s the limit because the key safeguards in Dodd-Frank that would rein in speculation are still mired in the rule-making process with the Commodities Futures Trading Commission.
Traders know they can also freely bet against a falling dollar. Oil, gold and other dollar-denominated commodities move inversely to the buck.

Speculation policing, however, is not on the books. The GOP budget plan even calls for cutting the CFTC’s staff by two-thirds, so even if the more stringent Dodd-Frank rules emerged, the agency may not have the cops to enforce them.

Congress has known for a while that speculators rule the roost and force oil prices higher. For years, political shaming sessions would be staged in front of key energy committees, but these wet-noodle floggings of oil company moguls never resulted in any meaningful investigations or tougher laws.

Meanwhile, oil companies and traders gorge on obese profits. Exxon-Mobil even had the cheek to post a recent blog noting “…it’s really not credible to suggest that we are responsible for world oil prices.” Sure, and Donald Trump has never made a dime in real estate and hates publicity.

Washington has already seen the evidence for speculative abuses. A long-forgotten 2006 report by the Senate Permanent Subcommittee on Investigations, showed that not only were speculators buying oil contracts for petroleum they would never use, their trades were run through opaque, unregulated exchanges.

The subcommittee faulted what it called the “Enron loophole,” (yes, that Enron) which Congress inserted in an infamous 1999 law deregulating commodities trading that permitted unpoliced over-the-counter exchanges. These devilish enterprises allowed derivatives such as credit default swaps to grow into a $60 trillion market — and we know what happened with those monsters in 2008.

Although the Senate probe concluded that speculation put oil prices on steroids two years before Wall Street’s massive meltdown, the money trust still wants to let speculators have their way. As a result, gasoline is above $4 a gallon in many urban areas with no ceiling in sight as politicians blame each other.

Unfettered commodity speculation has to end. Next time you grimace at your gasoline or heating-oil bill, your first thought shouldn’t be to curse an oil giant like Exxon-Mobil. Think Dodd-Frank. Then dial your congressman.

22 comments

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I totally agree with you on that is time to end this rampant and irresponsible commodity speculation, but is going to take a lot political will and commitment to do so, which seems very unlikely when high oil prices are going to be Republican’s next battle horse against Obama’s reelection next year.
It’s very unfortunate that the American people have to pay the price for such a Machiavellian tactics.

Meanwhile, what’s behind the argument that oil prices are high because of an imminent devaluation of the dollar, which is causing investors as well as speculators to hedge against it?…

Posted by marusik | Report as abusive

Wow, John, you’re a genius! Why didn’t anybody else think of that? Why don’t the president jump on your proposal, instantly bring down gas prices, leave the GOP green with envy and assure easy re-election?

Maybe because what you wrote is such utter hogwash. Is there a Pulitzer price for fictional content in an editorial? Hollywood couldn’t put more fiction in a 90 min movie than you put in this column.

Let’s start with the assertion that it’s all speculation. Sounds easy doesn’t it? I sell @$115/bbl to you, then you sell @$120/bbl to me. What could be easier? We’re both making money!

Except, of course, that I now own some oil that must eventually be sold to a real user, for at least $120/bbl for me to even breakeven. Why would the real user pay me more than someone else? Note that the real user (usually a refiner) has every incentive to buy as cheap as he can. If he pays more than his competitor, and they sell their product in a competitive market, he is going to lose his shirt.

It does not really matter whether a barrel is traded 20 times or 2,000 times before it goes to a real user. In the end, it can only sell for what the real user will pay. The speculators can pour in all the money they want, they all still have to sell to a finite number of real users.

Here’s the truth about speculators, courtesy of the Wall Street Journal(1): “But if they’re honest, they’ll agree with the Commodity Futures Trading Commission, which at George W. Bush’s direction launched an exhaustive investigation in 2008. The agency concluded that speculators—otherwise known as traders—were putting downward pressure on prices. The liquidity they provide helps to smooth volatility. In any event, the Federal Trade Commission already polices the gasoline markets for manipulation and anticompetitive practices, including a unit that since 2002 has monitored retail and wholesale data nationwide on a daily basis.” Read that and weep: “DOWNWARD pressure on prices.”

Also of note: despite countless investigations by our elected officials, nothing untoward has ever come to light. But then, I suppose, that only proves how cunning these speculators are, eh John?

So why are oil prices going up? Surprisingly, the Senate report you reference contains the answer (top of p2): “As
Saudi Arabia has increased its rate of production to meet increasing demand, its ability to pump additional oil in the event of a shortfall has declined, thereby providing less of a cushion in the event of a supply disruption. It is often asserted that these fears over the adequacy of supply have built a ‘‘risk premium’’ into crude oil prices.” Supply and demand! Who would have thought?

BTW, where did you the idea that a 1% increase in demand results in a 1% increase in price? The slope of demand curve is rarely 1:1. The slope of the curve depends on a slew of factors, including the availability of alternatives. Given that there is almost no alternative to gasoline for the American driver, a modest increase in demand has the potential to have a severe effect on prices.

But, hey, why let the facts spoil a good story? Of course, we’re entitled to $1/gal!

Posted by BokFan | Report as abusive

Nowhere do I suggest that anyone is “entitled” to $1 a gallon. In fact, I think it should be higher if you take into account that the federal gasoline tax hasn’t been adjusted for inflation. And we still haven’t figured out a carbon tax. Neither did I state that there would or should be a 1:1 relationship between demand and price. You saw that somewhere, but it wasn’t in what I wrote. As for speculators putting downward pressure on prices, where’s your evidence? Do they provide liquidity? Sure they do, but do their trades reflect real supply-and-demand concerns? I’d like to see the evidence for that as well. Are all the barrels traded going to end users? Nothing “untoward ever comes to light” because OTC trading has never been in the light in the first place. You can’t see what’s in the darkness.

Posted by johnwasik | Report as abusive

OK, you didn’t say anyone is entitled to $1/gal. At what price would you be happy that the free market is working as it should?

The 1:1 relationship is implied where you said: “Yet there’s a huge disconnect between actual rise in demand and prices. According the American Petroleum Institute, gasoline demand rose 6.1 percent (year over year) in March while the pump price rose 22 percent during that period.” Otherwise, what is odd about prices jumping 22% on a 6.1% increase in demand?

Speculators putting downward pressure on prices seems like common sense: if one trader gets greedy, the others eat his lunch. Your theory, that speculators bid up prices and reap all the benefits, require a vast conspiracy that no one has been able to unearth so far.

I think you have the tail wagging the dog as far as the speculators are concerned: speculators are responding to real events, such as widespread unrest in the Middle East. They don’t cause prices to rise, the respond to rising prices by getting in on the trade. I fail to see how speculators by themselves can move the price, barring a huge conspiracy. And remember, bidding the price up includes the risk that you won’t be able to sell at the price that you paid.

Pray tell, where do barrels go that don’t go to end users? Are traders dumping their holding in a secret location somewhere? That is a ridiculous notion, if ever there was one. At $115/bbl, why would they do that?

“You can’t see what’s in the darkness.” Are you saying that the free market equates darkness? That implies we need to get rid of the free market so that our all-knowing elected officials can control everything. I guess America is drifting in that direction already. So much for the free market, or personal freedom.

Accept the obvious: demand is growing and supply is struggling to keep up. No conspiracy required.

Posted by BokFan | Report as abusive

Thank you John.

I’ve always followed the mantra “When you don’t understand something, follow the money”.

Today, in many cases I cannot do that because, as you point out….

“You can’t see what’s in the darkness”

MIA

Posted by Missinginaction | Report as abusive

Their is one problem with your solution. Oil is a World commodity and you can’t just say the US needs to do something. That’s the trouble with the US. We think our Government can solve everything. In fact we have a weak dollar which if our deficit was not so huge a stronger dollar would by itself reduce oil cost. We keep focusing on oil companies as the culprits and they are merely a middle man for a commodity that is in demand in many more countries now then it was a decade ago. We have to stop thinking this is a US problem. Europe has struggled with consistently high fuel prices for a long time.
Finally the US has begun to face this same problem. Until we as a world reduce demand for oil and we as a country begin to get our Dollar stronger. We can expect high gas prices. No Congressman or woman can stop that from happening.

Posted by jscott418 | Report as abusive

Well, a simple test is in order ;) Restrict trades for 1 contract to those who take delivery…

Posted by jpstrikesback | Report as abusive

Wait just a minute. While I agree that market speculation is resulting in excessive increases in gas prices your rationale is totally wrong. You state “there’s a huge disconnect between actual rise in demand and prices. According the American Petroleum Institute, gasoline demand rose 6.1 percent (year over year) in March while the pump price rose 22 percent during that period.” When has the increase in demand for a product equal to the increase or decrease in price. In reality the more demand for a product results in a substantial increase in price when supply does not meet demand.

Yes, speculation by market traders is a major problem in the market today. But how does this fact make an oil company a villan. Because of the economics in the industry oil companies either lose money or make tons of it each year. The oil company do not hire or control market traders.

While I agree with your premise that speculation is a problem, I cannot agree with your logic.

Posted by SaminVa | Report as abusive

Yep, it’s that simple. Not. How about our weak dollar monetary policy by our dear leader and his Fed chief? That has more of an impact on the price of gasoline than any other factor. Their goal is to make the banks and bankers even stronger…forget about the majority of the people. We’re just the bill payers, don’t try to make life easier for us. Just keep trying to hoodwink the public. But we’re getting a little smarter now…more so than this writer. But, of course, even he doesn’t believe what he writes, he’s just doing his part to support this administration’s policies.

Posted by lezah2 | Report as abusive

Dollar prices of everything imported are going up because the dollar itself has been devalued.

The dollar has been devalued because we have a government of the many by the few. Our system has managed to disconnect the feedback mechanism between the public and the Government — the ballot. So politicians have only a very small chance of ever losing an election due to the actions of the people. This has let us fight unpopular war after unpopular war for 50 years now, all paid for by printing excessive dollars and, hence, inflation.

So the way to stop gasoline prices from going up is not to trap the American people with exchange controls, but to recreate our Government so that we actually have a choice.

And stop these “boutique” wars at once.

Posted by txgadfly | Report as abusive

A good start would be to impose an excise tax on the oil pumped from the Gulf farther out than a mile or two. BP pumped all that oil without paying for the privilege.

“Sen. Max Baucus announced a plan Thursday that would end tax breaks for the five largest oil companies. This would include the domestic manufacturing deduction established in 2004 and a reduction in the tax credit for royalties oil companies pay to foreign governments. An excise tax would also be levied on some leases in the Gulf of Mexico.”

Make the Republicants stand for destroying Medicare in order to pay for huge giveaways to the oil industry.

Posted by cirrus7 | Report as abusive

Great comments on an uninformed and speculative editorial. Our politicians and bureaucrats have made such a bloody mess of their own physcal behavior, how could anyone think they are competent to manipulate any global commodity. For once I agree with the Chinese – don’t preach at us about how to fix the kinds of things that you can’t or won’t fix yourselves.

Posted by John-B | Report as abusive

Prices are sky high on gas, food, and commodities because the U.S. dollar is being sabotaged by the Federal Reserve. The Dollar devaluation is a direct result of the Federal Reserve printing funny money out of thin air in order to pay an engineered annual federal deficit. Actually, it no longer even prints the money…it just enters a few more digits in a computer somewhere.

Call your congressman? That’s pretty funny. Our Congress and Obama are just paid lackeys who are carrying out the ruinous policies designed by the Federal Reserve. Mr. Wasik, you are obviously just another paid lackey as well.

Posted by gruven137 | Report as abusive

Reuters has a conservative slant to it’s opinions and being a progressive, I’m fine with that view being expressed. I am not fine with finger pointing in one direction in a news article, especially one that was planned to mis-direct. Barney Frank does deserve a little blame but the majority of finger pointing should be at the GOP senate that put a hold on a Pelosi CFTC bill that passed with over 400 votes. No mention of Burton in the GOP house in the opinion pieces tells me a schill for the oil industry does not come under scrutiny on these pages. The only way to stop an offshore leak is a relief well, yet you never hear that proposed as a regulation to drill offshore. With less than $50/bbl extraction costs another bore is a bullet easily bitten by producers.

Posted by JamesChirico | Report as abusive

[...] finished to comply with the Dodd-Frank Act. And that is what will lead to curbing gas prices, explains Reuters, as it will but the breaks on speculators.Petrochemical companies, banks, Wall Street and hedge [...]

When are you guys going to understand the economics of herd mentality? Prices are high because traders have “irrational exuberance”, they believe they can go long on WTI oil at $113 and not get burned. They are betting that there might be a supply disruption sometime in the future.

The way to solve this is for the Obama administration to make the following statement. ” If you read the statute governing the Strategic Petroleum Reserve, the President has the right to use the reserve to cushion a severe supply disruption. We have an abundance of oil inventories in the private sector right now, so we do not need to tap the SPR today. However, if a supply disruption occurs in the future, we will use the SPR to limit the effect of that supply disruption. An added benefit to using selling from the SPR is that we will be able to ‘sell high’,to reduce our budget deficit, and replace the oil when the prices go low.”

In 2008, traders were concerned that there might be a supply disruption, that a shortage might materialize because of the Nigerian rebels, or the Israelis attacking Iran, followed by Iran closing the Straits. When it became apparent the disruption was not going to happen, coupled with the economy softening, prices tumbled. Let’s be very clear; I watch the energy department reports on consumption closely, and there was never an increase in demand or reduction of supply in 2008 that would drive up the price the way it did. And at the end of 2008, there was never the reduction in consumption, or the increase in supply to warrant the prices tumbling far below last marginal barrel cost.

In the days when there is a lot of money looking for a home, the money follows the trader-herd. IF the herd gets spooked by the belief there might be a shortage in the future, they will drive prices up as they did in 2008 and they are doing now. Once the herd gets spooked the other direction, gets spooked into believing they might get toasted on a long contract over $110, they will start dumping in a hurry, and prices will tumble overnight.

And when that happens, the market price for ethanol will tumble, and ethanol producers will not be able to afford $7 corn. They will curtail production, and all of a sudden the corn market will be in surplus, and prices can tumble to the $4 level. At $4 corn, livestock producers will produce more chicken, pork, and beef, and prices at the grocery store will fall.

Yes Obama, there is a solution. Use the SPR the way it was intended to be used.

Posted by randymiller | Report as abusive

Randy Miller, you should have written the article! Good job.

Posted by r.felder | Report as abusive

In my opinion, the real reason gas prices have risen so much is because demand is inelastic. The traders, oil companies, stations can pretty much charge what they want because we don’t have an alternative. It also seems counter-intuitive to RAISE a tax on something that people are already complaining about as being too expensive. Lastly, I think this is around the price where real capitalism can take off and have a chance with alternative sources and alternative means of transportation. When people start talking about the sticker shock at the pump (loudly) and it is in day to day conversation, there is a market. This, however, should not be done by the government. There is too much beauracracy to get anything accomplished there. From my studies and experience, ideal team sizes where decisions are made effectively is somewhere between 5-7 people (think small start up). Last time I checked we had 100 Senators, 435 members in the house, and a President. Not too mention the thousands of lobbyists and thousands in the media influencing opinions. Good luck getting anything worthwhile through that without a lot of red tape. That is the ONE and ONLY good quality of a dictatorship, the decisions can happen much faster (for better or worse).

Posted by timo84 | Report as abusive

Foul play aside, speculators make money buying the low (or at least a less high price) in natural price cycles and selling the high. If they would do the other way around, there wouldn´t be many speculators still alive, would there?

Maybe if people wouldn´t insist on buying cars with a minimum top speed of 100 miles an hour they wouldn´t complain so much?

Posted by t4s | Report as abusive

A lot of dollars have been printed, only backed by a promise by our government, and now they won’t buy as much as before. When I started college many years ago gas was 30 cents a gallon, a new car was 1800.00 and a year at a private university was 1640.00. None of those things are worth any more now than then, just the dollar is worth 20 to 40 times less than in 1969. If 4.00 was too expensive, nobody would be buying cadilacs that do 0 – 60 in under 4 seconds. Quit blaming the market- wasteful govt spending money printing, and stupid energy polilcies are the problem.

Posted by zotdoc | Report as abusive

I think we need a separate agency, away from Congress and the Administration to control commodities. We have had too many boom and bust cycles with the presnt system. A few more independent agencies and our congress and the president could be like the British Royal Family (They cost money, put on a good show, but can’t really cause any trouble, plus they make good press).

Posted by fred5407 | Report as abusive

It’s obvious to anyone who can think who the speculators in the energy market are. Let’s say you are Exxon and have $200 million dollars you loan to an investor friend. You pump oil out of the Gulf of Mexico for $20 a barrel and out of West Texas for $5 a barrel say average cost of $18 a barrel.

You ask your investor friend to buy 1,000,000 contracts for oil a $100 a barrel pushing the price up. You then price gasoline at $100 a barrel cost which is $82 dollars above your real cost. Exxon probably doesn’t even care if they get the $100 million back as they made $17 billion in profit.

Yes they just have to follow the money and see where it is coming from to know who is behind the high oil prices.

And if you were wondering Exxon and the other oil companies are going into medical care and drug making big time. After all they know that in ten maybe twenty years the oil will be gone but human sickness is something they can charge a lot of money for and make a lot of money on.

Posted by JEYF | Report as abusive

Randy: “I watch the energy department reports on consumption closely, and there was never an increase in demand or reduction of supply in 2008 that would drive up the price the way it did.”
You do? Well, maybe you need to pay more attention(1). As shown in the figure, it was really a long term thing. Demand had been increasing for several years, while supply had stayed flat.

Randy: “And at the end of 2008, there was never the reduction in consumption, or the increase in supply to warrant the prices tumbling far below last marginal barrel cost.”
You’re kidding, right? The US economy goes into a tailspin, but miraculously there is no impact on oil demand? Tell me another one.

For those interested in the facts, the facts that Randy has so much trouble spotting, here they are (2).
May I suggest some coffee BEFORE you check those figures? Other than that, don’t let the facts get in the way of a good story.

Randy: “Yes Obama, there is a solution. Use the SPR the way it was intended to be used.”
Yeah! Let’s use the SPR for speculations! What could possibly go wrong? You know, other than causing MORE volatility in the oil markets…(3)

JEYF: “You then price gasoline at $100 a barrel …”
Oh, that was easy! You just price oil at $100/bbl, eh? But if it was that easy, why go through that elaborate scheme? Why not just price oil at $150/bbl, and keep it there, while you rake in the profits?
(1)http://www.consumerenergyreport.com/2 008/05/22/an-amazing-disconnect/
(2)http://www.eia.gov/emeu/ipsr/t21.xls
 (3)http://www.consumerenergyreport.com  /2011/04/07/speculators-political-reser ve/

Posted by BokFan | Report as abusive

[...] the third quarter of 2008. Just before the economy crashed, the CPI-W spiked temporarily due to a big increase in energy prices. The result was a whopping 5.8 percent COLA for 2009. Social Security payments can’t rise until [...]