Who is Responsible for Skyrocketing Gas Prices?

By Michael Califra

July, 2012

Republicans have been shouting about the high price of gasoline every chance they get. In the face of a steady stream of good economic news, they sense a political opening in the frustration and anxiety people feel when they fill up at the pump. House Speaker John Boehner endorsed the strategy of attacking President Obama on high gas prices when he recently urged Republican candidates to spread the meme that the price has “more than doubled since the president took office.”

Of course, this is nothing new. During the 2000 presidential campaign, then candidate George W. Bush lambasted the Clinton administration for high fuel prices, saying that, as president, he would “jawbone OPEC members to lowering the price.” Yet, despite the Bush family’s famously close ties to the Saudi Royal family, the average price for a gallon of regular gasoline rose from $1.52 in January, 2001 to $4.11 by July of 2008. Gas prices were again a big issue for several weeks during the 2008 campaign when the Republican refrains “Drill, baby, drill” and “Drill here, drill now” were born.

The Republican presidential candidates this time around have picked up on that theme, implying that there is a simple solution to high prices – more domestic oil drilling. Mitt Romney said it’s time to “finally get our oil and our gas out of the ground”; according to Rick Santorum, it’s President Obama’s “radical environmental policies” that are hampering production; Newt Gingrich said he could bring gas prices down to $2.50 a gallon by opening up more Federal lands for energy production. But is the answer really that simple? Is there a supply shortfall that has pushed up the average price of gasoline to $3.79 nationally (and closer to $4.00 in our area) with increases coming almost daily?

The answer is no.

First, the price for oil is set on the world markets; not here at home. Second, the country is awash in petroleum. The Great Recession drastically reduced the demand for gasoline. When the economy was shedding 750,000 jobs a month, the demand for all kinds of fuel sharply contracted along with the GDP, (which is why, when President Obama took office at the height of the economic crisis, the price of gasoline was less than half what it is today). Domestic demand for oil is now at its lowest level since 1997; so low that U.S. refiners have been exporting gasoline to world markets where demand is higher, making the United States a net exporter of gasoline for the first time since Harry Truman was president. And contrary to Republican claims, the Obama administration has approved additional drilling permits and opened up some previously closed Federal lands to leasing. According to the U.S. Energy Information Administration, the supply of oil and gasoline is now greater than it was three years ago when the average price was $1.90 per gallon.

So what’s driving up prices?

Two reasons: the tension with Iran in the Middle East, and the same Wall St. speculators who created the global financial crisis using that geopolitical instability to increase their profits.

On the New York Mercantile Exchange, where oil futures contracts are traded, end-users like airlines and shipping companies try to hedge against price increases by buying fuel at today’s price for delivery in the future. But Wall St. banks and hedge funds are also making multibillion-dollar bets on the future price of oil, with no intention of ever accepting delivery. They are betting that events, such as a continued escalation of tension between Israel and Iran, will further drive up world oil prices, enabling them to sell their contracts at a higher price than they bought them for.

But just how much of does all their speculating actually drive up prices? Open markets have never existed without speculators. But according to a recent McClatchy Newspapers report, financial speculators, historically, have accounted for about 30% of oil trading while end users and producers accounted for 70%. Incredibly, today that’s nearly reversed. Recently published research by the Federal Reserve Bank of St. Louis concluded that “speculation played a significant role in the oil price increase between 2004 and 2008 and its subsequent collapse.” The report also noted that “One striking characteristic of the oil market over the past decade is that large financial institutions, hedge funds, and other investment funds have invested billions of dollars in the futures market to take advantage of oil price changes.” And, as if rubbing salt into our collective wounds, a report by the Wall St. firm Goldman Sachs, a major speculator in oil futures, led to estimates that activities like theirs add $23.39 to the price of a $108 barrel of oil, increasing the price at the pump by 56 cents a gallon.

Right now, speculators are betting big that prices will continue to rise. And controlling as much of the market as they do, they can make that a self-fulfilling prophecy, causing an upward spiral in prices with the demand their own purchases create. Eventually, the bubble will burst. Some investors will be left holding the bag while others will have walked off with hundreds of millions of dollars in profits. (Sounds familiar, doesn’t it?) But until that happens, American families will continue to suffer and the economic recovery will be put at risk.  With more and more disposable income going into their gas tanks, consumers, still restrained be debt, will have to cut back spending elsewhere. While that’s good for the oil companies, it’s bad for everyone else.

What can be done?

It’s clear that supply is not the problem, and Republican calls for more drilling, building the Keystone XL pipeline and looser environmental regulations will do nothing to bring gasoline prices down. What actually will bring down prices at the pump is anathema to every Republican: regulation of the commodities markets. The Dodd-Frank Wall Street reform law passed by the Democrats in 2010, which all the Republican presidential candidates have vowed to repeal, requires the Commodities Futures Trading Commission to put tough new restrictions in place to curb excessive speculation in the markets. That was supposed to have happened by January 17th, 2011; but law suits brought by Wall St. players in December have delayed full implementation of those new rules. Recently, a group of 69 members of congress – all Democrats – spearheaded by Senator Bernie Sanders (I) of Vermont, have been urging the CFTC to put the new restrictions into full effect immediately. Yet nothing has been resolved, nor is it likely to be in the near term with Republicans controlling the House, filibustering in the Senate, and demonizing Dodd-Frank on the campaign trail as they demonstrate again and again that they are prepared to go to the mat fighting any new regulations on Wall St.

So, the next time filling up your tank empties your wallet, remember who it is that’s taking a big chunk of your money; and which political party is standing in the way of reforms that would bring sky-high gas prices back to earth.

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