Gas Prices.....What To Think?

[Ben]

What’s Really Pushing Up the Price of Gas?

by MIKE WHITNEY

Is the Fed’s “Easy Money” policy pushing up the price of gas? The editors of the Wall Street Journal seem to think so. Here’s how they summed it up in an article last week:

“Oil is traded in dollars, and its price therefore rises when the value of the dollar falls, all else being equal. The Federal Reserve throughout Mr. Obama’s term has pursued the easiest monetary policy in modern times, expressly to revive the housing market…..
“Oil staged its last price surge along with other commodity prices when the Fed revved up its second burst of “quantitative easing” in 2010-2011. Prices stabilized when QE2 ended. But in recent months the Fed has again signaled its commitment to near-zero interest rates first through 2013, and recently through 2014. Commodity prices, including oil, have since begun another surge, and hedge funds have begun to bet on commodity plays again….(“‘Stupid’ and Oil Prices”, Wall Street Journal)

“Another surge” for commodity prices?
Not exactly. As a whole, commodity prices have remained relatively flat. (Copper, nickel, zinc etc are all up a bit, but not much. No more than 4 per cent for any of them.) It’s only oil that’s skyrocketing. Oil soared to a 10-month high on Friday hitting $109-plus per barrel, up 14 percent in the last month. Prices at the pump have also jumped to nearly $4 per gallon across the country putting more pressure on consumers’ budgets and, once again, raising the prospect of a double dip recession.
The WSJ is correct in saying that quantitative easing (QE2) did push up food and energy prices, but is that really what’s driving oil prices higher today?
Probably not. There are other factors that are likely having a greater impact, like the escalating tension in the Middle East–particularly the supposed threat of a war with Iran. Buyers are rushing to build up their stockpiles before the conflict might begin. Here’s an excerpt from a post at Econbrowser that explains:

“Phil Flynn, a senior market analyst at PFGBest Research in Chicago, offered this interpretation:
“We’re seeing panic buying in Europe and Asia because they’re absolutely convinced that they’re not going to be able to buy Iranian oil or there’s going to be some kind of conflict that disrupts the transport of oil through the Strait of Hormuz…. there is a lot of hoarding in case the worst-case scenario happens. Asian buyers have been buying up West African crude like it’s going out of style.” (“Crude oil and gasoline prices”, James Hamilton, econbrowser)

So, is panic buying driving up the price of gas or does it have more to do with a gradually improving economic picture that’s increasing demand around the world? That seems to be the gist of a report by NPR’s John Ydstie on Thursday’s All Things Considered. Ydstie notes that “for the first time in six decades” the US “has become a net exporter of gasoline. We’re sending more gasoline out than we’re bringing in.” (“What’s Behind The Rise In Gas Prices?”, NPR) And that’s because it’s now cheaper to produce gas in the US than it is in the rest of the world (mainly due to fracking). Unfortunately, cheaper production costs don’t translate into cheaper prices at the pump. Why? Because gas is traded in a global market where prices are set by supply-demand dynamics.
Still, whether China is purchasing more oil or not doesn’t explain the sharp uptick in prices, because there’s no apparent shortage of supply. In fact, according to the EIA, the statistical arm of the Energy Department, inventories are unusually high.
Here’s a clip from their statement: “At 339.1 million barrels, U.S. crude oil inventories are in the upper limit of the average range for this time of year….Total motor gasoline inventories increased by 0.4 million barrels last week and are in the upper limit of the average range.”
So, if there’s no shortage of supply, then Ydstie’s “global market” theory doesn’t make much sense because there’s no pressure on prices. And there’s something else to consider, too, which is that gas consumption in the US has dropped sharply in recent months. In fact, “demand for refined oil products is close to its lowest level in nearly 15 years”. (CNBC) Here’s a clip from a post by Charles Hugh Smith’s titled “Why Is Gasoline Consumption Tanking?” that explains what’s going on:

“Retail gasoline deliveries, already well below 1980 levels, have absolutely fallen off a cliff….the declines in retail gasoline deliveries are mind-boggling….”
“There are no data-supported broad-based drivers for dramatically lower gasoline consumption other than austerity and lower economic activity……What other plausible explanation is there for the decline from 42.4 MGD in July 2011 to 30.9 MGD in November 2011 other than a dramatic decline in discretionary driving? (“Why Is Gasoline Consumption Tanking?”, Charles Hugh Smith, Of Two Minds)

Whatever the reason may be, US drivers have cut back on their gas consumption dramatically which should have a material effect on prices, but it hasn’t. Prices continue to soar, and the soaring prices cannot be explained in terms of the Fed’s easing policy, constriction of supply, refinery closings, or fear of another Middle East war. (The so called “fear premium” should be no more than $10 to $15 per barrel) Investigative journalist Kevin G. Hall explains what is really driving prices in an article for McClatchy titled “Once again, speculators behind sharply rising oil and gasoline prices.” Here’s an excerpt:

“….oil’s price shot up because it trades in financial markets, where Wall Street firms and other big financial players dominate the trading of oil, even though they have no intention of ever taking possession of the oil whose contracts they are trading….
Historically, financial speculators accounted for about 30 percent of oil trading in commodity markets, while producers and end users made up about 70 percent. Today it’s almost the reverse.
A McClatchy review of the latest Commitment of Traders report from the Commodity Futures Trading Commission, which regulates oil trading, shows that producers and merchants made up just 36 per cent of all contracts traded in the week ending Feb. 14.
That same week, open interest, or the total outstanding oil contracts for next-month delivery of 1,000 barrels of oil (about 42,000 gallons), stood near an all-time high above 1.486 million. Speculators who’ll never take delivery of oil made up 64 per cent of the market…..
Not surprisingly, big Wall Street traders on Tuesday projected oil will rise above $112 a barrel; some such as Swiss giant Vitol even suggested $150-a-barrel oil is coming soon. When they dominate the market, as they do, speculators’ bids can make their prophecies self-fulfilling.
“These people are not there to be heroes. They are there to make money. It’s our fault because we are allowing them to do that,” said Gheit. “Obviously these people are very strong, and the financial lobby is the strongest of any single lobby. I’ve been in this business 30 years, and I can tell you I think this is smoke and mirrors.” (“Once again, speculators behind sharply rising oil and gasoline prices”, Kevin G. Hall, McClatchy News)

Repeat: “Speculators who’ll never take delivery of oil made up 64 percent of the market.” That explains why prices are going up, up, up.

[robertlouis]

There are rare moments when a wave of nostalgia comes over me for Slick Willie. In fact, in comparison to the man in lieu of a President that currently inhabits 1600 Penn. Ave, I'd actively campaign this for this guy....Compare what he says about Keystone Pipeline with the testimony of that pinhead Energy Secretary Chu in his testimony . ....

At a hearing this week, Rep. Alan Nunnelee, R-Miss., specifically asked Chu if "the overall goal" of the administration is to "get our price down." Chu's answer was no.
In fact, he said that "somehow we have to figure out how to boost the price of gasoline to the levels in Europe," which are in the neighborhood of $8 a gallon.
Nuff Said

I paid the equivalent of $10.30 per gallon for diesel at my local Waitrose supermarket this afternoon. It currently costs just under £100 to fill my 60 litre tank. I get 50 mpg, but still....

[fred41]

I paid the equivalent of $10.30 per gallon for diesel at my local Waitrose supermarket this afternoon. It currently costs just under £100 to fill my 60 litre tank. I get 50 mpg, but still....

I believe some of that may be because , the way I understand it, you tax your gas at a much higher rate.

[robertlouis]

I believe some of that may be because , the way I understand it, you tax your gas at a much higher rate.

Correct. And unlike elsewhere in the EU, here in the UK diesel is taxed at a higher rate than petrol. Petrol currently comes in at around $9.75 per gallon.

That said, in terms of the rest of the developed world, it's the US that is way out of step on fuel prices. You therefore continue to drive cars which are too large and inefficient. Nobody really needs 4 or 5 litre engines these days. As others have said, your entire nation, government and consumers alike, are in total thrall to Big Oil.

Over here the trend is for cars with smaller and more efficient engines. A friend of mine currently drives a new Volvo V50 which has a 1.4 litre diesel engine which delivers the same bhp as a 2.0 litre petrol engine did four years ago. And he returns almost 65 mpg without trying. I drive a five year old Ford Mondeo estate (=station wagon) with a 2 litre diesel engine. It has a huge load space and I can get around 45-50 mpg.

[BluegrassCat]

There are rare moments when a wave of nostalgia comes over me for Slick Willie. In fact, in comparison to the man in lieu of a President that currently inhabits 1600 Penn. Ave, I'd actively campaign this for this guy....Compare what he says about Keystone Pipeline with the testimony of that pinhead Energy Secretary Chu in his testimony . ....

At a hearing this week, Rep. Alan Nunnelee, R-Miss., specifically asked Chu if "the overall goal" of the administration is to "get our price down." Chu's answer was no.
In fact, he said that "somehow we have to figure out how to boost the price of gasoline to the levels in Europe," which are in the neighborhood of $8 a gallon.
Nuff Said



http://dailycaller.com/2012/02/29/bi...g1U1V36XA2YaUm

Dear, god. The right-wing disinformation machine in full effect. Bill Clinton endorses the administration's position and it's spun as criticism. Chu utters the most obvious platitude about reducing dependence on foreign oil, (a cliche every president of both parties has made for the past 30 years) and we're treated to the twisted notion that he's advocating higher prices! SPIN SPIN SPIN! What an embarrassment.

[Stavros]

I paid the equivalent of $10.30 per gallon for diesel at my local Waitrose supermarket this afternoon. It currently costs just under £100 to fill my 60 litre tank. I get 50 mpg, but still....

Sigh...some of us can't afford to shop at Waitrose. I would have to get on a bus and travel to the next town to even pass by and look longingly in the window...

The BBC has produced a succinct breakdown of the price of a barrel of oil last November, the link is here

http://www.bbc.co.uk/news/business-15462923

[fred41]

Correct. And unlike elsewhere in the EU, here in the UK diesel is taxed at a higher rate than petrol. Petrol currently comes in at around $9.75 per gallon.

That said, in terms of the rest of the developed world, it's the US that is way out of step on fuel prices. You therefore continue to drive cars which are too large and inefficient. Nobody really needs 4 or 5 litre engines these days. As others have said, your entire nation, government and consumers alike, are in total thrall to Big Oil.

Over here the trend is for cars with smaller and more efficient engines. A friend of mine currently drives a new Volvo V50 which has a 1.4 litre diesel engine which delivers the same bhp as a 2.0 litre petrol engine did four years ago. And he returns almost 65 mpg without trying. I drive a five year old Ford Mondeo estate (=station wagon) with a 2 litre diesel engine. It has a huge load space and I can get around 45-50 mpg.

My point is then that we are really not.You receive something-a benefit, for your tax...at least I certainly hope so. If we'd rather have cheaper gas, for instance, than the benefit the added tax would bring...then we are not out of step with our prices. We're then, in fact, paying similar prices...the benefit or lack thereof, being a large part of the difference.

[robertlouis]

Sigh...some of us can't afford to shop at Waitrose. I would have to get on a bus and travel to the next town to even pass by and look longingly in the window...

The BBC has produced a succinct breakdown of the price of a barrel of oil last November, the link is here

http://www.bbc.co.uk/news/business-15462923

My two closest supermarkets, 8 and 9 miles away respectively, both happen to be Waitrose. No public transport worthy of the name, so net of the fuel cost they actually work out more cheaply than the nearest Tesco which is nearly 30 miles away.

[robertlouis]

My point is then that we are really not.You receive something-a benefit, for your tax...at least I certainly hope so. If we'd rather have cheaper gas, for instance, than the benefit the added tax would bring...then we are not out of step with our prices. We're then, in fact, paying similar prices...the benefit or lack thereof, being a large part of the difference.

That's not really the case Fred. Governments of both colours use the increasingly captive market of the car driver as a very easy source of income, since public transport, especially rail, has become prohibitively expensive for all but the comparatively rich - our rail fares are amongst the highest in the world. I'd counter-argue that the US government continues to be relatively indulgent towards drivers both private and commercial because it's too risky in voting terms and, of course, both parties are in thrall to big oil in a way that doesn't apply at least obviously in the UK and the rest of the EU.

Marginal tax rates are higher here too, although for that we do get a generously funded public health scheme, the much-vaunted NHS - one of the things that still makes one proud to be British, like the BBC, Stephen Fry and Jaffa Cakes lol, although even that is under real threat from the obsessive privatisers in the present government, and reasonable social welfare provisions.

You broadly have a choice - pay high taxes and social charges in return for a paternalistic but generous government provision, for which the best examples are in Scandinavia, or the other (relative) extreme such as the US where taxes are lower, but individuals have to be much more reliant on their own resources (and god help the poor).

Here in the UK we have something which sits in the middle, with a mix of public and private provision that has broadly existed by consensus since the 40s and even through the worst excesses of the Thatcher regime, but the present government seems ideologically determined to shift the balance of responsibility away from the state and on to the individual, but without adjusting taxes to reflect those changes. They want to have their cake and eat it too; the likeliest outcome of course is that consumer confidence will continue to fall as will net tax revenues - they've got the balance wrong.

That's also why despite public and business pressure - diesel prices in particular have a direct impact on the price of everything that needs to be transported - the government have dogmatically tied their hands behind their backs. They can't afford to cut or stall planned price increases in fuel because they desperately need the tax revenue. You don't need to be an economist to see that it's doomed to fail in the long run.

[Kramer]

If we are paying 5.00 a gallon in, say, August, Obama is FINISHED!! The so called 'independents" will bug out!! This is all part of the Messiah's plan the bring down America! This should come as no surprise. Open your eyes folks!