Watching traffic around Dallas and Fort Worth, you’d never know the U.S. was experiencing any kind of gasoline crisis. Many drivers on the freeways apparently think Texas has already approved the proposed 85 mph speed limit.
Most don’t realize that driving a vehicle that’s rated at 30 mpg on the road at 85 miles an hour will cut its fuel efficiency by around 35 percent. That makes the gas they are currently paying $3.79 for cost $5.11 in reality. It’s reasonable to assume, too, that if we really cared about the cost of gas, we would do everything we could to mitigate that cost. We don’t. We complain about prices but seem unwilling to do anything about them.
Americans think they know whom to blame for high gas prices. The usual culprits are people who drive too fast, inefficient engines, OPEC, and even China. Sure, those are all factors, but that’s like blaming the housing bubble on the lumber industry or a surfeit of carpenters. It’s no great mystery who is responsible for higher gas prices. As I and others have written in the past, the biggest culprits are the speculators gaming the futures markets to line their own pockets. We know all that. What might come as a shock is that they are being enabled by the Federal Reserve.
This explains why the market for oil and gasoline is currently costing consumers and industry far more than necessary. Until recently it was impossible to tell whether the speculators were accurate in telling the media that high worldwide demand for oil has caused prices to skyrocket once again, pushing gasoline prices $1 a gallon above where they were at this time last year.
It’s true that rail traffic is up in the U.S.—a sure sign of a strengthening economy—and it’s equally true that cargo shipments worldwide are back to pre-Great Recession volumes. However, MasterCard (MA) and some oil analysts are saying that domestic gasoline consumption has dropped anywhere from 3 percent to 3.7 percent over the past five weeks; for a country that at times burns 400 million gallons of gasoline a day, that’s no small drop. In futures trading, such a decline in demand should effect a comparable cost reduction in what buyers are willing to pay for fuel for resale. That’s not happening.
Goldman Outs the Speculators
Meanwhile, the media continue to say that gasoline prices are directly tied to oil pricing, which isn’t quite true. Oil and gasoline are sold to different sets of buyers. One needs to buy crude for refining and the other sells gasoline at retail; these are legitimate hedgers. Then there are speculators, who jump into the market in search of profits on all fuels. To prove once again that no one in the investment banking business actually knows anything about oil, Goldman Sachs (GS) advised its clients on Apr. 11 to get rid of their commodities holdings, including oil. The Guardian quoted Goldman’s advice as warning: “The record levels of speculative trading in crude have pushed their prices up so much in recent months that in the near term, risk reward no longer favors holding those commodities.”
“Record levels of speculative trading in crude” have pushed up oil prices? Funny, all we’ve been hearing is that today’s oil prices are justified because of abnormally large demand, owing to the world’s improving economy.
On the same day, the Financial Times reported that in March, the Saudis “throttled back their production of oil”—which seems to contradict their promise to replace any oil lost to world markets because of the Libyan Revolution. According to analysts, the Saudis produced an extra 300,000 barrels a day, which was enough to satisfy buyers. That assessment certainly is true in the U.S. We started this year with 333 million barrels of oil on hand. Today we have 359 million barrels. Some shortage.
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