Why Are Gas Prices So High? Speculating About Oil Speculation

Dave Fehling/StateImpact Texas

Prices creep towards $4 a gallon at a Houston gas station

With oil surpassing $100 a barrel, drivers are feeling the pain at the pump and some wonder if it’s simply a case of supply and demand. Or maybe something else.

“It’s sad, but people are very greedy,” said Houston driver Jodie Minear as she put $60 of fuel into her Jeep SUV at a Chevron station along Highway 59.

Does she have suspicions as to how prices are set?

“Definitely, I think everybody does.”

She’s not alone.

Back in July 2008, oil prices topped out at a record $145 a barrel. Some in Congress were convinced it had to be because greedy speculators were gaming the system, running up the price of oil and fleecing American consumers.

“[The market for oil] has now been taken over by an orgy of speculation. Speculators control these markets, driving up the price, despite the fact there has been no change in the fundamentals.” said then-Senator Byron Dorgan, a Democrat from North Dakota. He was speaking on the Senate floor in July 2008, railing against what he said had “broken” the futures market for oil.

“Investment banks, hedge funds, pension funds running deep into these future markets, driving up prices. Investment banks buying oil storage capability to buy oil and take it off the market,” said Dorgan.

Since then, the price of oil dropped dramatically, and a debate began over whether there was in fact speculators manipulating the market and if so, what should be done to stop them.

The oil futures market is under the regulation of the U.S. Commodities Futures Trading Commission(CFTC). Its chairman, the Obama Administration appointee Gary Gensler, pledged to take a more aggressive approach to investigating market manipulation. And in a speech Thursday on his energy policy, President Obama called out speculators as being one of the reasons behind high gas prices. ”When uncertainty increases, speculative trading on Wall Street can drive up prices even more,” he said. “So there are short-term factors at work here.”

In 2010, Congress passed the Dodd-Frank law that overhauled financial regulation including rules involving oil futures, callling on the CFTC to enforce new limits on the amount of oil speculators could trade.

Last May, the CFTC announced it was charging a group of companies and individuals who allegedly conspired in a scheme to hoard then dump oil stored in Cushing, Oklahoma in an effort to manipulate the price. The CFTC alleged the scheme netted $50 million in illegal profits.

But there were those who had their doubts about what the CFTC was finding.

Dave Fehling/StateImpact Texas

Craig Perrong: "It's like in Casablanca, round up the usual suspects"

“I sort of look at it (like) if this is the best they can come up with after all that digging, that suggests the market is actually pretty clean,” said Craig Pirrong, a professor of finance and energy markets at the University of Houston’s Bauer College of Business.

Pirrong is an outspoken skeptic of the extent of market manipulation. He said the Cushing case was, in his opinion, weak.

“Frequently, when prices go up, or should I say, invariably when prices go up, it’s like in Casablanca: round up the usual suspects. And essentially, the speculators are the first ones in line,” Pirrong told StateImpact Texas.

While acknowledging that price manipulation does happen, he said “it’s not what’s driving sort of the big price movement like we saw in 2008 … and it’s not driving what we see right now.”

Pirrong said far more influential is a world oil output that has stagnated, combined with disruptions in supplies from Libya and now Iran.

What’s more, the commodities trading industry is fighting the new limits on oil speculation, taking the CFTC to court to block it from enforcing limits.

The CFTC declined to comment to StateImpact on active cases but a spokesperson indicated that the commission had brought dozens of enforcement cases against energy traders in the past decade, resulting in millions in fines.

 

Comments

  • Clydealan

    Wall street greed gave us the housing crash.  Now it is oil.  Follow the money, as always, leads to the cause.

    • Mr.Chips

      Was not simply Wall Street, it was the democrats that gave us the mortgage industry crash. Frank/Dodd ring a bell????? Franklin Raines, head of Fannie Mae, ring a bell????? We can go back to Clinton who put the teeth in the CRA forcing the mortgage industry to make loans to people they knew could not afford the loans, even further, all the way back to Jimmy Carter and his penning of the CRA.

  • Anthony

    This is nothing more than speculation as there has been no uncertainty of demand being lessen.  Looks like someone is getting rich off of “Fear” than actual supply.  I bet some Trader in Wall Street bank account is getting fat?

  • LARS

    What I don’t understand is this… you hear a lot of talk about oil prices and speculation, but what about the relationship between the oil price and the gasoline price?  In July 2008, the oil price was $145/barrel and the average gas price was $4.11.  That equates to 35.3 gallons of gas per barrel.  In Feb. 2012, oil is $100/barrel and gas is $3.59.  That only equates to 28 gallons per barrel!  What happened to the other 7 gallons?  Why are we paying MORE for gas in relation to the price of the oil???

    • Dabrew1

      Pop a mole, if supply is up decrease refining, price goes up. If demand is down decrease supply, price goes up. If supply is up and demand is up speculate price goes up. Enron all over again only they were dum enough to think they could do it in public.

      • Bjones79

        You spelled dumb wrong.

    • http://profile.yahoo.com/JNVEVDUBGR4DK5BNWERNULVSWY JohnL

      Refinement capacity.

      • Lars

        Refinement capacity has changed by 20% in only 4 years?  I doubt that very much.  Can you supply links to data supporting that idea?

  • Grhardin

    @ LARS:  Exactly!  The most logical reason is that we have adjusted to the $3+ price per gallon now and our budgets account for it.  The market will charge what we are willing to pay for it.  The relation ship of price of gasoline vs the price of oil is no longer a rational equation.  If the economy is doing better, at least on the paper on speculators desks, then WE can afford to pay for fro gas because we have more money now,
    Next, look at the prices of other products, particularly food and those prices were supposed to have escalated because of the increased fuel costs, but when fuel prices did drop a few months ago, those food prices did not.  If they are truly tied to the price of fuel, they should have come down.  But again, we are accustomed, conditioned, to paying more, our budgets have adjusted, we are supposedly better off economically and can afford more.  Do not expect prices on ANYTHING to come down when and if oil does.  The best we can hope for is that they at least remain the same.
    The corporate business model of profit and loss is broken and the computers are setup to achieve a given profit margin, no matter what the impact, no matter what it does to the economy or how difficult it makes it for consumers to provide for themselves and their families.  I personally seek out businesses that are working to keep prices down that are willing to make a bit LESS profits in order to help the customers, their neighbors to be able to stretch their dollars.  The politicians are bought and paid for and their goal is to provide for those that they have allegiance to, and that ain’t you and me!  WE have to take the initiative to find those businesses and companies who are not stuck in the mud of corporate greed and are willing to charge a fair price for a quality product and support them.  That is where the resolution to the economic issues will come from, NOT from big business.

  • http://www.facebook.com/jonathan.lovelace3 Jonathan Lovelace

    This is a useless article. It has not data.

    • http://profile.yahoo.com/JNVEVDUBGR4DK5BNWERNULVSWY JohnL

      Agreed.

    • neal

      friend.you are the useless one….tea party member i suspect? drill baby drill wont fix this.

  • Gjarrett

    Does anybody know how much cash/margin is required to purchase a futures contract for a quntity of oil? Should speculators be required to put “more skin ” in the game?, ie, higher margins?

    • jooberdoober

       They should be required to take actual possession of the oil.

  • hjmaiere

    The price of gas is not going up. The purchasing power of the dollar is going down.

    Before 1971 the U.S. was still ostensibly on a gold standard. A U.S. Federal Reserve note was supposedly redeemable for one thirty-fifth of an ounce of gold–that is, as long as you were a bank or foreign government. The rest of us weren’t allowed to even use gold as money, let alone redeem Fed notes.

    However, by 1971 there were four times as many Fed notes as there was gold it supposedly represented claims to. The extra notes were printed up mainly to finance the Vietnam War. Other governments started demanding to redeem their notes for gold. So Nixon “closed the gold window.” The result was that prices started skyrocketing. Then, like now, they tried to blame it on oil. But then, like now, the price of oil, as measured by gold, remained relatively stable.

    Remember Quantitative Easing? They hope you don’t.

    • neal

       sounds like tea party rhetoric bs….you do realize in 08 when the deficit was LESS…
      and the gas prices were HIGHER…and we actually had $HORTAGES….
      i just think it’s messed up because i live near an area where ton’s of oil is stored…and during the crisis in 08…when the “$hortages reared their ugly heads”…the area where the oil was stored was at FULL CAPACITY….with still two dozen trucks trying to deliver new oil every day….i blame $peculation…and the oil companies wanting to push prices up.

      • Bjones79

        It’s not Tea Party rhetoric, it’s called economics.  When you debase a currency products accounted for in that currency will get more expensive.

    • Bjones79

      The first post to get it right.

  • Sglass1

    the reason is simple GREED

  • wingers

    Hmmmmm.  Another academic who sold his soul to big oil in Houston?   Sounds like, so maybe is so…/

  • Lancekoz

    I have never understood WHO exactly makes the money when prices go this high, esp. if not directly as a result of the oil price. If the US were to increase drilling/production, and finally update necessary refineries….would it be possible for the US reduce internal gas prices by segregating oil produced nationally and sell it nationally without the international market? Would that be illegal because of trade agreements or?

    • AT

       Refinement capacity is a major part of the problem. The EPA won’t let new refineries be built. They say it’s because of environmental protection. Realistically new refineries would be cleaner than anything currently operating. If we increased refinement capacity we’d have more gas available and lower prices. We also need more domestic drilling, and a better developed domestic energy policy. Green Energy is nice, but it doesn’t solve the problem short term.

  • Justin Walker04

    The below quote regarding the oil spill in 2010 is directly applicable to the price situation as well:
    As Coast Guard
    Cpt. Ed Stanton put it in response to concerns about the chemical
    dispersants, “It’s name your poison. Look, we’re all guilty in this
    rummage. If you drive a car, you own part of this spill.”The “oil execs” might be more directly responsible for the high prices, but we all have a hand in it.
    Johnathan Lovelace – you may be right, but do you have to be such a jerk about it?

  • Jontod

    There is always only one valid reason that the price of gas is going up. That is profit!  For any one to say it is because of this or that, is only there uneducated guess. It is always oil companies wanting more money. Because they feel one billion a month in profit is not enough!
    They are all greedy people, that make me sick. 

    • Kathymacw

       Supply and Demand

  • Rocky2345

    Be glad you don’t live in California these days if you have a big gas hog and have to do a lot of driving. Regular was $4.319 today. 

    • ChristiToomer

      I paid $4.26

  • http://pulse.yahoo.com/_2OL2ASFGRIIXW4PQJS3VEJECXQ M

    It’s unfortunate gas prices do not rise with the rate of inflation.   A few cents every year rather than entire dollars.    The constant spikes and slower declines are more difficult for humans to accept.

    When considering the inflation adjusted cost of gasoline, we’re getting by rather cheap.

    The cost of your vehicle, auto insurance and vehicle registration have risen at a much higher (and faster) pace than gas.

    No point in spending time worrying about it if you aren’t willing to reduce your consumption.

    • Bjones79

      Gas prices are rising because of inflation.

      Inflation is not increases in prices.  Inflation is an increase in the money supply.  The result of which is rising prices.

      The government, to help cover it’s budget deficits is printing money.  Thus the prices on all goods in terms of dollars are going up.  It is not just gas.  Have you been to the grocery store lately?

  • Jarheaps

    look you guys i am the vice president for a oil company in Texas and we are not greedy we need the money to survive but the congress for some reason aren’t using the money to build a spaceship to go to the moon to get the unlimited energy as we called H3O.

  • http://pulse.yahoo.com/_LIKE5KGDP6GVN52QXP5JFCJYUU Joe Jones

    When it became clear that many parts of the economy were beginning to bounce back, I told a friend of mine to expect gas prices to spike suddenly and squelch the rebound. Sure enough, here we are approaching $4 a gallon. 

  • http://www.facebook.com/KarenShines?ref=tn_tnmn#!/events/371156826235449/ Karendmd

    If all Americans committed to taking a day off and not using any gas, 400,000 gallons or so of gasoline would not be used.  I know it’s a drop in the bucket, but we need to do something.  Our “leaders” are in bed with these guys, so they are not going to really do anything, just posture a whole lot so they can get re-elected and keep sucking off the tax payers.  Here’s a link to a silent protest scheduled for 4/11/12:  http://www.facebook.com/KarenShines?ref=tn_tnmn#!/events/371156826235449/  Remember, this is not an event like the failed attempts at “gas outs” in the past.  This is an event where people are committing to using no gas on 4/11 by walking, biking, or just staying home for one day.

  • ProxyAriesMan

    skyfarms. algae. fuel. abandoned city lots can be reclaimed and turned into sky farms – to grow algae. for algae fuel. do this all over the US. We might just have a solution to oil.

  • kafantaris

    Iran is in a dilemma.  On the one hand it wants to show the world all it’s got and put it at ease, while on the other hand it fears that such show ‘n tell will give its enemies a roadmap to bomb it.
    Saddam Hussein faced a similar dilemma ten years ago. Though he wanted the world to know he had nothing to hide, he also wanted to bluff his archenemy Iran into believing Iraq still had WMD. 
    Bluffing did not go well for Saddam, and it might not go well for Ahmadinejad.
    But since the price tag for ridding Saddam proved high, we ought to reflect what we are asking of Iran now.  On the eve of a threatened attack, we are asking it to take us to the depths of its arsenal and show us all it’s got.  
    Such great expectations are a sign we have been talking to our friends too long and are in need of a broader perspective.  Exactly when was the last time we asked Pakistan, India, China or Russia to show us their arsenal?
    “But those countries are not advocating the destruction of Israel.” 
    True, but Israel is not a thorn on their side either. 
    Surely, however, we can see beyond the hyperboles and figure out their underlying purpose.  Or have we forgotten that not all Iranians are thrilled with Ahmadinejad?

  • http://profile.yahoo.com/JNVEVDUBGR4DK5BNWERNULVSWY JohnL

    This article argues that speculation isn’t driving up the cost of oil and gasoline, but fails to offer an alternative culprit or culprits. 

    And the only evidence the author brings to support his thesis is “an outspoken skeptic of the extent of market manipulation.” Biased opinion much?

    Weak article.

    • wasadlr

      Weak argument

  • Dkj11199

    Friends if you think gas and oil prices end at the pump, step into your favorite grocery store. Food and comsumables are following just as day follows night. It’s shameful that the small bit of economic recovery is going right back down, and could get alot worse.

  • http://profile.yahoo.com/FR2FUOOATUU2GR6OF4WQQQVZDQ John

    Interesting how Craig Pirrong teaches at the University of Houston, state of Texas where Enron started and oil is big business. Ahem, can you say conflict of interest. Most business teachers are Republicans, friends of big oil. Down with the crooks, vote Libertarian if you have a set of balls

    • Ken851

      grow a set of balls and vote this ASSHOLE out of office and things will turn around on a dime!!

  • http://twitter.com/Jaybird248 Jay Schleifer

    When the price of silver went to the moon some years ago, the government clamped down on speculation, confining transactions to producers and end-users and cutting out the middleman. Guess what? The price dropped 77% in three months. 

    Uncle Sam can, and must, do the same now for oil.  These parasites are simply hoarding an essential commodity. In other countries, hoarders get shot. I don’t propose that. But a few years in the “graybar hotel” would give them time to re-evaluate what right they think they have to monopolize what nature gave to all humanity.  They can play their games with gold, artwork, classic Ferarris, anything but the essentials we innocent bystanders need to live…oil and food.  Are you listening, Washington?  Act to ban speculation in oil now!

  • Kapjgh

    I understand that U.S. producers are exporting over 600,000 barrels per day up from 200,000 barrels from this time last year. There is not enough demand here, so they are selling it elsewhere and driving the price up here.

  • wasadlr

    All they have to do is make speculators take end delivery of all contracts purchased.

    It’s very funny (NOT) that the US is exporting gasoline now for the first time ever. Why is not this being talked about on the news?

  • Cherrytoot

    There is no reason for the gas prices to be going up except greed from the gas companies. 

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