Rise and Rise of U.S. Gasoline Prices: Wall Street and Big Oil to Blame?

 
on February 24 2012 7:24 AM
Oil prices Seen at a Gasoline Station
Oil prices as seen in a gasoline station REUTERS/Mike Blake

Everyone agrees the days of cheap gasoline are over. The pain at the pump is forcing people to cut down gasoline usage, resulting in a big drop in gasoline demand in the country. At the same time, domestic production is booming, with the number of rigs just in the U.S. oil fields more than quadrupling in the past three years.

Including those in natural gas fields, the United States now has more rigs at work than the entire rest of the world combined — and by a wide margin: 1,994 versus 1,171, the Wealth Daily reported.

There is more supply and less consumption, but prices are rising.

The tension in the Middle East and global supply worries are commonly cited as the reasons behind the gasoline price rise. But there are a lot of people who think the Wall Street speculators and the Big Oil are to blame for this anomalous situation.

According to the Oil Price Information Service, gasoline are up 25 cents since Jan. 1, and could touch a record $4.25 a gallon by late April when pump prices typically rise. Gas prices have risen 12 percent from a year ago.

This when gasoline demand plummeted -- down 5.4 percent, or about 500,000 barrels per day, from a year ago, marking the 24th week in a row that year-on-year demand is lower.

Some analysts blame the mammoth oil companies and speculative financial markets for the pain at the pump.

Because Oil companies and financial traders (think Goldman Sachs and Morgan Stanley) make money by speculating on oil trades, the cost of gas continues to rise along with their profits, Public Citizen, Washington-based nonprofit consumer advocacy organization says.

The advocacy group says the impact of speculation on gas price was addressed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, but Big Oil and Wall Street are playing the same game as since some of those rules haven’t yet taken effect.

“Speculation is now part of the DNA of oil prices. You cannot separate the two anymore ... I still remain convinced oil prices are inflated,” Fadel Gheit, energy markets analyst at Oppenheimer & Co. said, according to the Miami Herald.

The futures trading of oil on the Wall Street plays a role in jacking up the price of the commodity, mostly in an unfair way, it is argued. The speculators never take physical position of the oil they trade in, but use the fear premium to increase the prices and thereby increase their profits.

For example, Iran announced last week that it was stopping supplies to French and British companies. Speculators did not let go of the opportunity. Crude for March delivery rose to nearly $106 a barrel on New York Mercantile Exchange after the news broke, gaining $2.60, or 2.52 percent.

Analysts point out that financial markets did not factor in the reality that the EU had already decided to stop Iranian crude imports and that alternative supplies were in place to fill the vacuum created by the stoppage of Iranian supply.

A recent report said Saudi Arabia, the world's largest crude exporter, said the speculation premium on oil price currently amounted to as much $25 a barrel.

While a normal level of speculation is healthy, and unavoidable, excessive fear and speculation premiums have a role in increasing crude prices.

Big Oil Profits

Consumers take a hit when gas prices rise, but big oil companies do not. Instead, they record higher profits, raising doubts if they are fleecing the consumers.

Just the five largest oil companies—ExxonMobil, ConocoPhillips, BP, Chevron and Shell—booked a combined profit of $137 BILLION in 2011, even though these companies produced 4 percent less oil in 2011. And of course Big Oil’s record profits are directly related to increasing pain at the pump for American consumers, the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), said in a report.

Despite high prices within the U.S., oil majors are exporting gasoline and diesel to foreign markets and reaping profits. They figure out that there will be less demand in the U.S. in the coming years and are therefore expanding markets abroad, especially in Central America, South America and parts of Europe.

Again, it is calculated that U.S. refineries are not operating at optimum capacities, meaning the oil majors are not producing enough fuel to match the demand. The Energy Department statistics showed in April 2011 that refineries were operating at about 80 percent of their capacity, as against a 20-year historic average of about 89 percent.

However, oil companies insist their profits and high gas prices are not often linked and attribute the upward movement of gas prices to crude prices and geopolitical factors.

The American Petroleum Institute (API) says the biggest single component of retail gasoline prices is the cost of crude oil, the price of which has been between $105 and $120 a barrel, depending on the type of crude oil purchased.

An API report this month tried to break down the pump price of gasoline into various components, in order to show the oil companies are not overcharging the consumers.

They say, with crude oil at these prices a standard 42 gallon barrel translates to $2.50 to $2.85 a gallon at the pump. Excise taxes add another 49 cents a gallon on average nationwide. So the price for gasoline is already at $3.00 or more per gallon even before adding the cost of refining, transporting, and selling the gasoline at retail outlets. Taken together, crude oil costs and taxes account for about 85 percent of what people are paying at the pump. That leaves just 15 percent for the refiners, distributers, and retailers.

Last year, shortly after announcing a profit windfall in the first quarter, ExxonMobil justified itself, saying the company did not make profits by fleecing consumers.

For every gallon of gasoline and other products we refined and sold in the United States, we earned about 7 cents ... Compare that to the 40 to 60 cents per cents per gallon that went to the government (state and federal) in gasoline taxes, Exxon vice president Ken Cohen said in a statement.

Does the Government have a Role?

High gas price is a political weapon, especially in an election year. The Republicans are increasingly turning fire on President Barack Obama, saying the administration's policies are responsible for high gas prices.

They pick out the administration's policies on offshore drilling and the recent denial of permit for the 1,600-mile Keystone XL pipeline for carrying oil from Canada to refineries on the U.S. Gulf Coast.

Obama ridiculed the Republican plan for drilling the way out of high gas prices. And you can bet that since it's an election year, they're already dusting off their three-point plans for $2 gas …I'll save you the suspense. Step one is drill, step two is drill, and step three is keep drilling. .. We've heard the same thing for 30 years. Well, the American people aren't stupid.

Market observers do not hope an administration's energy policies can have a decisive impact on pump prices, at least not in the short term.

However, if not its energy policies, the monetary policies of this administration seem to have added to the price pressure. The Quantitative Easing (QE) program created excessive liquidity in the market, thereby increasing asset prices. With more funds at their disposal, institution and hedge fund managers funnelled money in droves into the commodity market place, eying higher profits, but caused a commodity super cycle.

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