Speculating Away Our Recovery


As gas prices rev up into high gear well before the summer months of traditional high demand predictions estimate prices at the pump will reach well over $4.00 a gallon. Along with the impacts this will have on the average consumer, these increases will, and already have, produced gushers of political rhetoric, laying blame squarely on the President’s shoulders. While high gas prices are great fodder for political gamesmanship, their accuracy is often suspect. How much influence does or can the leader of the U.S. have over the price of crude, let alone the prices at the pump?

Each political party plays the petrol price blame-game. Many a Democrat was overly eager to place copious amounts of blame on George W. Bush for the ceiling shattering prices which occurred under his watch. Bush took office in 2001 when prices sat at $1.60 per gallon. By July 2008 they soared to record levels as consumers payed an average of  $4.40 per gallon. Democrat exuberance aside, was Bush responsible for this? Despite the sharp fluctuations, gas prices did trend upwards throughout Bush’s presidency until they reached their high point in the middle of 2008. What was going on at that time? Well, the country was embroiled in the Afghan and Iraq wars. Between 1993 and 2003 refineries were consolidated  at fairly high rates, dramatically increasing market shares for the top refiners in the country, essentially reducing competition. Demand was also increasing globally, futures markets were trading crude at all time highs and the dollar was weak.

Now with a new round of price increases and predictions for more, Republicans are taking advantage of their turn to hit Obama on the issue. The GOP blames the President’s regulatory and domestic production policies, especially his decision to delay the Keystone XL Pipeline, for the current prices. But once again, how accurate is this assessment of his accountability? Newt Gingrich was quick to point out that prices were at $1.89 a gallon when Obama took office and today the average price is $3.52 per gallon as compared to the $1.13 per gallon when he was Speaker of the House. Mr. Gingrich’s comparison, however, omits what was happening at the time President Obama was inaugurated. In January 2009 the country, and the world, was in the depths of the Great Recession. Consumer demand was at extremely low levels which dragged prices down to their lowest point since 2003. By late 2009 prices rebounded to pre-recession levels fluctuating erratically as they have done over the past decade. Running contrary to Republican criticisms, the administration has approved numerous offshore drilling permits, has opened previously closed areas to leasing and is considering drilling in the Arctic. Despite this, prices have continued to rise straining the credibility of the usual talking points. Some economists equated the current increases to signs of a strengthening recovery. Others identified growing demand from developing countries and China and resulting supply concerns as the drivers of price increases.

Speculating the Recovery Away

If the Presidents are not to blame for higher gas prices then who or what is? While actual supply disruptions or reductions due to natural disasters, regional unrest, increased demand and decreased production are very real catalysts for temporary fluctuations, the drivers of the increasing volatility of oil prices over the past dozen years are due in a  large part to the futures markets or speculators. These are markets whose players hedge bets on future crude prices on what are essentially “what-if’s”. What if the hurricane hits the Gulf Coast? What if revolution breaks out in the Middle East?  What if a particular dictator passes wind in the wrong direction?

Currently, there are no natural disasters impeding supplies. There are no new wars breaking out. Demand, in the US at least, is low and production has not decreased. The price increases hinge upon  speculation market-based fear. Fear over what-if Iran blockades the Strait of Hormuz? Fear over what-if Iran extends an oil embargo, even though European countries were already close to instituting a boycott of Iranian crude. Fear over what-if a European double-dip recession occurs. Fear over what-if the United Nations acts against Syria. Fear over what-if there is armed conflict with Iran. None of these events have actually occurred, nor are there certainties that they will, yet speculation of their potential to take place is driving prices close to record levels. Based on this trend predictions place prices at the pump at $4.25 a gallon by this summer with $5.00 a gallon gasoline looming ominously nearby. As a result the strengthening US recovery will slow, consumer spending will contract, demand will drop and businesses will delay their plans for expansion and hiring. It’s difficult to accept how so much hinges on the hedged bets of a small group of investors.

What’s the fix?

Republicans in Congress are reigniting their calls for deregulation and increased domestic production. But does that solve the problem? Will increased domestic production isolate consumers from market volatility? Will one more pipeline increase our access to stable sources and bring prices down to sustainable levels? The simple answer…No.

As US demand for oil has dropped due to the recession, reduced driving times and higher efficiency vehicles, the country has become a net exporter of oil. Stepped up domestic production will only serve to increase the sale of North American oil overseas to satisfy the growing thirst of Asian markets. But for the sake of argument, if domestically produced oil did remain in this country and supply increased reducing gasoline prices to the levels consumers desire, what will producers do? If prices fall, producers’ profit margins will decrease and they will reassess their strategies. Producers will reduce production in order to decrease supply for the purposes of driving prices back up to profitable levels. This is the current situation in the natural gas industry. This is also evident from the significant decrease in domestic production and exploration when crude prices dropped in the 1980’s. Essentially, if prices reach levels consumers want, producers will cut production to protect profits.

Economists say, the country’s recovery is only one shock away from crisis. This is a disturbing assessment. It’s disturbing because it illustrates how dependent the US economy is on one finite resource. So how does the US cushion its economy against the constant threats from volatile markets?

Diversity.

Diversity is the key to survivability in nature. Diversification is key to a successful investment portfolio. It’s key to a viable energy policy. Diversity increases one’s potential to adapt to sudden shifts in the environment – whichever environment that may be – and survive until equilibrium is reached once again.

What does diversity have to do with fixing the problem of high gas prices? Well, nothing. Nothing to do with bringing gas prices down, not directly at least. But diversity does have something to do with increasing consumer choices at the pump through biofuel. Biofuel is produced from a variety of sources, from agricultural waste to used cooking oil to the weedy plant camelina to algae. Agricultural waste from corn crops is estimated to meet 50% of India’s transportation fuel needs by 2020 and has recently met EPA requirements as a source of ethanol. Used cooking oil has expanded from garage-based biodiesel projects to its prominent use as jet fuel on commercial airlines like Alaska Airlines and the Dutch-based KLM. Private companies are also building regional facilities to refine used cooking oil for local government and private sector consumer use. Camelina- and algae-based biofuels use is on the verge of exploding after successful US Navy and Air Force trials proved themselves as viable military jet and naval vessel fuels.

If a biofuel infrastructure is developed, the same as the oil and gas infrastructure was developed decades ago through government and private sector partnerships, alternatives to gasoline can be provided for consumers. When gasoline prices soar, consumers would then have a choice of products introducing an element of rivalry into a market noticeably lacking competitors. This also provides a palatable free market solution for those critics who favor market-based answers. Now, the argument may arise that government subsidies dispersed in support of biofuels does not represent a free market approach. But this neglects to recognize how those very government subsidies and private sector partnerships created the oil and gas infrastructure we all utilize daily. Is there any reason why that same process should not be applied now to develop these alternatives?

As sources of oil become increasingly difficult to extract and market forces continually ratchet prices higher, the challenges associated with biofuel development become all that more acceptable to take on. Theodore Roosevelt felt, “Nothing in the world is worth having or worth doing unless it means effort, pain, difficulty… “ It simply requires an acknowledgment that despite the criticisms or technical   complications, the results will be worth the costs and difficulties to ensure much needed alternatives are made available.

 

Additional Readings:

Clean Air Act & the Anti-Regulation Movement – Part 1

Clean Air Act & the Anti-Regulation Movement – Part 2

Speculating Away Our Recovery

One More Time, Why Do We Need Keystone?

The Forgotten 15: Job Creation through Deregulation

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5 Responses to “Speculating Away Our Recovery”

  1. Great piece and points the finger in the correct direction, the speculators cause most of the increases. In fact it was the same speculators that pushed the price of Gold through the roof, now that they are reaping the rewards from that they have resumed their focus on the oil market which finally warmed enough to make gambling and hedging bets on the price of oil and demand for oil which now favors their pockets against.

    I was in one of the Gas Stations and while I like the convenience of a Credit Card the pump was out of receipt paper and I had to venture into the store front. He told me that he can guarantee the price will go up 70 cents to a Dollar within the next seven days that he was told to increase the price by 10 cents each day. This indicates to me that the price increases are all pre-planned by the Oil Companies.

    The speculators and the Oil Companies are the big winners. The consumer is always the loser and always will be. Sadly!

    • junknfunk> Thanks!

      You know it will be interesting when that gold bubble bursts, won’t it? I think that would be a good time to ask why we’re not on the gold standard any longer.

      That’s a bit of a scary conversation you had with the gas station clerk. I guess I will have to get out there and fill up before they raise it again. I noticed today a Chevron was at $4.49/gal.

      Thanks for the comment…

  2. $4 per gallon. That is criminal. Almost as bad – but not quite – as Venezuela; where Hugo Chavez bribes his citizens into putting up with one of the most inequitous societies – ludicrously labelled socialist – on the planet.

    The price of oil in the USA is far too low; and demand for supply will only decrease when its price reflects the damage done by using it.

    Until then, the Earth is on course to become ice-free within 200 years and water-less in 500 years. The fact that the business elite (e.g. those behind the Heartland Institute et al) continue to ignore and/or deny this will be the greatest crime against humanity in recorded history.

    http://www.stormsofmygrandchildren.com/

    • Martin> You’re right, gas priced much lower than the overall health and environmental costs of its ongoing use. I’ve seen a few articles expounding on that topic of late. It’s interesting seeing that other perspective.

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