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staarduster 2012/04/13 09:36:52
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High Gas Prices? Blame Goldman Sachs





Photo: Huiping Zhu/iStockphoto




By MERRILL GOOZNER, The Fiscal Times


April 9, 2012



Democrats in Congress are preparing a volley against oil market speculators in their effort to counter charges by Republican frontrunner Mitt Romney that the Obama administration’s energy policies are to blame for skyrocketing gasoline prices.


A coalition of consumer groups, petroleum marketers and some industrial users said Thursday that legislation will be introduced in the House and Senate in the next few weeks that would slap new controls on oil futures markets. The goal is to curb the speculation that they say is driving up oil and gasoline prices and threatening to derail the economic recovery.


According to Mark Cooper, the chief economist of the Consumer Federation of America, and University of Maryland law professor Michael Greenberger, who in the late 1990s oversaw derivatives trading at the Commodity Futures Trading Commission, the proposed law would stop investment banks like Goldman Sachs and Morgan Stanley from selling oil-based commodity index funds; order an immediate Justice Department probe into oil speculation; and add 400 oversight staff to the CFTC to police oil and other futures markets.


“The American consumer is paying 75 cents more per gallon because of excessive speculation,” said Cooper. “That’s eating a hole in consumers’ pocketbooks and the U.S. economy.”



Given the U.S.’s declining dependence on foreign oil, which is a globally traded and priced commodity in any case, Democrats plan to point in coming weeks to oil speculators as a major cause of the recent run-up in prices, just as they did in 2008. During both price spikes, there was a coincident massive jump in the number of open crude oil futures contracts sold on the New York Mercantile Exchange. Cheaper West Texas Intermediate Crude sold for about $103.21 a barrel in late trading Thursday afternoon, over $10 a barrel more than a year ago.


The recent spike clearly has nothing to do with underlying demand, which has fallen by nearly 10 percent in the past year. “Anything over $80 is certainly linked to some extent to speculation,” said James Williams, a long-time oil industry economist at WTRG Economics.


The Securities Industry and Financial Markets Association, which represents investment banks like Goldman Sachs, refused to comment for this story.


IMPACT ON THE ELECTION
With the economy showing signs of taking off and generating hundreds of thousands of private sector jobs a month, the Romney campaign in recent weeks has shifted gears to focus attention on the pain at the pump being felt by most Americans. Gasoline prices have reached $4 a gallon in many parts of the country and are now approaching levels not seen since the height of the financial crisis, when prices also temporarily soared above $4 a gallon.


Republicans on Capitol Hill blame the price run-up on the administration’s failure to open more public lands to drilling and what they say is Obama’s misguided touting of clean energy technologies. The Obama administration counters that the U.S. is producing more oil than ever, and is now a net exporter due to the president’s decision to open more lands to drilling and the industry’s new drilling technologies.


U.S. dependence on foreign oil has in fact fallen from a peak of 60 percent in 2005 to 49 percent in 2010 because of increased domestic production. Falling demand from more fuel-efficient vehicles has also contributed to falling imports. The Energy Information Agency predicts U.S. consumption of foreign-produced oil will decline to 36 percent of total supply by 2035.


HOW THE GAME WORKS
Since repeal of the Glass-Steagall Act in the late 1990s that separated traditional banking from other financial activities, investment banks have been allowed to sell exchange-traded futures funds linked to commodities. The volume of oil sold in these “synthetic” markets is now equal to 18 times daily consumption compared to 6 or 8 times daily consumption in the 1990s.


“The market functioned quite well at 8 days,” Williams said. “There were plenty of speculators to keep the market liquid.”
But before consumers grab their hatchets to go looking for a Goldman Sachs scalp, they should realize that the speculators pouring money into the commodity-based ETFs include major pension funds, hedge funds and other money managers seeking higher yields. When oil prices begin to rise because of heightened tensions with Iran or an oil workers strike in Venezuela, they buy the ETFs in hopes of making a quick killing on rising prices.


The investment bank that underwrites that contract, in turn, goes into the futures markets to offset its risk. Since there are few speculators betting the market will go down in such an environment (the buyers outnumber the sellers by a wide margin), the futures price goes even higher.


That rising price feeds back into the physical market where real people actually buy and sell oil. Oil producers look at the futures price and tell the refiners that they won’t deliver supply at the current price because they can make more money by holding onto it for another 30 days. The storage price is less than the differential, Williams explained. That immediately drives the spot price higher because the refiners need crude. The price at the pump rises right along with it.


“Anytime the future price is above the cost of storage, it will drag up the price on the spot market,” Williams said. “There actually is a connection.”



At a public hearing of the House Democratic Steering and Policy Committee Wednesday, Gene Guilford, who heads the Independent Connecticut Petroleum Marketers Association, demanded that only companies that actually use commodities – the end-users of products like oil – be allowed to participate in futures markets. A final rule on end-users under the Dodd-Frank financial reform legislation is hung up at the CFTC.


“This game of Wall Street placing bets on the direction of these products . . . should not be allowed,” the former Reagan administration Energy Department official said. “What we’re talking about here is the food that Americans buy and the energy we rely upon to run our economy.”




Ad Astra, Scientia!
starduster
http://totherow.tripod.com/

Read More: http://www.thefiscaltimes.com/Articles/2012/04/09/...

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Top Opinion

  • Temlakos~POTL~PWCM~JLA~☆ 2012/04/13 12:26:57
    Sure, speculation on the oil futures market is fine with me. (Please leave a ...
    Temlakos~POTL~PWCM~JLA~☆
    +6
    Speculation works both ways. And in fact, speculation gives you a mildly higher price now, before you get a *shortage* later.

    It's easy to complain about speculation. It's much harder, at least for TMNHOAPOTUS, to increase supply so that speculation would, if anything, work the other way. Obama does not want lower prices. He wants higher prices but not the blame for them.

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  • Roblem BN-0 2012/04/15 18:01:01 (edited)
    I appreciate all Staarduster's efforts to make known as much as possible abou...
    Roblem BN-0
    +1
    Market manipulation has crippled the world's economy! :-(

    But the rich get richer...
  • Swampdog PWCM 2012/04/14 17:52:55
    Sure, speculation on the oil futures market is fine with me. (Please leave a ...
    Swampdog PWCM
    +1
    Oil speculation actually fixes prices at a certain level, for that speculator or group of speculators. What cannot be determined is the availability, ie. closing the Gulf of Hormuz. The oil companies only have a profit margin of between 3% and 7% while the government takes about 48% in taxes. Sure domestic production is up but these are privately owned wells, Oblamer has signed a 5 year ban on the production and development of oil within the borders of the U.S. and on the coastal shelf. Gas prices have more than doubled under this pissant president, only an idiot would vote for this megalomaniac.
  • HipJipC 2012/04/13 23:43:08
    None of the above
    HipJipC
    +1
    Gas prices concern those who have cars. As soon as I can afford a "running" automobile that can pass all the state regulated inspections that I have to pay for [cha-ching], re-register every year {cha-ching] afford the upkeep and repairs of said automobile [cha-ching, cha-ching, cha-ching] and the insurance costs [cha-ching] then I'll bitch about what they drink to make them go. Owning a car is now a luxury for this ex-middle class citizen and I'm sure I'm not alone on that. But in the meantime, I'll peddle my bike or walk. And speaking of bikes, has anyone noticed how expensive AIR for tires costs!!! You can now use debit/credit cards in these machines! It's AIR!! WTF!!

    noticed expensive air tires costs debitcredit cards machines air wtf
  • TerryAgee 2012/04/13 15:25:52
    None of the above
    TerryAgee
    +2
    My friend, it takes oil to fight wars. No oil, no Imperialism. Yay or nay?
  • linda ~PWCM~JLA 2012/04/13 12:40:25
    Sure, speculation on the oil futures market is fine with me. (Please leave a ...
    linda   ~PWCM~JLA
    +2
    I think speculation is fine in every area. Wall Street is the barometer of the country and it's been doing nicely here of late. Without investors I'm afraid of what would happen to what's left of our economy.
  • Temlakos~POTL~PWCM~JLA~☆ 2012/04/13 12:26:57
    Sure, speculation on the oil futures market is fine with me. (Please leave a ...
    Temlakos~POTL~PWCM~JLA~☆
    +6
    Speculation works both ways. And in fact, speculation gives you a mildly higher price now, before you get a *shortage* later.

    It's easy to complain about speculation. It's much harder, at least for TMNHOAPOTUS, to increase supply so that speculation would, if anything, work the other way. Obama does not want lower prices. He wants higher prices but not the blame for them.
  • staardu... Temlako... 2012/04/15 21:53:58
    staarduster
    TMNHOAPOTUS = The man now holding office as president of the United States?
  • Temlako... staardu... 2012/04/16 01:48:15
    Temlakos~POTL~PWCM~JLA~☆
    +1
    Correct. Because he is not repeat NOT qualified.
  • staardu... Temlako... 2012/04/16 02:06:06
    staarduster
    Makes no difference. There is no precedent for removing a duly elected president. If there was, wouldn't he have been removed by now, nearing the end OF HIS FIRST TERM? LOL
  • Temlako... staardu... 2012/04/16 13:28:53
    Temlakos~POTL~PWCM~JLA~☆
    +1
    Then we should d__n well set one.
  • Arjuna 2012/04/13 12:13:45
    None of the above
    Arjuna
    +1
    A combination of factors drive up gas prices. Speculation is one of those. Global oil consumption will peak in 2015 at the present rate of increase of use. Beyond that people will be consuming more than can be extracted. The USA seemed to have to right idea that it should turn to renewable although the execution was faulty - again due to a number of factors. Renewables are the future and the smarter that the USA is in realizing this, the less it will suffer beyond 2015.
  • Jackie G - Poker Playing Pa... 2012/04/13 09:58:38
    None of the above
    Jackie G - Poker Playing Patriot
    +5
    If one does not like speculation, then make it against the law. Of course, scrap the 401 Ks , investments by retirement plans of all kinds - minor stuff to contend with - after all stopping oil production, pipelines, drilling - none of that has anything to do with gas prices and while your at it have the government take over the oil industry - they have done such a great job with the debt and deficit.
  • linda ... Jackie ... 2012/04/13 12:43:23
    linda   ~PWCM~JLA
    +2
    haha - great comment and so true.
  • staardu... linda ... 2012/04/15 21:55:43
    staarduster
    +1
    hi stranger. wondering how you been doing? email me dear one.
  • staarduster 2012/04/13 09:38:49
    No, speculation directly raises gas prices at the pump, at the expense of eve...
    staarduster
    +1
    Nice article. Only for those who are truly interested in finding out why, with oil demand at the lowest point in years, our gas prices continue to rise.
  • 3052457 staardu... 2012/04/13 10:57:06

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