The Gas Wars

Nothing drives voter sentiment like the price of gas -- now averaging $3.56 a gallon, up 30 cents from the start of the year. It's already hit $4 in some places. The last time gas topped $4 was 2008.

And nothing energizes Republicans like rising energy prices. Last week House Speaker John Boehner told Republicans to take advantage of voters' looming anger over prices at the pump. On Thursday House Republicans passed a bill to expand offshore drilling and force the White House to issue a permit for the Keystone XL pipeline. The tumult prompted the Interior Department to announce on Friday expanded oil exploration in the Arctic.

If prices at the pump continue to rise, expect more gas wars.

In fact, oil prices are rising for three reasons -- none of which has to do with offshore drilling or the XL pipeline.

The first, on the supply side, is Iran's decision to cut in oil exports to Britain and France in retaliation for sanctions put in place by the EU and United States. Iran's threat to do this has been pushing up crude oil prices for weeks.

The second, on the demand side, is rising hopes for a global economic recovery -- which would mean increased oil consumption. The American economy is showing faint signs of a recovery. Europe's debt crisis appears to be easing. Greece's pending bailout deal is calming financial nerves on both sides of the Atlantic, and the Bank of England and European Central Bank are keeping rates low. At the same time, China has decided to boost its money supply to spur growth there.

Neither of these would have much effect were it not for the third reason -- overwhelming bets of hedge funds and other money managers that oil prices will rise on the basis of the first two reasons.

Speculators have pushed crude oil to $105.28 per barrel, up 35 percent since September. Brent crude, Europe's benchmark, is now $120.37 a barrel -- also worrisome because many East Coast refineries use imported oil.

Funny, I don't hear Republicans rail against speculators. Could that have anything to do with the fact that hedge funds and money managers are bankrolling the GOP as never before?

But that's okay. The gas wars may come to a screeching halt before too long, anyway. So many bets are being placed on rising oil prices that the slightest hint the speculators are wrong -- almost any sign of expanding supply or declining demand -- will set off a sharp drop in oil prices similar to the record one-day fall on May 5 of last year.

Robert Reich is the author of Aftershock: The Next Economy and America's Future, now in bookstores. This post originally appeared at RobertReich.org.

 

 

 

 

 

Follow Robert Reich on Twitter: www.twitter.com/RBReich

Comments

[CZlight]

08:47 PM on 02/25/2012

Hey 99%ers, it's time for a boycott. Decrease demand, lower the price and win against Wall St.

[Rock Knocker]

12:34 PM on 02/24/2012

The price of petroleum products could be manipulated by strategically shutting down oil refineries, and yes a record number of oil refineries have closed recently. The Koch brothers and their cohorts can apply pressure to our democratic process in ways unseen.

[TheMediaRanger]

03:59 PM on 02/23/2012

"Funny, I don't hear Republicans rail against speculators."

But I hear plenty of saber-rattling and war-mongering among those who have a lot to lose with the pending demilitarization of a country (USA) better known for perpetual war.

[Darius Molark]

08:44 AM on 02/23/2012

Thanks for your observations Mr. Reich. I worry about the speculators who see the profit in raising oil prices that they saw years ago in their manipulation of the global food markets. (I am reminded of Goldman Sachs selling Greek officials a load of sub-primes!) The urge to make a buck speaks well for those who have the money and can push the market their way insensitive to the millions of people who must pay the daily prices. This insensitivity must be stopped and I hope the administration can get a better look on what's happening.

[Pastori Balele]

01:27 AM on 02/23/2012

Bill O’rielly is a hypocrite. Three months ago he said government should butt out of businesses. He opposed President Obama appointing Czar to oversee Wall Street and banks. He argued by competing with one another companies regulate themselves and set prices i.e. using supply and demand concept. Today Bill was for President Obama - to regulate the oil industry because it is rigging gas prices. Gas prices are way up while supply is in plenty. Bill speculated oil companies are in collusion against American oil consumers. He's correct. They are shipping oil to other countries that pay more than American consumers. That’s exactly what I have been telling republicans about the role of government – to ensure its people are not cheated. There are some industries where competition does not set prices; public utilities such as electricity, water. Public utilities prices are set by governments. Now that gas is so important I think the federal government should intervene. Bill correctly argued the government impose higher tax to export oil to make exporting oil more expensive than selling it here. But three months ago, he was against raising tax for businesses-arguing higher tax kills jobs. He was wrong. Alternatively, the federal government should set gas prices as it does with public utilities. Bill should counsel those running for GOP nomination to stop blaming Obama regulating business behavior? President Obama is right to intervene into private businesses.

[techguy24]

05:14 PM on 02/22/2012

When oil went from 140 to 40 in a years time, I didn't see him complaining about the speculators. Why not? Supply/demand can't force oil to make a swing like that in one year... Why weren't the liberals screaming about speculation when the oil price crashed? There are always people speculating. There is always a buyer and seller in every transaction.

[JCRICHCRT]

12:44 PM on 02/22/2012

We have a President that has in reality no expirence in running anything except his mouth. He would have made a great circus barker so long as he had a ready script. President Obama has shut down the Gulf production, shut down building a pipe line that would have created jobs and lower fuel cost. I can hear it now BUT BUT BUT that would take years...YEP and had he been more interested three years ago in making us in the near future energy independant, and at the same time developing alternate energy we would not be in this mess now. But NO, We have the VOLT, GMs answer to the old Ford EDSEL. An expensive technology that has very very limited attraction to American consumers. This was force fed to US as the saving of our country,,,but they forgot something,,, the infrastructure to make it work. Hey, People!!!. energy production is up because demand is up, but available resources are locked down here... . Obama says he has increased drilling permits, HOW MUCH LAND HAS HE LOCKED DOWN IN COMPARISON??. By the way,,does it not take energy to make electricty to run the electrics??. Obama is doing his best to shut down COAL production...Bet you did not know that most power generating stations across the nation run on COAL.

[Lindarella]

02:45 PM on 02/22/2012

According to the State Department, the Keystone XL pipeline would only create 20 permanent jobs plus 5000-6000 temporary construction jobs. Most of the oil is intended for export, so it wouldn't really help lower our fuel costs. There are good reasons for not building the pipeline, probably the same reasons that Canada doesn't want to run it through their own country to their own coast for shipping.

[techguy24]

05:12 PM on 02/22/2012

Ummm...they are planning on running it through their own country too. And if we don't accept the oil, china will.

The 20 permanent jobs number is bogus. Just use your own brain for once. The number of full time security guards required to secure that pipeline and the end terminals will be more than 20. Not to mention the engineers needed to maintain it.

Oil goes to the highest bidder, so we have no idea where the oil will end up. It could all stay in the US if demand rises.

[zipowitz]

12:01 PM on 02/22/2012

High energy prices are exactly what the left wants. They want cap and trade and what in the world do you think happens under cap and trade? Here's a clue, energy prices go UP! So here is a little taste of what we avoided when the Dems couldn't push through their ridiculous regulations.

Steven Chu said he wants European gas prices and Obama wants energy "to necessarily skyrocket" in order for their green agenda to even be a little competitive. Hopefully people get a better understanding of what this would do along with the silly regulations the EPA is bringing down on us that are proven to not help anybody but will come at a great cost.

[PenGoddess]

09:48 PM on 02/23/2012

Silly regulations that keep the air and water clean enough to breath and drink. We can find new sources of energy...we can't find a new atmosphere or fresh water once we despoil it completely.  Personally, I prefer being able to breath and quench my thirst.

[George Picard]

11:33 AM on 02/22/2012

Funny how Dems blamed high gas prices on Bush back in the day, now well it has nothing to do with anything the President. Strange.

I guess Bush was just that much of a leader then Obama is.

[SteveB1956]

10:29 AM on 02/22/2012

What a pipe dream, here we go again. frightening the gullible again you should be ashamed. Who do you think sells options to the speculators, yeah that's right the manufacturers. They do it to ensure their own profit in a volatile market. This is just a smoke screen by the left to redirect attention away for how horrible the economy is and what is in store after a Greek default.

[CZlight]

09:02 PM on 02/25/2012

Weren't the Bush tax cuts meant to create jobs here? Do you know anybody that used their extra tax cash to start a business? My best GOP friend that's never had a job put his on Wall Street cause work is too hard for him. Thank goodness his parents liked to work!

[Reincarnation TPS]

10:09 AM on 02/22/2012

Peak Oil

[steve peddle]

09:04 AM on 02/22/2012

...of financial instruments for "speculators", most of these products are formed because they offer entrance costs a fraction of futures contracts so if someone from the growing number of people that manage their own nest egg wants to "invest" in oil as part of a diversified retirement porfolio and can't in any responsible way justify a futures contract (10k real cash levered up to 100k in asset value) buys a few hundred bucks worth oil ETF's is he a speculator? And should those instruments be banned from the market thus frocing someone to have to join with a fund of some kind and pay fees of some form or another just because regulators decided to effectively price them out the ability to do it them selves? So it boils down to this, the oil market bogey man a.k.a. the "spectulators" are either everybody or nobody, and if you decide that it's everybody then the only recourse is to take oil out of the open market pricing structure which leaves oil compamies to hang their own price tag on their product and given their history of overwhelming fairness and generosity how do you think that turns out?

[redraspberry]

11:28 AM on 02/22/2012

So you don't think the likes of GS aren't speculating?

[steve peddle]

12:18 PM on 02/22/2012

by definition of speculating, absolutly. But what I'm saying is that so are union pention plans, so is an individual with their own diversified portfolio, so is any holder of investment instument (mutal fund, etc) that has an oil component, so is an airline who buys attempts to hedge fuel costs by buying futures oil, so is every person with a properly diversified nest egg (is it 401k in the US? it's an RRSP in Canada), so is every person with a properly diversified education svaings portfolio for their children, etc. There's simply no way to reach in and remove one person for doing the samething as another person. You can't even draw the line based on something as vague as motive because the motives are all the same, to profit from the difference in price from entry to exit. so what I'm saying is that you can't blame "speculators" because that's every participant.

[redraspberry]

12:51 PM on 02/22/2012

There does not have to be motive in the investment. But just the amount of third parties all getting a little more piece of the pie is increasing the cost. It's estimated that 30% of the cost of oil is due to investment speculation.

There is so much crude floating around they rent ship tankers to keep it in. That's not cheap either and the investment hoses will have to make a profit on it.

[sdavidweaver]

09:01 AM on 02/22/2012

My fear is the oil speculators that Reich talks about are very close to holding the outcome of the election in their manipulative hands. Most of them are not, unfortunately, inclined to support Obama.

[bamboo4]

08:44 AM on 02/22/2012

We gave money to the banks to fix foreclosures instead they bought wheat and oil. Price of bread rose in Tunisia and Egypt. Then what happened?
If you don't want the same thing to happen in the U.S.-
Get the money out of politics.
All our "social/wedge isssues" are distractions. The only issue is rich vs. poor.
All of us have one thing in common - we are not represented in Washington.
REAL Americans are public servants not, Bribe Soliciters.
Be an American - get the profit incentive out of politics and let the votes fall where they may.

[nomoredead]

08:38 AM on 02/22/2012

Gas prices will creep up to that painful level as Big OIl post record breaking profits for the quarter and most americans will focus on watching sports or Kim Kardasian.......