12/18/2012 06:03 am ET Updated Feb 17, 2013

The Hyped Distortion of Exchange Traded Oil Prices and the Price You Pay for Gasoline

The price we pay for gasoline is derived in large measure from the price of oil as quoted on the commodity exchanges. We are told that these prices are a reflection of an unencumbered and freely traded commodity reflecting a true universe of supply and demand. Really?

The U.S. benchmark for crude as traded on the New York Mercantile Exchange (NYMex) is West Texas Intermediate (WTI) crude deliverable in Cushing, Okla. Its price has been hovering near $90/barrel these past weeks.

This in spite of the fact that storage capacity at or near Cushing is filled to overflowing. Cushing is nearly awash in crude oil and yet the quoted price on the NYMex stubbornly stays in the mid-eighties to nineties range.

Earlier this month the Financial Times pointed out (far be it for the American press to instruct us on the true formation of oil prices) that "Yesterday there was a $10 differential of Midland WTI to Cushing (WTI). That puts us at $75 a barrel approximately" ("Texas Crude Glut Sparks Oil Price Swings" FT 12.03.12).

Seemingly the pressure of supply and prices in various parts of the country have little or no impact on the traded and posted prices on the commodity exchanges. It is becoming ever clearer that the exchanges deal in financial instruments that have left all vestige of actual supply not to speak of demand.

The issue is only heightened and brought home by the dramatic differential between surging Canadian oil production originating in Alberta where producers are selling their oil at bargain prices of less than $45/bbl for viscous heavy oil. A qualitative difference yes, but hardly reflective of the massive divergence in price. ("Canada's Oil Becomes Cheapest In World Amid Glut In Alberta" FT 12.15.12

It is well past time that our government take a serious look at the massive discrepancies in the exchange quoted price of oil, and the price of wet barrels traded in the field. The oil companies and those allied to them would of course resist any scrutiny and not to speak of the enablers, the commodity exchanges themselves, especially if they can continue to help turning high NYMex exchange traded prices as a rationalization for disproportionately high and ever higher gasoline prices, in effect fleecing the pockets of all American consumers.

Back in April 2011, amidst great fanfare the Obama administration announced the formation of the 'Oil/Gas Pricing Fraud Panel' (Please see "Obama Administration Announces Formation of Oil/Gas Pricing Fraud Panel. Really" 04.27.11). Since then we have heard nothing, not a beep, from this august body. Now, with this administration's new mandate in hand, it is time for its work to begin. The Panel has work to do, and now is the time to do it!