Gas prices surge toward $4, threaten economic recovery

article by: Richard Moore

Gas prices continued to gallop toward $4 a gallon early this week, both in the area and across the state, as prices in Minocqua and Rhinelander hit $3.99 on Tuesday, even as prices for crude oil eased, at least temporarily.


Across the nation, according to GasBuddy.com on Wednesday morning, the national average price for a gallon of regular gasoline stood at $3.79; in Wisconsin, the average was $3.87. Four states, including Illinois, have seen prices already surpass $4.

Crude oil prices moved downward Tuesday from $113 a barrel – the highest price since September 2008 – to $106, a drop of more than 3.5 percent since Monday. However, according to Reuters, prices were edging upward again Wednesday morning.

Whatever the temporary movement, the long-term price outlook is not rosy for either crude oil or gasoline. Both industry analysts and government officials talked this week about a coming “sticker shock” and the inevitably of $4 a gallon gas; many predicted prices above $4 a gallon this summer; a few ventured to predict $5 a gallon by late summer.

The U.S. Energy Information Agency (EIA) itself projected the retail price of regular gas to average $3.86 per gallon during this summer’s driving season between April 1 and Sept. 30, up from $2.76 per gallon last summer.

“EIA forecasts the annual average regular retail gasoline price will increase from $2.78 per gallon in 2010 to $3.70 per gallon in 2011 and to $3.80 per gallon in 2012,” the agency state this week. “Current market prices of futures and options contracts for gasoline suggest a 33-percent probability that the national monthly average retail price for regular gasoline could exceed $4.00 per gallon during July 2011.”

Those prices are average, however, and many markets, including some in the Midwest, could average as much as 25 percent more than the national average.


A Threat To The Economy-
Many experts see the building price pressures as a serious threat to ongoing economic recovery, particularly if crude stays above $100 a barrel. Unfortunately, that’s exactly where the EIA predicts those prices will stay, inching as high as $112 a barrel in 2012.

The chief economist of the International Energy Agency (IEA), Dr. Fatih Birol, said in March such a level would spike inflation in the global economy, driving up food prices, transportation and other consumer products.

“The overall impact will depend largely on the extent of the price increase, its persistence, monetary policy response, and how producers spend their windfall revenues,” Birol said.

Putting $100 a barrel oil in perspective, the amount spent on oil imports by the United States and Europe would equal to 2.3 percent of their GDP, the IEA estimates, while each additional $10 increase would increase spending for oil .2 percent of GDP in those countries.

“If high prices remain, then the amount spent on oil by the big importing OECD nations will be more or less equal to what they spent in 2008, when the world was plunged into an awful economic crisis,” Birol said.
According to the Associated Press, to punctuate the point, in January, American foreign oil costs rose 9.5 percent, or slightly more than $3 billion, to $34.9 billion, the highest monthly total since October 2008.


The Cause-
To some, particularly Republicans, the rise in prices is simple: oil responds like every other market to the laws of supply and demand, and those laws are at work.

In this view, political unrest, especially in Libya and in oil-producing nations, has disrupted oil production, the Japanese tsunami and nuclear emergency will increase demand there, while demand is up in the U.S. as the fledgling recovery has juiced travel and consumer spending. According to the latest IEA report, worldwide oil consumption will rise by 1.4 million barrels a day this year to an average of 89.4 million a day.

Meanwhile, gas inventories in the United States are down by almost a million barrels as of the week ending April 8 and Bloomberg reports that U.S. gasoline supplies fell for the eighth week in a row, the longest streak of declines since the summer of 2008.

In other words, higher demand and lower supplies equal higher prices, in this viewpoint.


Speculators-
The other side of the coin is speculation, which is helping to fuel the growth in oil prices, as even Goldman Sachs acknowledges.

According to Reuters, the firmed cautioned its clients on March 21 to essentially take the money and run before the oil market reversed. Meanwhile, Reuters reported, the bank’s estimates indicated speculators were boosting crude prices as much as $27 a barrel.

In a research note, Goldman estimated that every million barrels of oil held by speculators contributed to an 8-10 cent rise in the oil price, Reuters reported.

“Although we believe that on a 12-month horizon the (oil market) still has upside potential, in the near term risk-reward no longer favors being long the basket,” the news agency quoted a Goldman note from its commodity team as stating.

The advice and the note supply an indication of how speculation drives up prices. Investors with large sums of cash purchase, on contract, barrels of oil at a pre-determined price for a future date, anticipating that, with rising prices, they will make a profit when the oil is delivered.

So, with recent Libyan and other unrest in the Arab world threatening to disrupt production and supplies in the future, speculators can purchase a barrel of oil at a certain price now and expect to leverage it later to a petroleum user for a higher price.

However, if the region stabilizes and inventories increase, prices could remain lower and reduce profit-taking, and perhaps even lead to a loss. The prospect of stabilization was in fact one of the reasons Goldman gave the advice it did, along with dimming prospects for a recovery at home curtailing oil demand and prices further.

“Not only are there now nascent signs of oil demand destruction in the United States, but also record speculative length in the oil market, elections in Nigeria and a potential ceasefire in Libya that has begun to offset some of the upside risk’ owing to contagion,” Reuters quoted the Goldman note.

In other words, the speculative downside risks were increasing. Of course, with consumption increasing around the world and ongoing strife in oil-producing nations, those downside risks could be short-term as well.

In addition, other than the pure gamble of it, speculators themselves drive up the price because, by entering the market, they drive up demand.

“The large purchases of crude oil futures contracts by speculators have, in effect, created an additional demand for oil, driving up the price of oil to be delivered in the future in the same manner that additional demand for the immediate delivery of a physical barrel of oil drives up the price on the spot market,” a 2006 Senate report stated. “As far as the market is concerned, the demand for a barrel of oil that results from the purchase of a futures contract by a speculator is just as real as the demand for a barrel that results from the purchase of a futures contract by a refiner or other user of petroleum.”

Even in 2006, the report stated, analysts estimated that speculative purchases of oil futures had added as much as $20-$25 per barrel to the 2006 price of crude oil – a figure the Goldman numbers now confirm – thereby pushing up the price of oil at the time from $50 to approximately $70 per barrel.

In addition to this direct effect, the Senate report stated, speculation has a pernicious domino effect: by purchasing large numbers of futures contracts, and thereby pushing up futures prices to even higher levels than current prices, speculators have provided a financial incentive for oil companies to buy even more oil and place it in storage.


What To Do-
For now, many Americans – and especially those in the Midwest – are facing the prospect of a summer with gas prices somewhere above $4 a gallon. One question is if and when the price will move finally toward $5.

For their part, Democrats are calling for a curb on speculation, and they want to tap the nation’s strategic oil reserve..

Sen. Jay Rockefeller and 12 other senators sent a letter to U.S. Commodity Futures Trading Commission chairman Gary Gensler asking the CFTC to use the new Wall Street reform law to crack down on oil speculation.

Specifically, the lawmakers encouraged the CFTC to require speculators to put more money down to prevent excessive speculation.

“Gas prices are being pushed up by speculators out to make a quick profit and it’s time for the CFTC to step in,” Rockefeller said. “Too many people on Wall Street are taking advantage of the political turmoil overseas – betting big dollars on oil markets with very little money down. The losers in this game are struggling Americans who can’t afford to pay higher and higher gas prices just to get to work or the grocery store.”

Meanwhile, most Republicans are resisting attempts to regulate speculation, and they are also critical of Democratic calls for President Barack Obama to tap the nation’s strategic oil reserves.

“As the price of gas continues to rise, the White House is considering a short-term response and ignoring the implications of its failed energy policies,” said House Republican Policy Committee chairman Tom Price (R-GA). “The Strategic Petroleum Reserve was created to offer relief should there be a temporary disruption in the supply of crude oil, like a devastating hurricane or a blockade of oil imports. It was not intended to be a tool to manipulate the market or provide political relief.”

What the American people are facing is not a temporary problem, he said. Energy prices have been on the rise for months, and we have faced similar pain at the pump over the past several years.

Instead, Republicans want expanded off-shore drilling in the Gulf and to open up the Arctic National Wildlife Refuge to drilling as well.


read more at The Lakeland Times