Manipulated Oil Markets: Why the "reasons" for Memorial Day price gouging are little more
than excuses ...
MAY 22, 2009 UCAN's Gas Project reports that the price of gasoline has surged three cents a gallon overnight since yesterday for a new record-breaking high for this year of $2.66 a gallon in San Diego.
On this day last year, gasoline cost $4.07 a gallon, on average, in San Diego.
Today's average is up 95 cents from a low of $1.71 a gallon in December of 2008. Scroll down for other statistics on the recent spate of price hikes.
Any excuse for a price spike will do ...
Here are the industry "excuses du jour" for the recent price spikes, followed by our response:
1: "Oil prices are the highest they've been all year."
While oil prices on the NYMEX (or Merc) hovered above $60 a barrel today, the increase since Monday only amounts to about a nickel a gallon for the cost of the oil in a gallon of gasoline. What's more, this oil is sold on the Futures Market for a delivery price at some point in the future. The oil that is being refined into our gasoline now was purchased roughly 90 days ago when oil cost $37 a barrel, or almost 50 cents a gallon less.
2) "Nigerian rebels are wreaking havoc with the pipelines.''
Worried about the threat of "Nigerian Rebels" (gasp!) UCAN scoured the local Department of Homeland Security. Surprisingly there isn't a single mention of "Nigerian Rebels" anywhere. Moreover, the Honorable Mayor Sanders seems unconcerned about the possibility, mentioning absolutely nothing about impending rebel threats to the local energy supplies.
3) The ConocoPhillips' refinery in the Bay Area went down, creating huge price spikes.
Malfunctions at this refinery are being blamed for higher local gas prices. One problem: The refinery is located in Northern California. It represents less than 3.8% of California's gasoline supply, and has minimal impact on Southern California. However, we did see big price spikes for Conoco brands such as Union, Unocal, 76, and Circle K locally. It is a good excuse, but it is not a good reason.
5) Sunoco's refinery on the East Coast went down, creating headlines and high gas prices all across America.
This refinery is so far away that it is almost impossible for it to have an effect on California gasoline supplies ... unless of course, it was taken out by roving Nigerian rebels, then we might have a problem ... but only if we lived in Pennsylvania.
6) "Carnivorous winged monkeys attacked our facility and then hypnotized everyone with their evil spells, forcing us to restrict the supply of fuel and drive up prices to gasoline retailers."
The analysts at UCAN's Gas Project have examined this threat closely. After careful consideration, we have determined that of all the explanations put forth by the industry, this excuse may be the most plausible ... at least the part about restricting the supply of fuel and driving up prices (we aren't sure about the flying monkeys).
7) Greed, lack of competition, a weak dollar, and speculation have driven up gas prices.
Our response: (Actually, these are the "real reasons" for our dysfunctional oil and gasoline markets).
This "excuse" cites four factors, most of which are largely legitimate. Let's review them one at a time:
First, "greed" looks very promising. Especially when you consider that California currently has 12% unemployment, and that demand for all fuels including oil is down, and that fewer people are on the road. The industry says "demand is up" but this is most likely a brief increase in demand due to seasonal issues, including increased holiday travel by unemployed motorists. Specifically, with more people out of work, and with less money to spare, a vacation that involves driving locally makes more sense than costlier options. It is worth noting that oil surplusses in the USA are at the highest levels in the last 20 years.
Second, "Lack of competition" is a solid reason: In the last ten years, the Federal Trade Commission (FTC) has allowed merger after merger between oil companies. It is the job of the FTC to make sure that vital industries in the USA are competitive. The FTC has accepted the argument that by allowing huge companies to merge it will somehow make the entire market more competitive. Unfortunately, the most recent FTC bureaucrats have been talented advocates for less competition in the oil business.
Bluntly, the current crop of FTC regulators is a splendid example of the idea that "government can't do anything" ... because they've proven it by doing nothing.
Third: the weak dollar:
The ugly truth is that as the Fed prints more money to bail out more banks (and pay off war debts), the value of the dollar will fall. What this means is that it will take more dollars to buy less oil. However, this doesn't explain the most recent price spike. This week, the price of gasoline increased by ten cents in San Diego, while the price of oil increased by only 5 cents a gallon. And as we observed in Excuse #1, the oil in today's gasoline cost about $37 a barrel, not the $61 futures price. Don't get us wrong - the weak dollar will eventually force gas prices up ... but it has nothing do with the sharp price spikes that we've seen in the last 14 days.
Fourth: Speculators are holding oil hostage.
When oil prices spiked to $147 a barrel on July 3, 2008, many analysts blamed renewed demand from China and the weak dollar. As it turned out, neither of these factors had anything to do with the price run-ups. What was happening was that speculators at Goldman Sachs, Bear Stearns, Morgan Stanley, and other big investment banks were buying futures contracts for oil with the money they made from derivatives profits that they thought were insured by AIG. When AIG collapsed, these banks had to unwind their holdings quickly, and oil prices made a rapid pratfall. These banks have no use for oil. They do not own refineries or distribution networks for gasoline.
What is especially appalling is that these banks helped destroy the world economy with $147-a-barrel oil, by holding it hostage. Investment banks have no legitimate use for oil, but by manipulating the futures market, they drove the price to artificially high levels. Most investment experts thought that the oil market was too big to game in 2008 because no entity could possibly have the capital required to manipulate the price. History shows that the "experts" were wrong.
But in the process, the "experts" were looking for free market explanations for irrational market movements by blaming China, Nigerian Rebels, war jitters, increased demand, and other reasons that in hindsight turned out to be completely ridiculous.
And the tragedy is, these analysts are still citing the same specious reasons to explain market movements.
If there is one motto we'd like to engrave on their frontal lobes regarding energy prices it is this: "If it doesn't make sense, then it is probably Market Manipulation, Stupid."
USEFUL GASOLINE STATISTICS (Regular Unleaded)
Price of San Diego Gasoline Today, May 22, 2009: $2.661 a gallon
Price of gasoline on Monday, May 18, 2009: $2.565 a gallon
Price of gasoline April 22, 2009: $2.369 a gallon
Price of gasoline March 22, 2009: $2.168 a gallon
Price of gasoline February 22, 2009: $2.275 a gallon
Price of gasoline January 22, 2009: $2.073 a gallon
Price of gas, December 22, 2008: $1.79 a gallon
Price of gas May 22, 2008: $4.07 a gallon.
All-time record high for San Diego gasoline: $4.62 on June 19, 2008.