Gas Pump Thievery: Who's Really Behind the Rising Prices at the Pumps? Wall Street?

Hightower argues this is the result of the work of a bipartisan cabal and names the usual suspects: Gramm, Summers, & Rubin.

http://www.alternet.org/workplace/140889/gas_pump_thievery%3A_who%27s_really_behind_the_rising_prices_at_the_pumps/

Rising Prices at the Pumps?

By Jim Hightower, AlterNet. Posted June 25, 2009.

What's going on here is not the "magic of the marketplace," but some hocus-pocus by brand-name dealers.
Like a Fourth of July crescendo of fireworks, our gasoline prices are rising higher and higher. While this is tough on consumers, we're assured by a covey of tongue-clucking industry analysts that nothing can be done about it, for it's simply the law of supply and demand in action -- so suck it up, and pay up.

But hold your BPExxonMobilShellChevron horses right there. Supply and demand? The supply of crude oil has risen this year to its highest level in nearly two decades, even while the demand for gasoline has dropped dramatically, having fallen this month to a 10-year low. Let's see -- supply up, demand down. That's a classic market formula for cheaper prices at the pump. Yet our prices have steadily moved up, rising by two-thirds since the beginning of the year (and by 60 cents a gallon in the past two months alone).

What's going on here is not the "magic of the marketplace," but some hocus-pocus by brand-name dealers. What might surprise you, though, is that the wheeler-dealers now jacking up our pump prices don't operate under the BPExxonMobilShellChevron brands -- but the logos of Goldman Sachs, Morgan Stanley and other Wall Street traders that have been placing vast, unregulated, secretive bets on the future price of oil. They're playing an electronic casino game in a global "dark market" of exotic derivatives and credit swaps.

If this sounds vaguely familiar to you, it's because this is the same game that Wall Street played with subprime mortgages, leading to the present crash of our economy. And, yes, these are the exact same banksters that you and I are presently bailing out with our trillions of tax dollars.

Yet, there they go again. By pooling money from sheltered hedge funds, sovereign state funds, offshore accounts and other super-wealthy investors, speculators like Goldman and Morgan have quietly been buying trillions of dollars worth of oil derivatives -- which essentially are bets that oil prices will rise to a certain level by a certain date.

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Why is this allowed? Because the Commodity Futures' Modernization Act of 2000 included a provision that was quietly tucked into the law by then-Sen. Phil Gramm, R-Texas, specifically prohibiting any regulation of such commodity-based derivatives. Among the enthusiastic backers of this legalized thievery were Robert Rubin, the Wall Streeter who was Bill Clinton's treasury secretary, and his protege, Larry Summers, who is now Barack Obama's chief economic advisor.

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The big oil companies have made their biggest profits in history over the past few years. With demand down, they should definitely be lowing prices instead of inflating them.

nt.

buying derivatives adds to the price of gasoline.

I don't see the cause and effect relationship in the article. It says they gamble on the price going up and that adds to the price of gasoline. How does that work?

I heard that one investment house is buying a ship to store oil in. I also heard that during the time gasoline was $4 per gallon there were ships loaded with oil waiting in the Gulf of Mexico because they were not permitted to enter port.

Are these investment house controlling the delivery of oil and forcing prices up by limiting the supply?

http://www.mcclatchydc.com/homepage/story/68552.html

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"They're buying because they think it will diversify their portfolio, and they think it will diversify their portfolio against inflation, and maybe they think the economy will turn around," said Michael Masters, a hedge-fund manager who testified before Congress last year about the consequences of what are called exchange-traded funds.

Oil contracts are traded mostly in U.S. dollars, and inflation would erode the value of oil earnings, stocks or any other asset denominated in U.S. currency. Many investors are pouring money into oil futures — contracts for future deliveries of oil at specified prices — in the belief that oil prices will rise as inflation erodes the dollar's value.

This turns oil futures contracts into a way for investors to hedge against inflation at the expense of American consumers, who have to pay more to fill their gas tanks as oil and gasoline prices rise.

Masters and other critics say this speculative flow of money into commodities markets is a self-fulfilling prophecy that's distorting the usual process by which buyers and sellers set prices and is driving up the prices of oil, gasoline, grains and other essentials.

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If I have a future contract I can do one of two things
1) sell it someone else
2) take delivery

without delivery future contracts alone cant raise prices.

I'm hardly an expert in this area, but here's an explanation of the difference:

http://www.luxlibertas.com/how-does-oil-speculation-raise-gas-prices/

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Everything that can be bought or sold has what 18th-century political economist Adam Smith called a natural price. This price is the sum total of the values of everything that came together to create the product or service. Raw materials, labor, distribution — all of these add to the natural price of a product. Any amount that the seller of a good or service can get above this natural price is profit.

What speculators do is bet on what price a commodity will reach by a future date, through instruments called derivatives. Unlike an investment in an actual commodity (such as a barrel of oil), a derivative’s value is based on the value of a commodity (for example, a bet on whether a barrel of oil will increase or decrease in price). Speculators have no hand in the sale of the commodity they’re betting on; they’re not the buyer or the seller.

By betting on the price outcome with only a single futures contract, a speculator has no effect on a market. It’s simply a bet. But a speculator with the capital to purchase a sizeable number of futures derivatives at one price can actually sway the market. As energy researcher F. William Engdahl put it, “<s>peculators trade on rumor, not fact” <source: Engdahl>. A speculator purchasing vast futures at higher than the current market price can cause oil producers to horde their commodity in the hopes they’ll be able to sell it later on at the future price. This drives prices up in reality — both future and present prices — due to the decreased amount of oil currently available on the market.

Investment firms that can influence the oil futures market stand to make a lot; oil companies that both produce the commodity and drive prices up of their product up through oil futures derivatives stand to make even more. Investigations into the unregulated oil futures exchanges turned up major financial institutions like Goldman Sachs and Citigroup. But it also revealed energy producers like Vitol, a Swiss company that owned 11 percent of the oil futures contracts on the New York Mercantile Exchange alone <source: Washington Post>.

As a result of speculation among these and other major players, an estimated 60 percent of the price of oil per barrel was added; a $100 barrel of oil, in reality, should cost $40 . And despite having an agency created to prevent just such speculative price inflation, by the time oil prices skyrocketed, the government had made a paper tiger out of it.

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Options are another example of derivatives.
Options on future contracts are derivatives of derivatives.

The point is that IF buyers of oil didn't believe oil would go up in prices (now this is true buyers not speculators) then they would not buy oil futures if the oil future was priced (due to speculation) higher than what they believe they could get oil for.

The reason for the oil bubble was that oil consumers (airlines, cruiselines, trucking companies, oil refiners) DID believe oil was valued that high. Speculators added to the rise and the made the rise come earlier rather than later but if people believed oil was not going to be worth that much they would have passed on the contract.

What happened though was a risk premium.

You you owned southwest airlines. You just saw oil rise from $70 barrel to $100 barrel. A lot of tickets priced @ $70 oil are now worthless (you are losing money on each person flying). You can price tickets now @ $100/brl but what happens if oil rises.
Same thing you are stuck. Oil futures for delivery in 6 months are $115/brl. Should you buy them? Well it depends. $115 is more but it locks in the price of oil for you. 15% more vs uncertainty. Oil could be $120, $150, $180 6 months from now. So you lock it in by buying the contract.

Now if spectulators drove the price of the future contracts to say $20,000/ brl would you buy it? Likely not. Oil consumers will only buy future contracts if the price is "reasonable". Since oil speculators can't take oil off the market they can only trade those contracts to each other or to a consumer.

You noted speculators added to the rise and made it come earlier. The fact the price of oil might have eventually risen to levels it was pushed to by speculation doesn't seem to justify the pushing of prices to those levels any earlier than necessary. Isn't this the kind of distortion that disrupts how buyers and sellers set prices (post #4)

And does speculation lead to the hording effect discussed in the article I linked to above (post #7)? That would seem to be another instance where speculation does lead to a rise in gas prices.

Thanks for responding. It's an interesting subject.

http://money.howstuffworks.com/oil-speculation-raise-gas-price1.htm

By betting on the price outcome with only a single futures contract, a speculator has no effect on a market. It's simply a bet. But a speculator with the capital to purchase a sizeable number of futures derivatives at one price can actually sway the market. As energy researcher F. William Engdahl put it, "<s>peculators trade on rumor, not fact" <source: Engdahl>. A speculator purchasing vast futures at higher than the current market price can cause oil producers to horde their commodity in the hopes they'll be able to sell it later on at the future price. This drives prices up in reality -- both future and present prices -- due to the decreased amount of oil currently available on the market.

Investment firms that can influence the oil futures market stand to make a lot; oil companies that both produce the commodity and drive prices up of their product up through oil futures derivatives stand to make even more. Investigations into the unregulated oil futures exchanges turned up major financial institutions like Goldman Sachs and Citigroup. But it also revealed energy producers like Vitol, a Swiss company that owned 11 percent of the oil futures contracts on the New York Mercantile Exchange alone .

However speculators are more like an amplifier.
They amplify existing sentiment.

Fear is the primary motivator. Fear of EVEN HIGHER oil prices in the future.
Speculators (defined as neither producers nor ultimate consumers) are substantially down compared to last year but oil is still rising.

It is fear based. Most oil consumers are happy with $60-$70 oil. They consider it a gift. They also understand $30 oil is unsustainable. So they want to lock in prices because of fear of $80-$100 oil. Doing so creates a lot of upward pressure. Speculators jump into that pressure and amplify it.

Even without speculators we would see a rise in future contracts because of the fear of what will happen to oil once the economy kicks back into gear. China is building a middle class that is equal to about 1 United States worth of consumers every decade.

Imagine another United States being added to the world economy every decade. That is the driver of the fear and fear is driving prices.

healthier.
Consolidate trips - starting a warm engine uses less gas than starting a cold one.

And all the other gas saving tips: no jack-rabbit starts; try to drive so you brake less often (e.g., don't tailgate), keep tires inflated to proper level for car, don't exceed the speed limit, open windows rather than using AC if driving less than 40-45 mph.

What have your experiences been on the road?

dedicated bike/walk trail as much as possible.
I will tend to stay on the sidewalk and go slower than to be on the street if there's a lot of traffic and/or parked cars.
Wear a helmet.
ALWAYS make eye contact with drivers before pulling in front of them.
Don't expect drivers making right turns to look to the right - in other words, don't cross the street in their path until you've made eye contact with them.

Bike lanes are safer but not by a whole lot - drivers fail to respect that it is your lane and will cut into them, either to swerve to avoid something midstreet - or because they aren't paying attention, or to make a right turn (in at least some states, they are technically restricted in terms of how close to the corner they have to be to enter the bike lane - but drivers rarely follow this law).

If you're making a fairly short trip - less than a few miles (which is about as far as the vast majority bike) - going slower but being safe is not really going to slow you down much. Sometimes, a longer route is safer and faster, esp. if it gets you on a trail.

Safety is ALWAYS paramount. I don't make left turns from left turn lanes, even though a biker can. I cross at the sidewalk as if I'm a pedestrian. This means waiting through two lights (one for the first crossing, then one to cross to the other corner) but it's much better than having a driver run me over.

Your profile says your hobby is cycling. Surely you knew all this - why did you ask?

The last time I rode a bike lane, a pickup truck driver drifted into my lane, nearly side swiping me, then came to a complete stop to scream at me that "I should get up on the sidewalk" (there are giant bike decals under my feet...)

If I ride the street, I ride far left of the curb, so drivers can see me.

"It's too dangerous" is one of the most popular excuses people use for not biking.