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.

This post originally appeared at Robert Reich’s Blog and is posted with permission.

8 Responses to "The Gas Wars"

  1. Robin D Williamson   February 21, 2012 at 6:30 pm

    I have just been introduced (2/21) to Mr. Robert Reich's blog and philosophies bubbling outta the Berkeley UC area and system. I am excited about attending a session and blessing myself with his seasonings of modern life and royal assistance toward tomorrow's economy. My name is Robin Williamson and I am a resident of the East Bay area…

  2. mgk   February 21, 2012 at 9:00 pm

    While a steadfast republican and capitalist, I completely agree that banks/funds borrowing at ZERO are taking the free fed $$ and artifically buying up crude. We want to fix this? Raise rates .50%…..the US DOLLAR will get some respect back , end a bit of the carry trade and stop the free borrowing of the dollar into oil, gld and other commodities. No one is buying homes at these rates anyway.

  3. Sierra   February 21, 2012 at 11:00 pm

    Today….MSNBC….500,000 barrels excess gasoline consumption supply per day?…
    What scarcity?????ure market HFT trades…….and we pay at theu!

  4. Sierra   February 21, 2012 at 11:02 pm

    Sierra comment….."And we pay at the pump"

  5. Aegean1972   February 22, 2012 at 5:23 am

    If gas was 4$ a gallon we would have a party here in Greece. But then again we re known for our Dionysian parties and symposioums…(and get blamed for them too!).

    But on a serious note, gas over here is at 9$ a gallon, while our salaries are a fraction of those of our Euro or American collegues. So thats another reason why we cant go back to a 60% depreciated new currency. In that case gas would be around 15$ a gallon. Prolly you could find cheaper gas on Mt Everest…

    It aint cool filling up your 30 gallon tank for 250$ once a week. And thats what 9$/gallon buys…

    So dear friends, dont complain if a gallon back in the good ol US still costs 4$. Thats pretty cheap.

    Oh one more thing!! Make sure you dont start a war with Iran either, because that would be the end of all SUV's.

  6. JohnCardillo   February 22, 2012 at 11:32 am

    Great! Here we go again. The last time oil hit $140 a barrel, the economy imploded. Everyone blammed the housing bubble, but oil played a large part. For every every $50 increase in the price of oil, approx. $365 billion is blead from the general economy (20 million barrels per day) . Thats approximately 2% of the U.S. GDP (20 Trillion). Diverting 2% of the GDP means 2% job loss accross other sectors of the economy.

  7. lachu   February 22, 2012 at 11:53 am

    """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?""" Neither do we the people hear the Democrats railing against the speculators; in fact da Boyz' Senator, Charles E. Schumer, downplayed speculation at the height of da Boyz' oil bubble in 2008. Fortunately or unfortunately, it's a world market in oil and da Boyz Club control extends to every commodity from aluminum in Detroit to a flotialla of oil tankers. Demand is no-longer US-centric, SE Asian and Japan, in lieu of nuclear power, accounted for a sudden rise to 1 MMBO/day/year.

    Dr. Steven Chu proposed $9 gasoline, higher CAFE standards, alternative electric power and electric cars. $5 by 2012 and no alternatives to Keystone XL are proof of the president's payback to contributors and intellectual elites of the East Bay, while across the state line Nevada has the highest unemployment and homeless rate in the nation.

  8. overpopover   February 22, 2012 at 1:53 pm

    If they're buying it up where are they storing it? Obviously, they're not because they're not taking physical delivery. So they're buying contracts, betting that the price will go up before expiration. That's not much of a driver, not really speculation.