Saturday, May 28, 2011

Why are gas prices high?

Kids, I remember the '70s. I recall waiting in my car all night long -- in a weird line of similarly stranded travelers, snaking through a residential neighborhood -- for a chance to pump up my Ford Falcon when the gas station opened at dawn. When I finally got home from school the next morning, it was time to go back to school.

The Carter-era gas crisis hit like the Joplin tornado: Precious little warning. Just...WHAM.

Did a similar crisis happen in 2008? Did it happen in 2011?

No. That fact tells you that something other than a supply squeeze caused gas prices to reach the four-buck-a-gallon stage. I am here today to tell you what that "something" is.

From Dakinikat:
There’s another interesting WikiLeak that’s come to light about high gas prices. It seems that President Bush asked the Saudis to pump extra oil to help relieve market pressure on prices in 2007 and 2008. The Saudis suggested that Bush tackle the problem by reigning in Wall Street speculation.
Emphasis added, and please study those words. Most Americans do not know -- most Americans would refuse to believe you if you told them -- that Wall Street speculation in commodities drove up oil prices. It's also driving up prices in food.

Not inflation, not supply shortages: Speculation. These are the same financial games that ruined the housing market.

Stop mumbling nonsense about the free market: I've read The Wealth of Nations and you haven't. (Probably.) I can assure you that Adam Smith never had this crap in mind; in fact, he would be appalled.

From the original McClatchy story:
"Saudi Arabia can't just put crude out on the market," the cable quotes Naimi as saying. Instead, Naimi suggested, "speculators bore significant responsibility for the sharp increase in oil prices in the last few years," according to the cable.

What role Wall Street investors play in the high cost of oil is a hotly debated topic in Washington. Despite weak demand, the price of a barrel of crude oil surged more than 25 percent in the past year, reaching a peak of $113 May 2 before falling back to a range of $95 to $100 a barrel.
When they say "hotly debated" they mean "The facts are clear, but admitting them out loud would be embarrassing."

Matt Taibbi:
The cables show that at the height of the bubble, in May 2008, U.S. officials met in Riyadh with the Saudi assistant petroleum minister, Prince Abdulazziz bin Salman bin Abdulaziz al Saud, who told the U.S. he was "extremely worried" that high prices would destroy the demand for crude.
And here's the reason why gas prices hit the four-buck-a-gallon mark right now:
Because of various changes to the way commodities were traded -- including a series of semi-secret exemptions handed out to commodities speculators, allowing companies like Goldman Sachs to popularize commodities speculation -- there was, by the summer of 2008, a cascade of investor money pouring into commodities, mostly all betting on a rise of commodity prices. Much of this might have been due to money flowing out of mortgages and into the "safe" haven of commodities, with exploding energy prices being an unwelcome side effect. While there was less than $20 billion of speculative activity in commodities in the early 2000s, by 2008 that number had jumped up to well over $200 billion, with virtually all that money being "long" money, i.e. bets on a rise in prices. All of that new money turned into a battering ram pushing prices through the roof. We are seeing the same phenomenon this year.
The Randroids, the baggers, the Peter Schiff and the Gerard Celente types all want you to blame inflation, not speculation. There is no inflation crisis. If there were, your wages would be going up, and so would the value of your home. The interest rate would skyrocket.

As always, the libertarians are providing ideological cover for the bandits who are ruining this nation.
An acquaintance that collects 1970's era Muscle-cars constantly bitches about the televised auction sites that have driven the prices up past the point of affordability for most blue-collar enthusiasts.

He's a Libertarian in the worst Social Security as Ponzi way but doesn't realize how relaxing investment regs brought about a small segment of the population controlling a large share of wealth and are investing willy-nilly.
As a former International Editor of the Oil Daily, I find your juvenile class-warfare analysis of oil price surges ludicrous to a ridiculous extent. I have been to a dozen OPEC meetings and know Oil Minister Naimi since forever.

The Saudis don't want to get the political heat from their fellow OPEC members for raising production---they didn't mind taking the heat from GWB in '07 & '08 because at that time GWB's back was to the wall politically and King Abdullah disliked other parts of his US policies in the Middle East.

I've known Prince Abdul-Aziz bin Salman Al Saud for twenty years and he's always professes to be "worried" about high prices, while he and his family rake in immense profits chuckling under their breath.

Your delusional ravings about Wall Street speculators is trying to make one infinitesmal element of a complex situation into an immense conspiracy---you may have read Wealth of Nations, but you sure don't understand 21st century oil politics.

Taibbi is a third-rate hack who thinks he's a muckraker, but is actually dealing with raw sewage.
First, Dave, all I can say is that if "Griftopia" is the work of a third-rate hack, then everything else written about the financial crisis is the work of fifth-and-sixth-rate hacks.

Second, I notice you don't argue against the specifics of what Taibbi said. That's troubling. Money did flow out of mortgages, GS did popularize commodities speculation, and exemptions were handed out to commodities speculators. You don't deny any of this.

Third: Whom should I believe -- you or the info derived from a leaked cable?

Fourth: If prices rose because supplies tightened, where were the long gas lines?

Fifth: Food prices have also risen. More evidence that Taibbi is right.

Sixth: If, as a general rule, "class warfare" analysis is "juvenile," then why do history books read the way they do? If honesty must take the risk of being labeled puerility, then so be it.
Seventh: Suppose that, back in 2007, someone said that it was a really, really bad idea to bundle shit mortgages into strange new financial packages rated AAA. Suppose that this same someone said that Credit Default Swaps were dangerous.

Do you think that the vast majority of cable news pundits would have called this person "juvenile"? I do.

Eighth: How did the big banks regain some semblance of health (paying back TARP and so forth) if NOT for commodities speculation?
By the way, Dave...AWESOME cat.

1) I dont think speculation on its own is entirely responsible for higher oil prices. Cheap money is a tool. If you give me cheap money I get the chance to buy stuff on easy terms. So then I look around me and decide what stuff I think is gonna go up in price. I look around and I see oil, metals and food where I see demand supply conditions starting to look a little tighter. So I figure I will buy me some kind of exposure to these markets. I wont buy things like suburban real estate cos I dont think those markets look like supply is tighter than current or future demand.

However, without the cheap money I cant do the trade. I cant borrow money to buy oil. If you make money expensive enough you make speculation unprofitable.

2) I read the Saudi comments differently. I think they were effectively laughing at Bush. Cos while defense and industrial interests (and almost all companies in the US who are not involved in energy markets) have an interest in cheaper oil, they dared him to deal with the speculative interests in the US first before coming to them. Well there was no way Bush was gonna do that. Reign in bank speculation in commodity markets? Hedge fund speculation?


Loose money is a really ineffective way of stimulating the US economy. But it is a great way of helping banks. If you wanted to boost the economy you would use fiscal policy. But they dont do they. They want to rescue the banks, just like the Japanese.

Doing things this way means that real wages come down. But asset prices remain supported. The policy is a a form of socialism for the rich. Its dumb policy and immoral. But hey, its not my country.

I partially agree with Joe.Right now we dont really have inflation - cos wages are going nowhere. But I think if we had genuine inflation, then I think that oil prices would be absolutely flying, and the dollar would be in free fall.

NB. I am a speculator. Not a very successful one but thats how I make my living. I hope Joe isnt offended that I addressed these remarks to you.

Joe, I think you are aware that I disagree a little with you. It is a question of extent. Oil prices are not high exclusively through speculation. But speculation is certainly an enabler and without the liquidity commodity prices would definitely be lower.

Its important to remember that speculation cannot make a market high forever. But it can make prices boom and bust. See housing.

I know that there is a battle coming about allowing speculation in key commodities. I think speculators (americans generally call specs "traders"), will loose that battle eventually. But it will take time and by then other issues may have taken over.

Are you sure you waited to fill your car during the Carter years? I remember it was during the Nixon years, after the Yom Kippur War of 1973, when the Arabs stopped pumping their oil. I'm not saying you are wrong; I just don't remember waiting for gas in the late 70s.
Anon 11:11 -- there were two gas shocks. The Nixon one kind of crept up on us over the course of three days or so. (I wasn't driving at that time.) The Carter one hit with a BOOM.
I wanted to point out a study that shows the C.F.T.C basically did miss the oil speculation and its influence in prices at that point in time. I'm sure the Saudis were aware of the speculation issues as they have many analysts on top of the oil market. I'm also sure they probably really didn't care that the prices were high. However, that doesn't dismiss these finding reported in 2009. The authors aren't hacks either.

Here's info on that:

"A new academic study contends that speculation by financial players like banks, hedge funds and index funds was behind the steep rise in oil prices last year and says that the Commodity Futures Trading Commission used models that were “not adequate” when it argued that speculation was not a major factor in the oil price spike.

The authors of the study, Kenneth Medlock and Amy Myers Jaffe, from the Baker Institute for Public Policy at Rice University, write that the commission looked at models that measured volatility just in a couple of months to base their conclusion that financial speculation was not behind oil’s meteoric rise last year to $147 a barrel, from $80.

The authors argued that the commission should have been looking at the rise in the number of speculators in the market, most which were betting on higher oil prices, in order to gauge the effects that speculation was having. "
I'm not convinced the distinction that people tend to make between speculators (Wall Street) on one hand and oil producers (Saudis) on the other, is terribly important. To a large extent, the big speculators are the big producers. They're the investment class.

"Why are gas prices high?" is a critical question. But another question that needs to be asked is "Why are gas taxes low -- after 9/11, the Iraq war, Copenhagen, BP Horizon oil spill?"

I suppose when oil taxes are minimal there's more space for price manipulation or profit gouging by producers and speculators.

Most Americans don't recognize the invisible petrol tax they pay to the investor class, they've only been informed about taxes they pay to the government.
During the Carter years, we did wait in long lines for gas. It was tied to your registration. Odd numbers got gas on one day, even numbers got gas on the other day. I can remember spending an entire day waiting to fill up. I was a poor college kid and the thing was, soemtimes I'd wait in line without enough money to fill up. I'd wait and only put $5 of gas in but that $5 bought alot more as then than today.
I made money driving people's cars to the gas station and waiting in line for them in 1973-74. It's the only time I remember ever waiting very long to fill my gas tank. I remember distinctly when it was because I was pregnant, and I sat in my car listening to the radio and knitting baby clothes. If there were gaslines during Jimmy Carter's presidency, they were minor in comparison.
Glenn...ah, it all comes back now! The "registration number" thing started two or three days into the crisis, and it lasted well after the problem was over. Those first two or three days were pure chaos.

And as I said, it hit literally overnight. No warning, at least none that caught my attention.
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