Who's to Blame for Higher Gas Prices? Most Fingers Point to Wall Street

Those $4+ a gallon gas prices starting to bite? Looking for someone to blame? Well guess what, they're baaaack: yup, the industry the world loves to hate, your friends in finance.

It would have been SO easy to let the energy industry take the hit because they are not exactly at the top of anyone's corporate social responsbility index, but a trade's a trade, a buck's a buck and anyone who doesnt agree is a sucker. So, not content with sticking it to the global economy on financial crises, the investment firms have entered energy trading in a big way. Now futures traders are important for the effective functioning of any market, but it seems that The Masters of the Universe may have gotten carried away - again.

Admit it: we were all tempted to blame Wall Street and The City for the Japanese tsumani and this spring's killer tornados, but it's hard to find causal evidence. And hey, it's Memorial Day weekend so most financial traders have driven their new Maseratis out to the Hamptons or to their stately homes in Devon.

But the timing is astonishing: just when we thought they might actually be behaving - at least within the extremely flexible and porous boundaries that investment firms inhabit - along comes a 25% increase in gas prices. The implication is that with a Presidential election in full swing, you can bet the financial types have just earned themselves a fresh round of public scrutiny. JL

Dan Piller reports in USA Today:

"Gasoline costs $1 per gallon more than it did last Memorial Day, and the the Wall Street speculator, more than Texas oilmen and OPEC ministers, is often seen as the bad guy at the gas pump.

"There won't be another drop in the price of gasoline this weekend, and it's due to Goldman Sachs and Morgan Stanley," said Mark Meyer, president of Keck Energy. On Tuesday, Goldman Sachs and Morgan Stanley, both major investors in crude oil markets, issued forecasts of higher crude oil prices this summer -- even as prices at the pump in some areas began to descend. The price of oil promptly rose more than $1 a barrel in the next two trading days on exchanges.

"What a crazy system we have," he said. "People resist paying an extra 5 cents per gallon in gas tax to fix the highways, but we allow speculators to raise the price of gasoline by 50 cents a gallon."

As crude oil and gasoline prices have risen 25% since Jan. 1, more charges of market manipulation are flying.

U.S. regulators have launched one of the biggest-ever crackdowns on oil price manipulation, accusing traders and companies of artificially driving up crude oil prices in 2008. Also this month, Rex Tillerson, chairman of ExxonMobil, told a congressional committee that supplies of crude oil and refined gasoline were adequate and that the supply-and-demand price of crude probably should be around $70 a barrel.

The price impact
Small part of budget. Gasoline costs amount to no more than about 5% of a typical family's spending, well below food, 13%, and shelter, 40%. So economists believe that the effect of higher gas prices tends to be at the margins, such as holiday driving and attendance at special events.

The auto club: AAA reports that 30.9 million Americans are expected to travel more than 50 miles by car this weekend, a slight decline from the 31 million a year ago. The AAA survey said that of those who will travel, 6 of 10 said rising gas prices won't affect their plans. Of the remaining 4 of 10, 70% said they'll simply economize other areas of their travel budget.

Not just gas: Airfares, hotel rates and car rental rates are also up along with gas prices. The number of travelers flying this weekend is expected to be up about 11.5% from last year's 2.63 million. Memorial Day weekend airfares are projected to be about 14% more expensive than last year. Crude oil traded at $99 a barrel on the day of Tillerson's comments.

"Oil prices have risen for basic supply and demand reasons," said John Felmy, chief economist for the American Petroleum Institute. "Worldwide demand for oil, particularly from China and India, is up while production is flat."

Felmy argues that all commodity markets, including crude oil, need speculators "to provide the liquidity that any functioning market requires" to attract investors.

Stephen Schork of Villanova, Pa., a former oil trader on the New York Mercantile Exchange whose commodities newsletter makes the speculation argument, said this: "The best way to predict the market is to create it.

"Goldman was giving a signal that the dumb money could come back into the oil market, and it worked," Schork said. Schork and others noted that a lot of money fled the oil markets May 5 after Goldman Sachs had warned clients that crude oil prices, then about $114 a barrel in New York and $124 a barrel in London, were too high.

Goldman and Morgan Stanley have declined to comment on their market forecasts. Commodity trader Don Roose of U.S. Commodities in West Des Moines, Iowa, asked: "You tell me: Did the supply of crude oil suddenly increase enough in a single day to justify a $10 drop in the price of crude oil?"

Roose asserts that speculators, or investors who don't take physical possession of crude oil, are a "major factor" in the wild swings in oil prices that taunt motorists from lighted signs at gas stations.

Last week, U.S. attorneys filed lawsuits against two oil traders in Australia and California and three American and international firms, alleging that in early 2008 they tried to hoard nearly two-thirds of the available supply of a crucial American market for crude oil, then abruptly dumped it and improperly pocketed $50 million.

That activity coincided with the rise in crude oil prices that year to $147 per barrel, still a record.

Retail gasoline prices soared above $4 a gallon that summer, cutting demand by an unprecedented 5% during peak driving season in June and July and teaching the oil industry that $4 gasoline may be the point of price resistance.

That lesson was relearned last month when prices climbed to more than $4 nationally. The American Petroleum Institute reported that demand for gasoline dropped 2.2% during April from the same month a year earlier.

So the sudden drop in oil prices in early May, spurred by speculative selling, gave conspiracy theorists more ammunition. Market manipulators pulled the price back just at the point where demand is hurt, the speculator detractors said. Schork said he isn't sure that a market conspiracy could work that deeply.

"Speculation tends to exaggerate prices," he said. "There's no question that demand for gasoline seems to soften between $3.50 and $4 per gallon."