Will Gasoline Prices Crash the Economy? Again?

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Monday’s federal report on gasoline prices is a horror story. The national average price for a gallon of regular spiked seven cents to $3.05 in a week. That’s an all-time record for this time of year–and for no good reason. One former oil company CEO just predicted that gasoline prices will hit $5 a gallon by 2012.The price is likely to drop a bit after Jan. 1, though not enough to take the curbs off an economy just trying to show new signs of life.

Yet federal regulators, under pressure from big hedge funds and financial companies, can’t get it together to issue tough energy trading rules ordered by Congress. Last week, the Commodities Futures Trading Commission simply tabled the issue for an unknown time, as traders complained the already weakened rules proposal wasn’t weak enough for them.

Energy analysts increasingly agree that market speculation is a big factor in volatile oil and gasoline prices that seem unhinged from supply and demand.

From the Kansas City Star, in a Dec. 20 story by Steve Everly:

[S]ome energy market analysts, such as economist James Williams of WTRG Economics, have been looking at the influence of the futures markets.

Williams said there was a time when analysts could look at an indicator such as the number of days that petroleum supplies would meet demand and have a good idea where prices would go. But he said that with the rise of futures trading, which more than tripled leading up to the 2008 energy price surge, that’s no longer the case.

Williams can’t say just how much the futures trading alone is pushing up prices. But he estimates that based just on supply and demand, oil prices would be about $20 a barrel lower than they are now. That would amount to $400 million in daily savings on petroleum products in the U.S., and gasoline prices that would be lower by roughly 40 cents a gallon.

Just imagine: $146 billion a year freed up to boost the U.S. economy, rather than going down the nozzle into our gas tanks. Some analysts think the difference would be even bigger than $20 a barrel–that the natural cost of oil would be $50 or less.

Instead, speculative traders are happy to put lumps of coal in our stockings, busting the family budget to fill the pockets of Goldman Sachs investors and other financial cowboys. And government just twiddles its thumbs, afraid to make the big boys mad.

Let us close on a comment from economist Raymond Learsey, for the Huffington Post, on the meaning of the regulators’ paralysis:

And who has access to the CFTC while the issue is “ripening a little more”? A plethora of industry lobbyists such as the CME Group Inc., the world’s largest futures/derivatives trading marketplace pushing the CFTC to defer setting limits, and Gensler’s professional alma mater, Goldman Sachs. A Forbes article on April 13, 2009, “Did Goldman Goose Oil?” hypothesized that Goldman played a key role in the massive short squeeze on Semgroup Holdings, whose oil positions amounted to 20 percent of the nation’s crude oil inventories. The squeeze itself was deemed to have a dramatic impact on the price of oil leading up to the $147/barrel on July 12, 2008.

Will the regulators still be caving in to the speculators in 2012, presuming we still have an economy to fight over? And wouldn’t that make for an interesting election?

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