War Tax at the Gas Pump

Sanctions, Threats and Speculators

by JEFF KLEIN


It’s hard to miss the higher cost of gas every time we fill up our cars these days, but the News Media doesn’t do a very good job of explaining why. There isn’t any mystery, though, if you read the financial press and oil industry sources: We’re paying extra for gas because of rising tensions in the Middle East and especially the scare over a possible US or Israeli attack on Iran. In effect, we’re paying a “war tax” at the gas pump, and the cost will only get higher unless we put aside the talk of war and get down to serious diplomacy to settle the differences in the region.

Here’s what the Wall Street Journal had to say recently, under the headline Oil Rise Imperils Budding Recovery:

Rising oil prices are emerging once again as a threat to the U.S. economic recovery just as it appears to be gaining momentum. Oil prices have climbed sharply in recent weeks as mounting tension with Iran has raised the threat of a disruption in global supplies. On Wednesday, oil futures on the New York Mercantile Exchange rose $1.06 to $101.80 a barrel on reports that Iran had cut off sales to six European countries in response to the European Union’s newly stepped-up sanctions.

The world market price for oil is headed upward of $110 a barrel, which could translate into $4 gasoline before too long. If an actual war breaks out, we could soon be remembering the current price at the pump as “cheap gas”.

But what about “Drill Baby Drill” to lower the price of gas – as the Republicans demand? Political rhetoric aside, the reality is that there is a world market price for petroleum which cannot be significantly lowered by marginal increases in US supply. International oil prices are rising even as US oil production has increased during the past decade. Do you think US suppliers are going to sell us domestically-produced oil at a discount lower than the world market price? Keep dreaming. That’s just not the way the oil companies do business.

For example, after the US Arctic oil fields were developed and the TransAlaska pipeline came into service – despite serious environmental objections – large amounts of Alaskan oil were exported rather than sold in the lower 48 states. Between 1996 and 2004 almost a 100 million barrels of Alaska crude were shipped to Japan, Taiwan, Korea and China. Direct export of North Slope oil was eventually banned by Congress, but refined petroleum products – gasoline, heating oil, jet fuel – continue to be shipped abroad from refineries in Alaska and the lower 48. Today Gulf Coast refineries find it more profitable to sell gasoline to Latin America instead of shipping it to the East Coast, where the law would require them to use US-flagged tankers with American crews. The US is now a net exporter of refined petroleum products, even as the rising price of gas continues to put a strain on struggling families with no alternative means of transportation.

But an even higher war tax on gas is not inevitable. Diplomacy with Iran could still diffuse the conflict before the unthinkable happens. Despite all the alarmist and warmongering rhetoric, especially from Republican presidential candidates, we are not facing an imminent nuclear threat from Iran. US intelligence agencies are unanimous in judging that Iran does not have an active nuclear weapons program at this time. In fact, the Iranians – like all the other countries in the Middle East except Israel – have signed the Nuclear Non-Proliferation Treaty and they have the right under its safeguards to produce low-enriched uranium for power plants and medical research. All of Iran’s nuclear materials are under real-time inspection by the International Atomic Energy Agency. The only nuclear weapons in the Middle East right now are the hundreds of warheads belonging to the US and Israel.

Despite this reality – and in the face of opinion polls showing Americans prefer a diplomatic solution to the Iran issue rather than a military conflict – some politicians seem determined to drive us into yet another Middle East war. Ironically, the very same politicians who are trying to make a partisan issue out of the price of gas are the ones who are pressing for policies to sharpen the regional tensions that have caused them to rise.

After the bitter experience of Iraq and Afghanistan, we should have learned enough to demand a peaceful way out of this conflict. If we fail, a new war could have unpredictable and catastrophic results throughout the region. Of course, in that case, $5 gas might be the least of our problems.

What’s Really Pushing Up the Price of Gas?

Return of the Speculators
by MIKE WHITNEY

Is the Fed’s “Easy Money” policy pushing up the price of gas? The editors of the Wall Street Journal seem to think so. Here’s how they summed it up in an article last week:

“Oil is traded in dollars, and its price therefore rises when the value of the dollar falls, all else being equal. The Federal Reserve throughout Mr. Obama’s term has pursued the easiest monetary policy in modern times, expressly to revive the housing market….. 

“Oil staged its last price surge along with other commodity prices when the Fed revved up its second burst of “quantitative easing” in 2010-2011. Prices stabilized when QE2 ended. But in recent months the Fed has again signaled its commitment to near-zero interest rates first through 2013, and recently through 2014. Commodity prices, including oil, have since begun another surge, and hedge funds have begun to bet on commodity plays again….(“‘Stupid’ and Oil Prices”, Wall Street Journal)

“Another surge” for commodity prices?

Not exactly. As a whole, commodity prices have remained relatively flat. (Copper, nickel, zinc etc are all up a bit, but not much. No more than 4 per cent for any of them.) It’s only oil that’s skyrocketing. Oil soared to a 10-month high on Friday hitting $109-plus per barrel, up 14 percent in the last month. Prices at the pump have also jumped to nearly $4 per gallon across the country putting more pressure on consumers’ budgets and, once again, raising the prospect of a double dip recession.

The WSJ is correct in saying that quantitative easing (QE2) did push up food and energy prices, but is that really what’s driving oil prices higher today?

Probably not. There are other factors that are likely having a greater impact, like the escalating tension in the Middle East–particularly the supposed threat of a war with Iran. Buyers are rushing to build up their stockpiles before the conflict might begin. Here’s an excerpt from a post at Econbrowser that explains:

“Phil Flynn, a senior market analyst at PFGBest Research in Chicago, offered this interpretation: 

“We’re seeing panic buying in Europe and Asia because they’re absolutely convinced that they’re not going to be able to buy Iranian oil or there’s going to be some kind of conflict that disrupts the transport of oil through the Strait of Hormuz…. there is a lot of hoarding in case the worst-case scenario happens. Asian buyers have been buying up West African crude like it’s going out of style.” (“Crude oil and gasoline prices”, James Hamilton, Econbrowser)

So, is panic buying driving up the price of gas or does it have more to do with a gradually improving economic picture that’s increasing demand around the world? That seems to be the gist of a report by NPR’s John Ydstie on Thursday’s All Things Considered. Ydstie notes that “for the first time in six decades” the US “has become a net exporter of gasoline. We’re sending more gasoline out than we’re bringing in.” (“What’s Behind The Rise In Gas Prices?”, NPR) And that’s because it’s now cheaper to produce gas in the US than it is in the rest of the world (mainly due to fracking). Unfortunately, cheaper production costs don’t translate into cheaper prices at the pump. Why? Because gas is traded in a global market where prices are set by supply-demand dynamics.

Still, whether China is purchasing more oil or not doesn’t explain the sharp uptick in prices, because there’s no apparent shortage of supply. In fact, according to the EIA, the statistical arm of the Energy Department, inventories are unusually high.

Here’s a clip from their statement: “At 339.1 million barrels, U.S. crude oil inventories are in the upper limit of the average range for this time of year….Total motor gasoline inventories increased by 0.4 million barrels last week and are in the upper limit of the average range.”

So, if there’s no shortage of supply, then Ydstie’s “global market” theory doesn’t make much sense because there’s no pressure on prices. And there’s something else to consider, too, which is that gas consumption in the US has dropped sharply in recent months. In fact, “demand for refined oil products is close to its lowest level in nearly 15 years”. (CNBC) Here’s a clip from a post by Charles Hugh Smith’s titled “Why Is Gasoline Consumption Tanking?” that explains what’s going on:

“Retail gasoline deliveries, already well below 1980 levels, have absolutely fallen off a cliff….the declines in retail gasoline deliveries are mind-boggling….”

“There are no data-supported broad-based drivers for dramatically lower gasoline consumption other than austerity and lower economic activity……What other plausible explanation is there for the decline from 42.4 MGD in July 2011 to 30.9 MGD in November 2011 other than a dramatic decline in discretionary driving? (“Why Is Gasoline Consumption Tanking?”, Charles Hugh Smith, Of Two Minds)

Whatever the reason may be, US drivers have cut back on their gas consumption dramatically which should have a material effect on prices, but it hasn’t. Prices continue to soar, and the soaring prices cannot be explained in terms of the Fed’s easing policy, constriction of supply, refinery closings, or fear of another Middle East war. (The so called “fear premium” should be no more than $10 to $15 per barrel) Investigative journalist Kevin G. Hall explains what is really driving prices in an article for McClatchy titled “Once again, speculators behind sharply rising oil and gasoline prices.” Here’s an excerpt:

“….oil’s price shot up because it trades in financial markets, where Wall Street firms and other big financial players dominate the trading of oil, even though they have no intention of ever taking possession of the oil whose contracts they are trading…. 

Historically, financial speculators accounted for about 30 percent of oil trading in commodity markets, while producers and end users made up about 70 percent. Today it’s almost the reverse. 

A McClatchy review of the latest Commitment of Traders report from the Commodity Futures Trading Commission, which regulates oil trading, shows that producers and merchants made up just 36 per cent of all contracts traded in the week ending Feb. 14. 

That same week, open interest, or the total outstanding oil contracts for next-month delivery of 1,000 barrels of oil (about 42,000 gallons), stood near an all-time high above 1.486 million. Speculators who’ll never take delivery of oil made up 64 per cent of the market….. 

Not surprisingly, big Wall Street traders on Tuesday projected oil will rise above $112 a barrel; some such as Swiss giant Vitol even suggested $150-a-barrel oil is coming soon. When they dominate the market, as they do, speculators’ bids can make their prophecies self-fulfilling.
“These people are not there to be heroes. They are there to make money. It’s our fault because we are allowing them to do that,” said Gheit. “Obviously these people are very strong, and the financial lobby is the strongest of any single lobby. I’ve been in this business 30 years, and I can tell you I think this is smoke and mirrors.” (“Once again, speculators behind sharply rising oil and gasoline prices”, Kevin G. Hall, McClatchy News)

Repeat: “Speculators who’ll never take delivery of oil made up 64 percent of the market.” That explains why prices are going up, up, up.

The Gas Wars

Tuesday, February 21, 2012 by Robert Reich
by Robert Reich

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.

Sanders: Oil speculators behind high gas prices

By David Edwards - Posted on 06.3.11

Sen. Bernie Sanders (I-VT) says that the soaring gas prices are the fault of oil speculators on Wall Street.

“Ten years ago oil speculators controlled about 30 percent of the oil futures market,” Sanders explained. “Today Wall Street speculators control over 80 percent of that market.”
“Their sole function in life is to speculate to drive oil prices up and to make money,” he added.

Watch this video from WCAX, uploaded June 2, 2011.

The Illusion of Money

Real wealth or phantom assets? the difference between the kind of wealth that makes life better and the phantom wealth created by financial speculation.

Sunday, January 23, 2011 by YES! Magazine

by David Korten

In business school, we were taught to assess investment options to maximize financial return. I don't recall that the professor ever mentioned that this meant maximizing returns to people who have money-to make rich people richer. Or that money is a system of power and that the more our lives depend on money, the greater our subservience to those who control the creation and allocation of money.

Nor do I recall asking my professors, "What is money?" "Why do we assume that maximizing financial return maximizes the creation of real value?" "How does the conversion of natural living wealth to financial wealth create real value?" "What about the many fortunes built through financial speculation, fraud, government subsidies, the sale of harmful products, and the abuse of monopoly power?" I may have had some doubts, but kept them to myself for fear of being dismissed as hopelessly stupid.

Perhaps those who taught us economics, finance, and accounting did not themselves recognize the difference between real living wealth and phantom financial wealth.

Real wealth has intrinsic value. Examples include fertile land, healthful food, knowledge, productive labor, pure water and clean air, labor, and physical infrastructure. The most important forms of real wealth are beyond price and are unavailable for market purchase. These include healthy, happy children, loving families, caring communities, a beautiful, healthy, natural environment.

Real wealth also includes all the many things of intrinsic artistic, spiritual, or utilitarian value essential to maintaining the various forms of living wealth. These may or may not have a market price. They include healthful food, fertile land, pure water, clean air, caring relationships and loving parents, education, health care, fulfilling opportunities for service, and time for meditation and spiritual reflection.

Money, a number on a piece of paper or created with an accounting enter, has no intrinsic value. Wall Street generates it in astonishing quantities through accounting tricks, financial bubbles, and debt pyramids. It appears from nowhere and can disappear in an instant, as a phantom in the night.

Those engaged in creating phantom wealth collect handsome "performance" fees for their services and walk away with their gains. When the bubble bursts, borrowers default on debts they cannot pay and the bubbles and debt pyramid collapse in a cascade of bankruptcies.

The market, of course, makes no distinction between the dollars acquired through means that enrich society, those created by means that impoverish society, and those simply created out of thin air. Money is money, and the more you have, the more the market eagerly responds to your every whim. It is still only a number with no existence outside the human mind.

It is easy to confuse phantom financial assets with the real wealth for which they can be exchanged.

Those who benefit from the creation of phantom wealth may never realize that their gain is unfairly diluting everyone else's claim to the available stock of real wealth. They may also fail to realize that Wall Street and its international counterparts have generated total phantom-wealth claims far in excess of the value of all the world's real wealth, thus creating expectations of future security and comforts that can never be fulfilled.

The deceptions are built right into our language. We refer to speculation as "investment" and to phantom financial wealth as "capital." Indeed, when we hear the terms wealth, capital, assets, or resources we have no way to know whether the reference is to a real asset or only to a phantom financial asset. Our language gives us no way to make this essential distinction. It is no wonder we get confused and fail to recognize that Wall Street produces nothing of real value.

Bang, Zoom, Straight to the Moon!

Summers to the US Economy: Bang, Zoom, Straight to the Moon!
By Bill Bonner
04/06/10

Baltimore, Maryland – No matter how absurd things get, they can always become more absurd.

“Summers: US nears ‘escape velocity’

That’s the headline on the weekend Financial Times.

Summers is jubilant. He got the latest employment figures on Friday. They tell the story of an economy that he thinks is headed into outer space, with 162,000 new jobs created in March. Hallelujah…all this intervention by the feds is paying off! Thank God Summers was on the job. If he hadn’t been…well, the economy would have had to get along on its own…right here on planet earth…just like it did for all those centuries up until the feds got control of it during the Great Depression (or shortly after).

Heck, you know how terrible it was back then. People would go broke… Speculators. Bankers. Promoters. They would be wiped out. Jobs would be lost. Businesses would go bankrupt. And then, a few months later, they’d have to get back on their feet…begging, borrowing, or stealing enough capital to make a fresh start.

But now things are different. Now, we have a better world, designed in part, by Mr. Summers himself. Now, people don’t go broke. Well, at least, major campaign contributors don’t go broke. They get bailed out. They stay in business. The feds give them money so they can keep doing what they did before. And then, the feds put a booster rocket under the whole economy…

Yes, dear reader…this is a happy day for Summers. But it also marks a giant stoop for mankind. Finally, man is free from the discipline of the market system. Now, Werner von Summers et al are on the case. So you can forget about anything really bad happening. Now, it’s to the moon and beyond…growth and prosperity from here to kingdom come.

Summers is not crazy. He is merely lost in space. He thinks you can manipulate the economy all you want…like solving an engineering problem…well…like sending a man to the moon. But you could say that about almost all modern economists. At about all those that don’t agree with us.

The other 2 or 3 are muttering to themselves while rummaging through trashcans hoping that someone left a little liquor in the bottle before throwing it away.

At least our president has his feet on the ground. Obama believes the US has “turned the corner” on the jobs issue.

But wait. The private sector added 123,000 jobs last month. According to our sources it needs to create 100,000 just to stay even with population growth.

So, we’re not at all sure that 23,000 jobs is really that great after two years, 8 million job losses and $10 trillion of stimulus.

Let’s see, at that rate, it will take approximately 320 years to get back to full employment…(that) doesn’t sound like ‘escape velocity’ to us. We’ve seen Amtrak trains going faster. Maybe we’re missing something.