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Business Title: Oil: We're Being Had Again Watching traffic around Dallas Fort Worth, you'd never know that America was having any kind of gasoline crisis. Many on the freeways drive like Texas has already approved the proposed 85 mph speed limit. After all, if a vehicle rated at 30 mpg on the road is driven at 85 mph, its fuel efficiency drops by around 35 percent. This makes that gallon of gas they're currently paying $3.79 for cost the equivalent of $5.11. That does not mean that the market for oil and gasoline is not oversold, the cost to consumers and industry far more than it needs to be. Until recently it was impossible to tell whether the speculators' claims to the media were true - that it's the high worldwide demand for oil causing prices to once again skyrocket, pushing gasoline prices $1 a gallon higher than they were this time last year. It's true that rail traffic is up in America - a sure sign of a strengthening economy - and it's equally true that cargo shipments worldwide are back to pre-Great Recession volumes. However, MasterCard and other oil analysts are saying that our gasoline usage has dropped anywhere from 3 - 3.7 percent over the past five weeks. For a country that sometimes burns 400 million gallons of gasoline a day, that's no small drop. Yet in the system of futures trading, such a decline in demand should require that what buyers are willing to pay for fuel for resale drop proportionately - and that's just not happening. Goldman Outs Speculators Meanwhile, the media keep saying that gasoline prices are directly tied to oil pricing, and that isn't entirely true, either. Oil and gasoline are sold to two different buyers. One market's buyers refine the crude and the other comprises gasoline's retail vendors; these are the legitimate hedgers. But let's not forget the speculators - who jump into the market for paper profits every chance they get. To prove once again that no one in the investment banking business actually knows anything about oil, on April 11 Goldman Sachs advised its clients that it's time to get rid of their commodities holdings, including oil. The British Guardian's report quoted Goldman's advice as warning, "The record levels of speculative trading in crude have pushed their prices up so much in recent months that in the near term risk reward no longer favors holding those commodities." "Record levels of speculative trading in crude" have pushed up commodities' prices? Funny, all we've been hearing is that today's oil prices are justified because of abnormally large demand, owing to the world's improving economy. Fleece While You Can? That same day the Financial Times reported that in March the Saudis "throttled back their production of oil" -which seemed contrary to their promise to replace any oil world markets lost through the Libyan Revolution. But they're keeping their word: According to analysts the Saudis produced an extra 300,000 barrels a day, and that sufficed to satisfy buyers. America certainly didn't need extra: We started off this year with 333,112,000 barrels of oil on hand and a week ago we had 359,300,000 barrels. Some shortage. Leave it to Bank of America to issue a completely different forecast for oil on the 13th of this month, giving the possibility that oil could hit $160 a barrel sometime this year a 30 percent chance of happening. Now the waters are truly muddied. One investment bank claims speculators have put crude oil into bubble territory and it's time to bail; but another investment bank suggests it's time to load up on oil as the price will go even higher - even though the Saudis say buyers are turning down available oil. If anyone actually knew what was going on in the crude oil market, you wouldn't have these so-called experts taking diametrically opposite positions. Let's Blamestorm So, whom do we blame for all this confusion - or for the average American family's having to shell out $700 to $1,000 more this year for gasoline, while American Airlines claims it's now in another fuel crisis? Well, as with 2008, let's quit blaming China. Last year China imported just 4.79 million barrels of oil per day. And according to China Daily, official government figures show that they're importing only 5 percent more oil this year, or 239,000 barrels more per day. Moreover, China has raised bank rates twice this year in an attempt to cool down the country's roaring economy. Both times that's happened, oil prices worldwide have declined slightly. Who else could we blame? Certainly one could look at refinery utilization and find out exactly why gasoline supplies have fallen over the past two months, thereby raising the price of gas: Week before last we ran our refineries at only 81.4 percent of capacity - only 39 percent utilization on the East Coast. That's less than in the first week of April 2009, the bottom of the economy's crash after the meltdown, when our refineries ran at just 81.8 percent of capacity. When demand falls so should prices, instead refiners make less; for them to keep making a profit, supply can't outstrip demand. Now let's look at the big picture to see why gasoline prices are so incredibly high. Remember that our refinery utilization last week was only 81.4 percent? In the same week in 2005 it sat at 93.7 percent, and as a result we had 212.2 million barrels of gasoline on hand. And even at that exceptional refining rate, three weeks later we were down by almost 1 million barrels. And now, even though since the first of this year we have dropped our gasoline inventories from 223.2 million barrels to 209.7 million, we still have only slightly less gasoline on hand than we had the same week of April in 2005, during a blistering economy - although our refineries then were running at nearly 10 percent greater utilization. So Why the Price? No matter how many of his Fed presidents claim they are not to blame for the high price of oil, the real problem starts with Ben Bernanke. The fact is that when you flood the market with far too much liquidity and at virtually no interest, funny things happen in commodities and equities. It was true in the 1920s, it was true in the last decade, and it's still true today. Richard Fisher, president of the Dallas Federal Reserve, spoke in Germany in late March. Reuters quoted him as saying, "We are seeing speculative activity that may be exacerbating price rises in commodities such as oil." He added that he was seeing the signs of the same speculative trading that fueled the first financial meltdown reappearing. Here Fisher is in good company. Kansas City Fed President Thomas Hoening, who has been a vocal critic of the current Fed policy of zero interest and high liquidity, has suggested that markets don't function correctly under those circumstances. And David Stockman, Ronald Reagan's Budget Director, recently wrote a scathing article for MarketWatch, titled "Federal Reserve's Path of Destruction," in which he criticizes current Fed policy even more pointedly. Stockman wrote, "This destruction is, namely, the exploitation of middle class savers; the current severe food and energy squeeze on lower income households ... and the next round of bursting bubbles building up among the risk asset classes." Let's not kid ourselves. Oil in today's world is worth far more than the $25 a barrel it sold for a decade ago. But the markets' ability to function properly, based on real supply and demand equations, has been destroyed by allowing ridiculous leverage amounts, and unlimited ability to borrow the leverage at historic low interest rates. Fortunately for our elected officials, they've got the public convinced that their biggest fear from government is taxation and deficits. That keeps us from getting more productively enraged about the rising costs of non-discretionary items such as food and gasoline - which current Fed policy is actively enabling. No One is on the Public's Side This isn't a new argument; it dates as far back as 1979, when Paul Volcker, then head of the Federal Reserve, started moving to stop inflation in its tracks. The Carter White House mused that one of the benefits that raising interest rates would confer on the public would be slowing down the speculators in the oil market, who were taking advantage of that year's turmoil in the Middle East. The economy is getting better, and that's a good thing. And, though some claim gasoline could potentially go to $5 a gallon this summer, that's not a given. Also good news is that quickly rising oil prices, like a slasher movie, are only truly frightening the first time. It gets less scary with repetition. Being less scary doesn't change the basic facts. Markets need both hedgers and speculators to function properly, but when the balance gets too far off in one direction, the market no longer functions on real supply and demand equations. Ben Bernanke doesn't seem to understand that while he is allowing huge profits for banks and investment firms, so they can recover their massive losses from the financial meltdown, he is intentionally damaging what could be a much better recovery with the misery he's causing the average American consumer. Or maybe he does understand that. After all, there's always China to blame.
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