NEW YORK - Despite common perceptions attributing high gasoline prices to fuel inefficient cars, OPEC, and drivers who drive too fast, the real culprits are speculators and the Federal Reserve, writes Ed Wallace for Bloomberg BusinessWeek.
"This explains why the market for oil and gasoline is currently costing consumers and industry far more than necessary," wrote Wallace.
Wallace said contrary to speculators?? media leaks that worldwide demand for oil has caused prices to rise, MasterCard and some oil analysts have reported domestic gasoline consumption has fallen up to 3.7 percent over the past five weeks. Future traders, he said, should therefore realize a comparable cost reduction, but that is not happening.
While the media report that gasoline prices are related to oil pricing, Wallace refuted that, noting that oil and gasoline are sold to different sets of buyers. "One needs to buy crude for refining and the other sells gasoline at retail; these are legitimate hedgers."
He also said that speculators have erred when it comes to assessing oil price movements, citing a Goldman Sachs advisement earlier this month to sell oil holdings: "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," the advisement said.
He also countered popular notions that speculative trading has pushed up oil prices, relating that recent news is that high demand is causing the price spike. He said U.S. oil supply, in fact, is higher now than it was at the start of the year (359 million barrels vs. 333 million barrels).
Wallace also noted other industry scapegoats ?" China and refinery utilization, for instance. However, he seemed to dismiss those and all of the above, placing the blame for rising gas prices on an entirely different entity.
"Now let's look at the big picture to see why gasoline prices are so incredibly high," Wallace wrote. "The problem starts with Ben Bernanke, no matter how many of his Fed presidents claim they are not to blame for the high price of oil. The fact is that when you flood the market with far too much liquidity 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."
He said that Kansas City Fed President Thomas Hoenig has been sharply critical of the current Fed policy of zero interest and high liquidity, suggesting that they skew the market. And he noted that David Stockman, Ronald Reagan's former budget director, recently wrote an article titled, "Federal Reserve's Path of Destruction," in which there is sharp criticism of current Fed policy: "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."
Wallace said legitimate supply and demand forces have been ruined by allowing "ridiculous leverage and the unlimited ability to borrow the leverage at historically low interest rates."
"In reality the public should be infuriated with the rising costs of nondiscretionary items such as food and gasoline, which current Fed policy actively enables," Wallace wrote.
He closed with a sharp rebuke of Bernanke: "Ben Bernanke doesn't seem to understand that while he is allowing huge profits for banks and investment firms so they can recover massive losses from the financial meltdown, he is intentionally damaging what could be a much stronger recovery with the misery he's causing the average American consumer."
For which he said we could always blame China.
The 2011 NACS Fuels Report provides an in-depth look at today??s motor fuels retailing industry - and where it is headed. Learn more at nacsonline.com/gasprices.