Why Americans keep paying more for gas? Ask the Traders
By Sarah Jones
On Thursday, Arab Gulf states approved a $20 billion economic aid package for both Bahrain and Oman in an effort to help calm unrest in the region. “The situation in the Middle East is impacting the rise in prices but that’s definitely not the whole story,” says Commissioner Chilton of the US Commodity Trade Commission.
“The first thing you should know is no one agrees on gas or oil prices,” says Steve LeVine, a contributing editor at Foreign Policy and the author of The Oil and the Glory.
Oil is marketed as a commodity and since gasoline is made up of oil the price at the pump depends on the price of a barrel of crude oil. Traders in the New York Mercantile Exchange (NYMEX) or International Petroleum Exchange in London (IPE) act as buyers and sellers by agreeing to negotiated selling price for a future date usually about three months away. Future traders are playing a role in the price of the commodity and don’t actually buy and sell literal barrels of oil.
As for commercial buyers and sellers, these traders can exchange their place in futures for the physical commodity or more commonly just cash out at a price negotiated upon with the future trader much closer to the “delivery” date for the oil. This exchange is known as Exchange Traded Funds or ETF.
LeVine says “Oil prices are driven up by trades in New York and London who bid up the price of the commodity. Investors are pouring money into this commodity and it’s an investment vehicle like a bond, gold or precious metal. But the glut is why the inventory levels in the United States are at historic highs.” A member of the US Commodity Trading Commission says there’s a large group of future traders who are hoarding the market and they are driving up the price of crude oil in a manner that is devoid of supply and demand .
Commissioner Bart Chilton says “these future traders invest in commodities as if they were bonds or blue chips because they aren’t concerned with placing bets on the price of oil for the short term. These traders are betting the price of oil will go up in three years or five years and investing in commodities the way someone would put money into a company.” Commissioner Chilton doesn’t believe these speculators are blatantly out to driving the price up but he says they are pushing on the gas pedal when they get into these markets because they don’t really mind a consistent steady increase in commodities price if it matches their bet.
Currently the US does not have any regulations on these speculators and Commissioner Chilton says it would be helpful to have “sideboards to ensure markets are efficient and effective and good for consumers, businesses and good for the economic engine of a democracy.” But not all Commissioners on the US Commodity Trading Commission agree with Chilton.
The Wall Street Reform and Consumer Protection Act which was signed by President Obama last year requires the US Commodity Futures Trading Commission (CFTC) to implement institute position limits on speculators. These limits would restrict them to a certain position of the market by January 2011. But the agency has yet to do so because not all Commissioners are in support of the legislation.
According to energy experts the lack of regulation isn’t the only reason oil prices are up. Steve LeVine says Americans are also paying more at the pump because of a fear of the worlds spare capacity going off line. Future traders are supposed to take into account market trends, supply and demand, disruption to oil transportation lines but there’s one major factor which has become more of a threat and that’s market risks.
“The big concern is if Saudi Arabia goes offline and there is meat on this bone” according to Energy expert Steve LeVine. World surplus production capacity remains low at about 4.7 million barrels per day. About 3.8 million barrels per day of the reserves held for world energy security reasons are in Saudi Arabia. The combination of these two factors means that prices react strongly to not only actual supply disruptions but to perceived supply disruptions as well.
In February, one bridge and one country away from oil fields which house ninety two percent of the world’s spare petrolium capacity- thousands of protesters took to the streets of Bahrain demanding constitutional reform. Saudi Arabia is only about twenty five miles away from Bahrain and is connected by a bridge. Most of Saudi Arabia’s oil fields are located in it’s eastern provinces.
Although most of Saudi Arabia is Sunni, it’s Shiite minority is based in the eastern province near the neighboring Shiite majority country Bahrain. The elite in Bahrain are a minority and are mostly Sunni. Although the majority of Saudi Arabia is Sunni, the Shiite minority in the eastern provinces most likely feel more aligned with Bahrain because they share the same sectarian beliefs. Therefore, there is a real fear that the unrest in Bahrain could wash onto the Eastern provinces of Arabia.
If the world’s spare oil capacity were compromised at all, any disruptions in transportation or production of oil what so ever would impact markets. “Now you have the Middle East unrest and that’s creating all that uncertainty and if Libya is offline – that’s over one million barrels a day that are offline and if Algeria goes offline too that another million and some barrels. Approximately three million barrels a day offline is close to the four million barrel a day spare capacity,” says LeVine.
(Sarah Jones is a freelance online, print, radio and tv journalist currently based in the US. Her website can be found at: www.sarahjonesreports.com Her blog is Sarahjonesreports.wordpress.com. Sarah is currently freelancing with CNN. She has also appeared in Northern Virginia Magazine)
Cross Posted to Iron Mill News