Found: the speculator who is driving up the price of gasoline

Senators Patty Murray and Maria Cantwell blame speculators for high oil prices. Seattle Times They present no evidence.

The Seattle Times editorial board agrees, citing the following empty evidence:

Indeed, oil speculation — meaning the amount of barrels held by speculators — has increased dramatically since June 2008, the last time gas was this expensive. Excessive speculation is estimated to be adding several dollars to the cost of filling up.

Speculators are making bets at the expense of consumers. Extra dollars spent at the pump make a big difference to families already balancing tight budgets.

Who is holding oil? Where?

It would be very, very expensive to try to raise the price of oil by manipulating the market, even to try and fail, because you have to buy it and store it. The Hunts tried it with silver in the late 1970s and failed. Warren Meyer Coyote Den blog explains:

... In fact, it is almost impossible to find examples of private action sustaining an artificially high price floor. Only with the cooperation of an interventionist government are such sustained price floors possible — that’s why at one point or another in history we have had minimum prices set by the government for taxis, airline fares, rail freight rates, farm products and government-enforced limits on supply that have driven up prices of everything from attorneys to real estate agents to funeral homes to interior design.

The argument du jour is that speculators are driving up oil futures prices, and these higher futures prices in turn drive up prices of oil for current delivery. The first half of this argument has a ring of truth. It is much easier for bubbles to emerge in buy-and-hold type investment assets. Stocks, bonds, futures, and even houses can experience speculative bubbles. But do these bubbles spill over into current commodity prices?

There are two checks on current commodity values that make sustained speculative bubbles much less likely. First, physical commodities are really expensive to inventory. I can hold futures contracts on a million barrels of oil in my desk drawer; a million barrels of physical oil requires a container the size of 63 Olympic swimming pools. Second, the demand curve for oil futures is based on expectations and predictions and hope and fear. The demand curve for physical oil is grounded in the real economics of electricity generation and powering factories and driving trucks.

So lets consider speculation in this context. We start from a market in oil for current delivery that is in balance, where the price is such that supply and demand are roughly equal. Now, enter speculators. They supposedly drive the price up above this “natural” price. As the price rises, we know producers will seek ways to bring more oil to market, and consumers will reduce their consumption. The result is a glut – an excess of supply over demand. Here is the real question to ask if one suspects that speculators are driving the price of oil for current delivery above and beyond the market clearing price: Where is all the extra oil going?

Let’s consider the example of when the Hunt’s tried to corner the silver market in the late 1970s. Over six months, they managed to drive the price from $11 to almost $50 an ounce. Leverage in futures markets allowed them to control a huge chunk of the available world supply. But just driving the price up temporarily did not get them anywhere — to make the fortune they wanted, the prices had to go up and stay up. As prices rose, no one but the Hunt’s were buying, while new supplies flowed onto the market. The only way the Hunt’s could keep the price up was to pour hundreds of millions of dollars in to buy up this excess supply. Eventually, of course, they went bankrupt. They only could maintain the artificially higher commodity price as long as they kept buying and storing excess capacity, a leveraged Ponzi game that eventually collapsed.

So how do oil traders’ supposedly pull off this feat of keeping oil prices elevated above the market clearing price? Well, there is only one way: Excess supply created by the artificially high price has to be stored, either in tanks or in the ground.

In fact, the Koch Brothers (who else?) have recently been accused of buying several tankers just to store oil for speculative gain. Forgetting for a moment whether this makes any economic sense for them, even four full million-barrel tankers would only only increase world crude inventories just over 1%, and would effectively store just over an hour of world oil demand. To keep prices elevated, someone would have to be buying this amount of oil every day, and keep on buying and storing this amount indefinitely.

Certainly this would bankrupt anyone in the attempt — it would cost something like $80 billion (just for the oil) to maintain this game for six months and require storage larger than the entire US strategic petroleum reserve. So it should not be surprising that we see no such trends in inventories. Crude oil and gasoline inventories are among the most carefully watched economic statistics there are. Crude oil inventories always rise this time of year (in anticipation of summer gasoline demand) and the rise in inventory this year has been well within historic norms. Gasoline inventories have actually been falling, indicating that the price of gas is perhaps a bit too low.

The only real option for raising prices is to store the oil in the ground — in other words, don’t allow it to get produced in the first place.

It would cost $80 billion to buy enough oil - four million-barrel tankers full - every day just for six months, plus the cost of storing it. Who is buying oil just to store it? Where is it stored?

The answer: The oil is not being bought and stored; the oil is in the ground. The Interior Department is preventing ramping up oil production in the Gulf of Mexico. US Energy Info Administration shows it declining. The EPA is preventing Shell Oil from producing in the Beaufort Sea and Chukchi Sea north of Alaska. The Obama administration is keeping production down. We found the speculator: President Obama. He is not buying and storing oil, but keeping it in the ground: less supply causes higher prices: President Barack Hussein Obama.

Go after him, brave Senators.