Are Speculators to Blame for High Gasoline Prices?

Townhall.com ^ | February 23, 2013 | Mike Shedlock

[Kaslin]

Given a two-day plunge in crude futures, gasoline prices may have hit a temporary peak.

Nonetheless, consumers feel the pinch as pump prices have risen 34 straight days. For only the fifth time in history Gas prices topped $4 a gallon in District of Columbia.

Nationwide, the price of a gallon of regular gasoline climbed to $3.78 a gallon, up 47 cents in the past month, the AAA said.

In parts of California, Gasoline Prices Topped $5.00 on February 5. CNN Money has an interactive Gas Price map to check prices in your state.

Republicans Cry Foul

Yahoo!News reports Politicians Cry Foul Over High Gas Prices, Urge Action on Keystone XL

Rep. Fred Upton, R-Mich., posted a "Keystone Clock " on his House Energy Committee's website Wednesday. The chairman states more than 1,615 days have passed since TransCanada's Keystone XL pipeline proposal sought approval. Joining Upton's call to build the pipeline is Speaker of the House John Boehner, R-Ohio. Executives at TransCanada have tried a different tactic to try to get approval from the Obama administration by claiming the pipeline won't affect global warming.

The tug of war between economics and environmentalism is escalating thanks to 34 straight days of rising gasoline prices.

Boehner posted a "Running on Empty " graphic Tuesday. The Speaker of the House complains gas prices have "soared $0.43 since Jan. 17" before remarking with his own Keystone clock, "How long will Americans have to wait?"

Boehner cites several sources, including nine Democratic senators, who want Obama to approve the project quickly. The pipeline may not see a decision until mid-June. Around 20,000 jobs and nearly a million barrels of oil a day are at stake for American oil companies.Speculators to Blame?

The Salt Lake Tribune reports Spike in gasoline prices points to speculators

"Like locusts ravaging fertile crops, gasoline prices are soaring again and eating away at the purchasing power of ordinary Americans. And again, financial speculators appear to be a big part of the story."

Refinery Closures

In Recovery Killer? Gas Prices Barrel Toward $4 a Gallon CNN notes refinery closures.

Five dollar a gallon gas "is a real possibility" said John Kilduff, partner at Again Capital in New York. "This is partly being driven by the lost refinery capacity of about one million barrels per day...that's a lot."

Kilduff cited Hess's (HES) closure of a key refinery hub in Port Reading, New Jersey in January as a major factor that has sent gas on a tear. "Prices haven't looked back since," he said.

"It's one of about eight refineries that have announced closure. Now the East Coast is heavily reliant on [gas] imports when it used to be self-sufficient," Kilduff stated. Speculation Nonsense

Refinery closures are one part of the puzzle. If speculators have driven up the price of oil (and that is debatable) it's not the speculators who are to blame, but rather the Fed.

By providing massive liquidity and negative real interest rates, the Fed encouraged speculation in the stock market, in junk bonds, and in commodities.

I believe there is a bubble in all of those areas. The Fed's intent was not to foster bubbles per se, but rather to stimulate housing and spur job creation. On the job creation front, the fed failed miserably, and bloated its balance sheet to over $3 trillion dollars in doing so.

Fed policies have destroyed those on fixed income for the benefit of the banks and wealthy, as I wrote on Wednesday in Reader Asks Me to Prove "Inflation Benefits the Wealthy" (At the Expense of Everyone Else).

The Bernanke Fed is so out of line that the House Subcommittee on Economic Growth Demands Answers From Bernanke on Fed's Exit Strategy; Fed Must Reply by March 5

Yet the media blames those evil speculators. Get real.

[WhiskeyX]

“The refiners themselves have admitted such:”

No, you have cherrypicked a quotation in a way that takes it out of context and reverses the actual meaning of what was stated in the full statemnt. Readers who go to the article and read it in full can see how the article finds that Valero was able to increase its own margins to avoid the kind of financial losses sustained by its competing refineries which caused them to go bankrupt or shutdown due to the razor-thin profit margins resulting from hyper-competition among refineries. Due to the the interference of Big government and its tax policies, Valero is in a position to profit from the disparate tax accounting treatment of different refining companies. Valero is therefore in a position to survive the low profit margins long enough for the competing refineries to go out of business, so it can then increase its pricing enough to avoid going out of business itself.

Valero will not be able to sustain this situation indefinitely without changing its business model. Valero’s current business model relies upon its opportunities to buy old refineries from the first tier integrated oil companies at pennies on the dollar of what it cost the original owners to construct, maintain, and renovate them.

The major oil companies have been divesting themselves of many of their diversified and integrated operations for the past three decaddes. They’ve been selling their retail marketing divisions, chemicals divisions, transportation systems, and now their downstream refining operations. As their old refineries have become to inefficient and costly to renovate to meet the increasingly stringent demands of the EPA OSHA, and state agencies, the major oil companies have looked for ways of getting these underperforming and perhaps lawsuits losses waiting to happen off of their balance sheets. The Federal windfall profit taxes presented an oportunity for the major oil companies to do just that. Rather than just hand huge sums of money over to the Federal Government in windfall profit taxes, they instead decreased their taxable income by selling the underpreforming refinery assets to other companies at bargain prices and recorded the losses on the sales to reduce their taxable income. In other words, the Federal Government adopted policies which distorted the marketplace in ways which led to the dismantling of the first tier refinery markets.

Companies like Valero and Tesoro were then able to buy up these old refinery assets at a substantial enough discount to justify the investment of enough money to renovate the plants enough to satisfy the latest regulatory requirements, but only for a limited time. These refineries, though renovated by the new investments, are still aged and aging. In the not too distant future, companies such as Valero and Tesoro will have invested in so much capital to renovate and maintain the plant facilities, they too will have to follow the path of their predecessors and sell or shutdown these old refineries. The less profitable or more unprofitable their cracking margins prove to be, the sooner these refineries too will be shutdown.

As the Atlantic Monthly article indicated, Valero is doing what it is supposed to do. It is pricing its product high enough to avoid going out of business. There is no indication its is pricing its products to make windfall profits.

[WhiskeyX]

So, you are advocating Vero to be shamed for making a profit instead of going bankrupt or becoming too unprofitable in the hyper-competitive low refinery pricing to remain in business. Such a lynching of reputations appears no different than the tactics of false propaganda employed by socialists and communists to incite class warfare.