WASHINGTON - Oil consumption has fallen, demand
from U.S. motorists for gasoline is flat at best and refiners that turn
crude into fuel are operating well below capacity. Yet oil prices keep
marching toward $90 a barrel, pushing gasoline toward $3 a gallon in
many markets, and prompting American drivers to ask, "What gives?"
Blame it on the same folks who brought you $140
oil and $4 gasoline in 2008: Wall Street speculators.
attribute much of the recent rise in prices to flows of speculative
money into oil markets. These bets are fueled by investor expectations
that the U.S. and global economies are poised to return to growth and
thus spark increased use of oil. Strong growth in China supports the
narrative of rising oil consumption and tightening supplies.
"The thinking goes that rising stock (market) prices implies
expanding business activity, implies growing energy demand, implies
rising oil prices. I think you can make that case, but it's awfully
weak," said Michael Fitzpatrick, vice president-energy for MF Global, a
financial firm that brokers the sale of contracts for future delivery of
While there are signs of U.S. economic recovery, such as a
slight uptick in consumption and strong manufacturing data, there are
plenty of ho-hum signs too, including dismal construction spending and
continued high unemployment.
"I just don't think if you look
across the entire spectrum of the macro-economy that it creates a
picture of a growing body of incontrovertible evidence that there is a
strong, sustainable recovery. I just don't see it," Fitzpatrick said. "I
think it should be closer to the range we were seeing in late summer
and early fall, $67 to $72" a barrel.
On the last day of July, oil
traded at $67.50 a barrel and gasoline sold at a nationwide average of
$2.52 a gallon for regular unleaded. On Thursday, oil prices settled at
$84.87 on the New York Mercantile Exchange, and regular unleaded
gasoline averaged $2.80 a gallon and more than $3 on the West Coast,
according to the AAA.
"It's the story we've been talking about . .
. . It's really about oil being an attractive investment for investors
right now," said Troy Green, a AAA spokesman. "You've seen quite a bit
of money flooding into the oil markets because of that."
different about today's price run-up from two or three years ago is that
oil is now in ample supply.
"If you look at the fundamentals
right now, there is certainly an abundance that is available (of oil) to
the market for the next 12 months or so. It's not a near-term supply
shortfall," said David Dismukes, the associate director of the Center
for Energy Studies at Louisiana State University in Baton Rouge.
motorists and businesses consumed 18.69 million barrels per day (bpd)
of petroleum product last year. That's projected to rise slightly this
year to 18.89 million bpd. However, it remains far below peak
consumption of 20.80 million bpd in 2005.
The latest data from the
Energy Information Administration, the statistical arm of the Energy
Department, shows that as of mid-March, U.S. refiners were operating at
81.1 percent capacity. They're making eight gallons of gasoline for
every 10 they're capable of producing, a clear sign that demand is down.
the only argument that would justify rising prices is that global
consumption is expected to grow by 1.6 million bpd to 86.6 million bpd
this year, according to the Paris-based International Energy Agency.
so, there's 6 million bpd of oil that's shut-in, a technical way of
saying that recoverable oil is being left in the ground by the world's
"When you look at inventories and shut-in capacity,
(oil) prices today are above what those would indicate," said Daniel
Yergin, the author of "The Prize: The Epic Quest for Oil, Money &
Power," the recently updated Pulitzer Prize-winning book that chronicles
the history of oil.
When oil traded above $140 a barrel nearly
two years ago and pundits warned that the world was running out of oil,
Yergin suggested that a glut of oil would come onto the market in 2010
and beyond. The 6 million bpd of oil now on the sidelines suggests that
he was right.
Today's spare production capacity is three times
what it was in 2004 and 2005, when supply actually was tight.
Organization of Petroleum Exporting Countries signaled this week its
concerns about rising prices by not calling for hard enforcement of
production quotas by its members. That suggested the cartel will
tolerate an open-spigot policy by its 12 members as needed to stabilize
"While OPEC was silent on any threat to the recovery,
speculation continues that the cartel is deliberately allowing members
to exceed production quotas in order to limit upward price pressure,"
wrote analyst Matt Robinson, in a research report Thursday by forecaster
Rising oil and gasoline prices are deja vu
all over again for Michael Masters. The hedge fund manager has crusaded
for legislation that would prevent so much speculative money in the oil
Wall Street is "gaming" the price of oil, he warns.
you're a bank, and you know there is going to be a large amount of
investor inflows into the commodities market, you are going to position
yourself ahead of them . . . You want to be a seller at a higher price,"
explained Masters, noting that large Wall Street banks invest for
themselves in these markets even as they also broker the oil investments
What's abundantly clear, he and others argue, is that
an oil contract's price today has little to do with the supply of and
demand for oil.
"It's a capital asset now. Once the majority of
participants are capital-asset folks, common sense would tell you it's
going to be traded like a capital asset . . . and consumers pay,"
Masters said. "It wasn't that way in the past."
What can be done?
Commodity Futures Trading Commission is weighing a proposal to put
global limits on how many oil contracts any one market player can buy or
sell, and legislation to revamp financial regulation that's expected to
pass Congress this year could force greater disclosure by oil traders
Neither, however, promises imminent relief at the
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