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One Year Later: Why Are Gas Prices So High?

Katrina Is History; High Gas Prices Aren't

By Mark Huffman
ConsumerAffairs.com

August 30, 2006
While the one-year anniversary of Hurricane Katrina has riveted the nation's attention, another anniversary has passed virtually unnoticed.

It was one year ago, in Katrina's aftermath, that gasoline prices surged to a record high, where they have stubbornly remained for the last 12 months, eroding consumers' purchasing power and forcing many families to confront painful choices.

A subtle but important shift occurred in the days following Hurricane Katrina's destruction. The damage to Gulf Coast oil drilling rigs significantly reduced U.S. oil production. At the same time, tension between the U.S. and Iran raised concerns about the reliability of supplies of oil from the Persian Gulf.

As a result, the price of oil in futures markets, where oil is traded as a commodity, surged past $60 a barrel, a new high. It kept rising over the months, reaching $75 before settling in the low $70s.

At the same time, gasoline futures also rose sharply. Gasoline wholesalers raised their prices, attempting to follow the spike in crude prices.

At the neighborhood gas station, confusion reigned as operators tried to guess at their replacement costs for the fuel in their tanks. Some undoubtedly took advantage of the confusion to gouge consumers. Others didn't raise prices fast enough and, in effect, gouged themselves.

The Organization of Petroleum Exporting Countries (OPEC), which for three decades had controlled the price of oil by controlling the spigot, lost control of prices to market traders. As gasoline prices rose and fell with seemingly no rhyme or reason, many consumers sensed they were being manipulated and ripped off.

Now, one year later, some U.S. regulators think they may be right.

The U.S. Commodity Futures Trading Commission (CFTC) has launched an investigation into European oil company BP, to determine if it manipulated the crude oil and unleaded gasoline markets. The Justice Department has also opened a probe. A spokesman for BP said the company is cooperating with both investigations.

The CFTC is trying to determine whether BP unfairly used proprietary information about its own distribution and storage networks to push up oil and gas prices. However, even if it did, regulators say making commodity trades using information about company operations is not against the law. That's why financial services and investment houses have been buying up energy properties over the last few years -- not for the profits but for the insider information.

Two members of the U.S. Senate, Norm Coleman (R-MN) and Carl Levin (D-MI), have blamed runaway oil and gas prices on the new wave of speculative energy commodity trading in markets that are, for the most part, unregulated. It's a result, they say, of changes to the law enacted in 2000, allowing big energy trading firms like Enron more latitude in over-the-counter commodities trading.

Meanwhile, it's motorists who pay the price every time they pull up to the pump.

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