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$2 A Gallon Gas Possible, Analysts Tell Congress

Eliminating 'excessive speculation' could bring back 'good old days'

By Mark Huffman
ConsumerAffairs.com

June 24, 2008
You've heard the doomsday scenarios of $4 a gallon gas rising to $7 as oil prices continue their surge. A Congressional committee Monday heard the flip side of that, as four analysts predicted gas prices could plunge to $2 a gallon if lawmakers get speculators out of the oil market.

Among those testifying before the House Energy and Commerce Committee was Michael Masters, who heads up Masters Capital Management. Should Congress limit speculators' participation in the energy markets, he sees the price of oil quickly dropping to between $65 and $75 a barrel. That would represent a 50 percent decline.

Masters isn't alone in that assessment. Fadel Gheit of Oppenheimer & Co., Edward Krapels of Energy Security Analysis and Roger Diwan of PFC Energy Consultants agreed. They say the price would fall much faster than it has risen, as panicked fund managers try to liquidate their positions before the oil bubble pops.

The "good old days" of $2 a gallon gas could be back in less than 30 days, Krapels predicted.

The House Energy and Commerce Committee Subcommittee on Oversight and Investigations is considering changing the law to do just that. Committee chairman Rep. Bart Stupak (D-MI), has introduced revised legislation aimed at closing loopholes that are allowing speculators to manipulate energy markets and artificially inflate prices. His is one of several bills that is designed to removed speculation from the energy markets, already stretched by heightened worldwide demand.

"For the past three years, I have been looking into the excessive speculation occurring on the energy markets," Stupak said. "I have done more than just scratch the surface; I've really delved deep into this issue to understand the extent to which market speculation is inflating the price of crude oil."

Stupak's colleague, Rep. John Dingell (D-MI) agreed, calling at Monday's hearing for Congress to consider a broad range of options to rein in speculation.

Stupak says a chart prepared by the International Monetary Fund is particularly illuminating.

It presents a 30-year comparison of oil prices and gold prices. Gold prices are not dependent on supply and demand, and have been viewed as a highly speculative commodity and a hedge against inflation. The IMF analysis showed that since 2002 crude oil prices almost exactly track increases in gold prices.

"Oil has morphed from a commodity into a financial asset – traded for its speculative value instead of its energy value," Stupak said.

CFTC data

Data provided earlier to the House Energy and Commerce Committee by the Commodity Futures Trading Commission shows that speculators now control an overwhelming amount of the oil futures market.

In 2007, speculators owned just 37 percent of the contracts to buy West Texas Intermediate Crude on the New York Mercantile Exchange. The remaining 63 percent was controlled by oil refiners, wholesalers, trucking companies and other end users of petroleum products.

By April of this year, the proportion had almost reversed itself. Speculators controlled 71 percent of the contracts while oil users held only 29 percent.

With more and more money from speculators chasing a finite number of oil futures contracts, the supply and demand principle takes hold. When demand for something outpaces the supply, the price rises.

Take the speculative money out of the market, for example, and watch what happens. With another 71 percent of oil contracts up for grabs, and no speculative money to compete for it, oil users are the only ones left bidding for contracts. They don't have to bid as much, now that there is less demand.

While the Bush Administration's position is that speculation is only a small factor in oil prices, the campaign to get speculators out of the market is gaining critical mass. Congress is drafting various legislation to limit speculative investments in commodities markets and both major presidential candidates are proposing various limits on speculators.

Speculators have found the oil markets profitable investments because oil is bought and sold in dollars, whose value has seriously eroded over the last year. Speculators have pushed up gold prices for the same reason, but it's unlikely any anti-speculative limits will be placed there.

After all, consumers don't run their cars on gold. Though increasingly, many surely feel that's what they're doing every time they pull up to the gas pump.

Echoes of Katrina

Today's situation reminds some observers of the gas price hikes that followed Hurricane Katrina. It was nearly two years that we reported that gasoline futures trading was doing more to keep gas prices high than damage to Gulf drilling rigs or Gulf Coast refineries. (Story).

In August 2006, the U.S. Commodity Futures Trading Commission (CFTC) launched an investigation into European oil company BP, to determine if it manipulated the crude oil and unleaded gasoline markets.

Last month, the CFTC made a similar announcement, saying it had undertaken a six-month investigation into possible price manipulation in the oil and gas markets..

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