Why Gas Prices Are High When There’s Plenty of Oil

Believe it or not, but there’s no shortage of oil. The Guardian explains: 

Gasoline prices at the pump have surged, reaching a US national average of $4.34 on 21 March, and remain more than 70% greater than at this time last year. At the same time, global supplies of oil have actually increased, including from Russia, even amid the war in Ukraine.

So if high prices are not being driven by scarcity, what’s going on?

Experts are warning that little-publicized energy traders, most of whom work for the world’s largest oil companies, banks and privately held trading houses, are partly to blame.

The amount of trades – and the profits associated with them – have been skyrocketing, reaching record highs in 2021 and 2022. This inadequately regulated activity is hitting Americans’ pockets and represents a “market emergency”, according to Michael Greenberger, a former US government trading regulator.

“My instinct tells me that a very careful analysis of this market would show that the price is not reflective of supply chain problems, that there’s just too much leeway for the big banks and the big producers to manipulate if no one is looking and watching what they’re doing,” says Greenberger, the former division director of the Commodity Futures Trading Commission (CFTC), the main regulator of US energy markets.

Veteran oil analyst Philip K Verleger has warned that supply and demand “fundamentals have been rendered almost irrelevant” for oil prices, a key determinant of the price of gasoline at the pump.

He has pointed to a dramatic rise in speculation driven by artificial intelligence rapidly buying and selling massive energy bets based on minor or even nonexistent changes to real-world supplies. “Under these circumstances, a change in [supply and demand] fundamentals that might have moved prices by 50¢ or $1” will cause a change of as much as $10 a barrel of oil, he has written.

Overall, global oil production is nearly 5m more barrels a day greater in 2022 than in 2021, yet US politicians on both sides of the aisle have called for even more drilling. Oil exports from Russia into the global market have not been slowed by either the war or sanctions. Instead, they’re rising and are expected to end April higher than at any time since before the Covid pandemic, according to research firm Kpler. . . .

There are certainly other factors putting upward pressure on prices, including fears that Russian supply could decline in the future. But the price of oil, natural gas, and other vital fossil fuel commodities are today primarily set by energy traders, whose actions are stoking rising prices and volatility.

Little physical oil actually changes hands with such trades, which take place on two main exchanges in the US, CME Group and the Intercontinental Exchange. Instead the trade is in futures contracts, a commitment to purchase a set amount of oil in the future for a price agreed in the present. But because the virtual trading has come to dwarf the physical trade, it now determines the price of oil.

Greenberger estimates that “something like 13 times the physical amount of oil is traded” via these purely financial contracts. And commercial trades – those based on the actual use of oil – have been pushed out, he says, replaced almost entirely by speculators looking to make a quick buck, which is in turn increasing excessive speculation and volatility.

According to data provided to the Guardian by CME Group, the amount of crude oil futures contracts traded daily on its platform rose in 2022 over 2021, and is nearly double that of a decade ago.

Rising prices and volatility have been on display since the day before Russian troops went to war against Ukraine, when the price of a barrel of oil was $90. Since the invasion, despite no change in supply, it has vaulted to a $124, fallen to $95, shot back up to $114, before sliding down to $103 a barrel today – over 60% higher than the price one year ago.

All the major oil companies, leading US banks, and lesser known private trading houses led by Vitol, Trafigura, Mercuria, and Glencore, are involved in speculative energy trading. Some have been found guilty of illegal trading over the years. But determining their exact level of involvement is not easy, as there are few reporting requirements allowing the public into this largely opaque world.

In a 2020 earnings call with analysts, Shell CEO Ben van Beurden called Shell’s trading “core to the success of our company, it actually makes the magic in many cases”. Shell typically earns as much as $4bn annually from this trading.

“We’re seeing just massive volatility, in terms of trading activity, in terms of pricing, where you’ve got big bounces between prices, and so something is wrong,” says Tyson Slocum, director of Public Citizen’s Energy Program, a non-profit consumer advocacy organization. Slocum, who also serves on the Energy and Environmental Markets Advisory Committee to the CFTC, calls for greater regulation and transparency into a broken system where “speculators are allowed to reign free”. . . .

Slocum argues that the federal government has ceded too much authority to the futures exchanges. With profits based on volume of trades, they have little incentive to reign in traders, including excessive speculation, he alleges.

Asked to respond to these allegations, both CME Group and Intercontinental Exchange declined to comment. . . .

The Biden Boom

The economy sucks. It’s hard to escape that message, even if it’s not true. Eric Boehlert of Press Run criticized the reality-based press (not Fox) for “burying great news”:

Like clockwork, the first Friday of the month brought another blockbuster jobs report. The U.S. economy under President Joe Biden added another 400,000-plus new jobs in March, it was announced last week.

Biden is currently on pace, during his first two full years in office, to oversee the creation of 10 million new jobs and an unemployment rate tumbling all the way down to 3 percent. That would be an unprecedented accomplishment in U.S. history. Context: In four years in office, T____ lost three million jobs, the worst record since Herbert Hoover.

Yet the press shrugs off the good news, determined to keep Biden pinned down. “The reality is that one strong jobs report does not snap the administration out of its current circumstances,” Politico stressed Friday afternoon. How about 11 straight strong job reports, would that do the trick? Because the U.S. economy under Biden has been adding more than 400,000 jobs per month for 11 straight months.

The glaring disconnect between reality and how the press depicts White House accomplishments means a key question lingers: Why is the press rooting against Biden? Is the press either hoping for a T____ return to the White House, or at least committed to keeping Biden down so the 2024 rematch will be close and ‘entertaining’ for the press to cover? Is that why the Ginni Thomas insurrection story was politely marched off the stage after just a few days of coverage last week by the same news outlets that are now in year three of their dogged Hunter Biden reporting? (“ABC This Week” included 19 references to Hunter Biden yesterday.)

Just look at the relentlessly dour economic coverage. For the press, inflation remains the dominant, bad-news-for-Dems economic story. Even on Friday, the day the stellar jobs report was released, “inflation” was mentioned on cable news nearly as often as “jobs,” according to TVeyes.com.

Axios contorted itself by claiming Biden’s promise to add “millions” of new jobs (which he’s already accomplished), was being threatened because there aren’t enough workers, because so few people are out of work— or something.

The home-run report itself was often depicted as a mixed bag. These were some of the glass-half-empty headlines that appeared in the wake of the latest runaway numbers:

• “America’s Job Market Is On Fire. Here’s Why It Doesn’t Feel Like It” (CNN)

• “Booming Job Growth Is a Double-Edged Sword For Joe Biden” (CNN)

• “Why a Great Jobs Report Can’t Save Joe Biden” (CNN)

• “Unemployment Hits Pandemic Low in March, But Uncertainty Looms Ahead” (Washington Post)

• “Biden Gets a Strong Jobs Report, But a Sour Mood Still Prevails” (Washington Post)

Totally normal journalism, right? The president announces another blockbuster jobs report and the press presents it as borderline bad news.

Note that the above headlines about the sour mood prevailing despite the great jobs, and how uncertainty looms, came from the Post, the same outlet that slotted the March jobs report into 87th placed on its website on Friday.

That afternoon readers on the daily’s homepage had to scroll down 87 headlines before they saw the first reference to the great economic news. Among the headlines that ran higher on the Post site that afternoon [was] “What’s The Best Way to Share My Old Home Videos?”

On-air, CNN also downplayed the jobs report, according to Dean Baker, senior economist for Center for Economic and Policy Research. “CNN’s coverage of the report quickly turned to inflation,” he wrote. “In its more general coverage of the economy, the jobs report — which tells us about the employment and earnings situation for more than 160 million people — was barely a blip.”

Sunday’s “Meet the Press” round table featured two segments with assembled pundits. One focused on how immigration might be a problem for Democrats in the midterms, the other on how T____ might be a problem for Democrats in the midterms. As usual, Biden’s historic economic record was ignored.

That’s why, according to a recent poll, 37 percent of Americans think the economy lost jobs over the last year, when it’s gained 7 million. (Just 28 percent of people know jobs were up.)

Virtually all the Beltway coverage today agrees on this central point: When it comes to the economy, Biden’s approval rating is taking a hit because Americans are freaked out by inflation. But maybe it’s taking a hit because Americans are under the false impression that jobs are disappearing. Voters don’t know what they don’t know because the press isn’t interested in telling them about record job success and an economy that’s years ahead of where experts thought it would be coming out of a global pandemic.

Biden is facing not just one organized opposition in the form of the [Republican Party], but another in the form of the Beltway press corps.

Last week, they hit Biden with 14 separate questions at a press briefing over the supposed “gaffe” he made, expressing his moral outrage over the mass killings Russian President Vladimir Putn has unleashed in Ukraine. . . . The press didn’t ask a single question about the state of the Ukraine war.

And remember all winter how the press treated Covid as the most important “crisis” Biden faced and hung the pandemic around his neck? Today, the topic has vanished, the press has given the White House no credit for steering the country back to normalcy, and instead has latched onto gas prices as being a defining issue under Biden. The buried Covid coverage represents a telling example of how an issue that the press itself claimed would define the Biden administration gets translated into no news when it turns towards positive territory.

The Beltway press needs to take its thumb off the Biden scale.

Unquote.

The Labor Department reported today that there were 166,000 new jobless claims last week, the lowest number since November 1968, when the population was much smaller.

The change since Biden took office. They didn’t all start driving for Uber:  

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Sadly, the writer quoted above has died in a bicycle accident:

Eric Boehlert, a veteran journalist who was a fierce critic of right-wing misinformation and hypocrisy in the news media, died on Monday in New Jersey. He was 57.

Providing for the General Welfare Works

I don’t think I’ve ever heard anybody say the goal of the Democratic Party is to “provide for the general welfare” (that phrase from the Constitution). We’ve all heard instead that Democrats are fiscally irresponsible big spenders, while Republicans keep government spending under control, helping the economy grow. Simon Rosenberg, who leads a progressive think tank, explains how wrong this is

Inconvenient truth, fiscal responsibility edition:

Biden is now the third consecutive Democratic president to have seen the annual deficit drop significantly on their watch. It rose significantly under the last three Republican presidents.

[Biden] said he’d soon become the only president “ever to cut the deficit by more than $1 trillion in a single year.” He’s on track to deliver. . . . 

When it comes to the deficit, Americans have endured a remarkably consistent pattern for four decades.

It starts with a Republican presidential candidate denouncing the deficit and vowing to balance the budget if elected. That Republican then takes office, abandons interest in the issue, and expresses indifference when the deficit becomes vastly larger. Then a Democrat takes office, at which point Republican lawmakers who didn’t care at all about the deficit suddenly decide it’s a critical issue that the new president must immediately prioritize.

During the Democratic administration, the deficit invariably shrinks — a development Republicans tend to ignore — at which point the entire cycle starts over.

As the cycle spins, polls continue to show that most Americans see Republicans as the party most trustworthy to reduce the deficit, despite reality, because some partisan branding is tough to change, even in the face of four decades’ worth of evidence. [Steve Benen, MSNBC]

There is perhaps no more important false narrative in American politics than the [Republican Party] is the party of growth and fiscal responsibility.

Team Biden appears to be eager to take that on. Praise f—ing be.

The White House is leaning into a new argument: That deficit reduction can and should be recast as a positive feature of successful *progressive* economic policy. [Greg Sargent]

As we’ve been saying for many months now, it is essential that every 2022 voter knows that when Democrats are in power things get better, and when Republicans are in power they don’t.

The data is clear, overwhelming. . . .

 [It’s] the most important, least understood story in American politics. . . 

Since 1989, 43 million jobs have been created in the US, 41 million – 95% – have come under Democratic presidents. 

33.8 million jobs = 16 yrs of Clinton & Obama 

7.4 million jobs = 13 months of Biden

1.9 million jobs = 16 years of Bush, Bush & T____ [Rosenberg]

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. . . Democrats need to have this conversation with voters this year. It is essential knowledge, critical to understanding where we are, and where we are going as a nation.

Unquote.

It’s amazing that voters regularly say they “trust” Republicans more on the economy despite their consistently worse results. Why? Republicans associate themselves with low taxes and getting the government “out of the way”. But reducing taxes on people and corporations who already have lots of money doesn’t help the economy; it simply concentrates more wealth at the top. Repealing the Affordable Care Act or abolishing the Department of Education wouldn’t create jobs. Democrats do a better job on the economy by spreading the wealth around. They do this by promoting the “general welfare”, as the Constitution requires. When the general population is better off, the economy is better off. It’s as simple as that.

Exxon, Chevron, Shell – They’re Not America’s Friends. Neither Are Republican Politicians.

Biden isn’t to blame for rising oil prices. Or gas prices: “Energy analysts say other factors — which predate the Biden administration — are responsible”. Charles Pierce of Esquire uses colorful language to say we should look elsewhere:

Since it seems that the elite political media is going to define everything except the upcoming NCAA basketball tournament through the price of gasoline—CNN should open a bureau at that one gas station that is clearly overcharging people . . .

When did the consensus among us common folk break down that the oil companies are a miserable flock of price-gouging harpies interested only in lining their own pockets, despoiling land and sea and contributing to the planet’s self-immolation? I mean, Deepwater Horizon wasn’t that long ago. . . .

So now, as Ukraine fights to remain an independent nation, and as the economic recovery from a worldwide pandemic rolls on largely unacknowledged by much of the elite political press, the oil company executives, who currently hold a plethora of oil leases, are shoveling the money they’re gouging out of the rest of us to their shareholders rather than plowing it into developing the leases they already own. From the New York Times:

In his broad Oklahoma twang and in language that will be heard repeatedly in the next few months, [former Democratic senator Fred Harris] . . .  said that Congress should “break up” the major oil companies, which he contends illegally control both production and marketing of petroleum products.

Where have you gone, Fred Harris? Your party turns its lonely eyes to you.

Unquote.

Some facts from Dana Milbank of The Washington Post:

A cynic is rarely disappointed by this Republican Party. Yet even by that standard, the current attempt to blame President Biden — and absolve Vladimir Putin — for the spike in gas prices is a special case. . . .

It’s not only that the charge is bogus — the current price of gas has virtually nothing to do with Biden’s energy policies — but that the Republican officials leveling it are sowing division at home and giving a rhetorical boost to the enemy at a perilous moment when national unity and sacrifice will be needed to prevail against Russia.

Announcing the ban on Tuesday, Biden said, accurately: “Since Putin began his military buildup on Ukrainian borders, just since then, the price of the gas at the pump in America went up 75 cents. And with this action, it’s going to go up further.” He dubbed it “Putin’s price hike” and said “Russia is responsible.”

Republicans leaped to Putin’s defense.

“These aren’t Putin prices. They’re President Biden’s prices,” House GOP leader Kevin McCarthy said on Wednesday. Via tweet, he claimed: “Gas prices started rising the day President Biden took office — when he canceled the Keystone Pipeline and halted new drilling on federal lands.”  

Rep. Elise Stefanik (N.Y.), head of the House Republican Conference, added: “Joe Biden blames Russia for skyrocketing gas prices. But make no mistake — Biden’s war on American energy is to blame.”

Scores of Republicans piled on. The GOP side of the House Energy and Commerce Committee tweeted: “Russia isn’t ‘responsible’. Biden’s shutdown of American energy is.”

That’s just a gusher of mendacity.

Gas prices “started rising the day President Biden took office”? Wrong. They’ve been on an upward trend since bottoming out in April 2020 at the start of the coronavirus pandemic. This is because of booming demand during the recovery — not because of Biden’s policies . . .

Canceling the Keystone XL pipeline caused gas prices to rise? Wrong. It was only 10 percent done when Biden canceled it, and its owners didn’t expect to open it until 2023 at the earliest.

Biden “halted new drilling on federal lands”? Wrong. After a temporary halt in new leases, Biden has outpaced Trump in new drilling permits for public lands, The Post reported.

As for Biden’s “shutdown of American energy,” U.S. production has increased under Biden from 9.7 million barrels a day to 11.6 million barrels. The number of oil rigs operating was at 172 in July 2020, E&E News reports. Now, 519 are in operation. U.S. production is forecast to set a record next year.

What’s holding back oil production isn’t government policy. U.S. producers still have 4,400 wells already approved and drilled that are not yet producing. They aren’t drilling more because of a shortage of workers and equipment and, particularly, [Big Oil]. As The Post reported, major U.S. oil companies say they would rather use their profits “to boost payouts to shareholders” than “rush to drill new wells.”

Blaming Biden for the spike in prices around Russia’s Ukraine invasion isn’t just false — it’s an assist to Putin . . .

[That’s not surprising]. Fox News’s Tucker Carlson, after parroting Kremlin talking points justifying its invasion of Ukraine, has pivoted to blaming the United States for provoking Putin. “Why in the world would the United States intentionally seek war with Russia?” he asked on Monday night.

T____ himself has praised Putin’s acuity, Sen. Josh Hawley (R-Mo.) has called for the United States to appease Russia by abandoning its support for Ukrainian membership in NATO, and Rep. Marjorie Taylor Greene (R-Ga.) [supports impeaching] Biden for “threatening war” with Russia . . .

Unquote.

Meanwhile, the creepy intruder from Upside Down World speaks:

T____ says the U.S. should not have been buying Russian oil, but imports increased 39% during his four years, after dropping 22% over Obama’s two terms.

Putin vs. the World Economy (and Ours)

The last two Democratic presidents, taking office in 2009 and 2021, inherited disasters from their Republican predecessors. Obama was much too easy on banks and bankers and didn’t do enough to help the victims of the financial collapse, but he restored some normality to our economy fairly quickly. Biden won’t be as successful in the short term.

His administration took serious measures to address the pandemic, unlike You Know Who’s, but right-wing insanity and the Omicron wave delayed getting back to normal. Supply chain disruptions,  corporate greed and the country going back to buying and selling have led to inflation (as in other countries). After four years getting what he wanted from his stooge in the White House (including criticism of NATO and the illegal interruption of military aid to Ukraine), Putin decided it was time to take Ukraine. That will increase inflation even more (and although Republicans want us to be “strong” and stop buying Russian gas, they’ll criticize Biden when gas prices go up). It appears that Republicans can sit back, not propose anything helpful, lie about Biden’s failures and simply wait for unhappy voters to reward them in November. 

Nevertheless, I think it’s worth knowing what’s going on with the economy. Paul Krugman offers his analysis:

When Vladimir Putin invaded Ukraine, I think it’s fair to say that most observers expected him to get away with it. Surely Russia’s huge military would take Kyiv and other major cities within a few days; surely the West would respond with its usual timidity, giving Russia no more than a minor slap on the wrist.

Instead, here we are, 13 days in, with Kyiv and Kharkiv still standing and invading forces bogged down by fierce Ukrainian resistance (helped by a rapid influx of Western weapons) and disastrous logistical problems. At the same time, Western sanctions on the Russian economy are clearly already having severe effects and may get even stronger.

Obviously all this could change: Russian forces could regroup and resume the offensive, weak-kneed Western governments could start lifting sanctions. For now, however, Putin is facing far worse consequences than he could have imagined.

Unfortunately, standing up to aggression doesn’t come free. Events in Ukraine and Russia will, in particular, impose serious costs on the world economy. The question is, how serious?

My tentative answer is that it will be bad, but not catastrophic. Specifically, the Putin shock seems unlikely to be nearly as bad as the oil shocks that roiled the world economy in the 1970s.

As in the 1970s, the blow to the world economy is coming from commodity prices. Russia is a major exporter of oil and natural gas; both Russia and Ukraine are — or were — major exporters of wheat. So the war is having a big impact on both energy and food prices.

Start with energy. So far, the sanctions being applied by Europe against Russia conspicuously don’t apply to oil and gas exports; the United States is banning oil imports from Russia, but this won’t matter that much, because America can buy and Russia can sell elsewhere. Markets are nonetheless reacting as if supplies are going to be disrupted, either by future sanctions or because global energy companies, fearing a public backlash, are “self-sanctioning” their purchases of Russian crude. Indeed, Shell, which bought Russian oil at a discount the other day, has apologized and says it won’t do it again.

As a result, the real, inflation-adjusted price of oil has shot up almost to the level it hit during the Iranian revolution in 1979:

Oil prices in 2022 dollars.

To be honest, I’m a bit puzzled by the size of this price spike. Yes, Russia is a major oil producer. But it accounts for only about 11 percent of world production, whereas Persian Gulf producers extracted a third of the world’s oil back in the 1970s. And Russia will probably find ways to sell a significant fraction of its oil despite Western sanctions.

Furthermore, the world economy is much less dependent on oil than it used to be. Oil “intensity” — the number of barrels of oil consumed per real dollar of gross domestic product — is half what it was in the 1970s.

What about natural gas? Europe depends on Russia for a lot of its supply. But gas consumption is strongly seasonal:

Winter is coming — but not for quite a while.

So the impact of Russian disruption won’t be that big until late this year, giving Europe time to take measures to make itself less vulnerable.

Overall, then, the Putin-made energy crisis will be serious but probably not catastrophic. My biggest concern for the United States, at least, is political. You mightn’t think that Republicans could simultaneously demand that we stop buying Russian oil and attack President Biden for high gasoline prices. That is, you mightn’t think that if you’d spent the past 25 years sleeping in a cave. In fact, that’s exactly what’s about to happen.

Politics aside, food may actually be a bigger issue than energy. Before Putin’s war, Russia and Ukraine combined accounted for more than a quarter of the world’s wheat exports. Now Russia is sanctioned and Ukraine is a war zone. Not surprisingly, wheat prices have shot up from less than $800 a bushel before Russia began massing its forces around Ukraine to around $1,300 now.

In wealthy regions like North America and Europe, this price surge will be painful but for the most part tolerable, simply because advanced-country consumers spend a relatively small percentage of their income on food. For poorer nations, where food is a huge fraction of family budgets, the shock will be much more severe.

Finally, what impact will the Ukraine war have on economic policy? Spiking oil and food prices will raise the rate of inflation, which is already uncomfortably high. Will the Federal Reserve respond by raising interest rates, hitting economic growth?

Probably not. The Fed has long focused not on “headline” inflation but on “core” inflation, which excludes volatile food and energy prices — a focus that has stood it in good stead in the past. So the Putin shock is exactly the kind of event that the Fed would normally ignore. And for what it’s worth, investors appear to believe that it will do just that: Market expectations of Fed policy over the next few months don’t seem to have changed at all.

Overall, the Russian shock to the world economy will be nasty, but probably not all that nasty. If Putin imagines that he can hold the world to ransom, well, that’s probably yet another fatal miscalculation.