What’s really behind high gas prices

Priming the Pump
By DEIRDRE FULTON  |  May 2, 2012

TJI_GasGage_main

Fingers crossed that we've seen the worst of it — analysts say gas prices won't go any higher than the April 6 peak of $3.94 per gallon — but filling up your tank this summer is still going to cost a big chunk of change. According to the price-tracking website MaineGasPrices.com, Maine drivers were paying about $3.90 a gallon as of Monday, April 30.

As it's a presidential election year, accusations abound about who or what is the cause of these pocket-draining prices.

On the campaign trail, presumptive Republican nominee Mitt Romney and GOP talking heads have fingered the Obama administration's reluctance to drill in the Arctic Refuge or approve the Keystone XL pipeline as factors contributing to high fuel costs. Throughout March and April, as pump prices climbed steadily, Romney repeatedly blasted "the gas hike trio" — US secretary of energy Steven Chu, secretary of the interior Ken Salazar, and Environmental Protection Agency administrator Lisa Jackson — who he claims came into office with the goal of raising energy prices in order to steer Americans toward alternative energies.

"They have put in place policies that are designed to reduce our production of fossil-based fuels and drive up the cost of energy and therefore encourage people to move towards wind and solar which are of course much higher cost," Romney said in April.

Meanwhile, the Obama administration continues to push for development of domestic natural gas supplies as well as increased energy and fuel efficiency to reduce demand.

But it turns out that none of these explanations gets at the root cause of astronomical gas prices.

Fluctuations at the pump have "nothing to do with the actual supply and demand for petroleum-based products," explains University of Southern Maine economics professor Susan Feiner. In fact, recent reports suggest that worldwide supply is steady, while US demand for oil has actually gone down slightly due to the recession and an influx of fuel efficient cars.

Feiner points her finger squarely in the direction of Wall Street traders, who buy and sell oil futures (a/k/a contracts to exchange an asset in the future at a price agreed upon in the present). They gobble up futures, which raises the price, and then sell to make a profit. "Their activity drives up the cost, the future price of oil," she says.

Keep in mind that these speculators are trading "paper oil" — they have no intent on ever accepting delivery of real, physical oil. And right now, tensions are running high in and around Iran, creating fears about looming oil shortages. So people buy more futures, which leads to the impression of a shortage, which keeps prices high.

Meanwhile, oil refineries (where crude oil is turned into gasoline for your car) charge retailers (i.e., gas stations) "not based on what it cost them today to produce the gas, but on what it will cost them to replace the gas they just shipped," she says. As market prices rise, so does the cost to your local Big Apple. And that cost is passed on to you.

In a New York Times opinion piece last month, former congressman Joseph Kennedy II (a Massachusetts Democrat) wrote: "[Speculators] should be banned from the world's commodity exchanges, which could drive down the price of oil by as much as 40 percent and the price of gasoline by as much as $1 a gallon."

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