$4 gas: Get used to it

Friday, 05 October 2012
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Published in United States Economy

A new U.N. report says the massive bets placed on the commodities markets are the "root cause" of the volatility in oil and gas prices. And that's not about to change

President Obama may have a lot more to worry about than bombing the debate this week. Traders are starting to get particularly bullish over gasoline prices – and that is bad news for the average driver, who may also be looking to vent his spleen at the voting booth.

Reports of gas shortages along the high-demand west and east coasts may be fleeting – although deeply concerning – but they highlight a problem that's expected to persist in the U.S.: our refineries are getting old. Given that a new refinery has not been built since 1976, commodities desks on Wall Street are bracing for more refinery outages and fires just as the nation needs to gear up for the busy winter heating season.


What does that mean? Probably more weeks where we'll see U.S. crude oil inventories hovering above the upper limit of the average range for this time of year, yet gasoline inventories tunneling into the lower half of their average range, as the U.S. Energy Information Administration reported Wednesday.

Translated in dollars and cents, retail gas prices likely won't be moving off the $4 needle anytime soon. In fact, some gasoline buyers think this may even usher in a run to $5 a gallon (especially out west where gas stations are shutting down because they cannot buy gas at price levels low enough to turn a profit).

The firmness in gasoline also is giving oil prices a boost, the knock-on effects of which cannot be understated.

Oil price spikes and consumer prices have been "highly correlated" over the past decade, according to the EIA, the nonpartisan statistics branch of the U.S. Department of Energy. The upshot? Americans are increasingly grappling with unchanged paychecks in the face of higher energy prices. Their money is buying them less, the EIA says, citing the Bureau of Labor Statistics' Chained Consumer Price Index.

Meanwhile, the U.N. recently released a report stating definitively that the "financialization" of commodities markets – or "hundreds of billions of dollars of bets placed on expectations of temporarily rising prices" for energy, food and metals products – is the "root cause" of the today's price volatility.

A key highlight of the U.N. report touched on how global oil prices this past summer were 65% higher than the averages reached during the commodity price boom of 2003 to 2008 (the period of the latest Iraq war to the Bush-era high near $150 a barrel). "Investors treat commodities as an asset class, which means that they are betting on a certain price trend during the period they are invested in commodity assets," the U.N. said. "They do not trade systematically on the basis of fundamental supply and demand relationships in single markets, even if shocks in those markets may influence their behavior temporarily."

Of course, when supply shocks do happen to dovetail with bullish bets – as is happening now – that's when oil and gas prices really take off. Perhaps it's no coincidence that the first presidential debate was sponsored by ExxonMobil (XOM).

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Jeremy Holcombe

Jeremy is a seasoned finance writer who has been studying the gold and silver industry for many years. His vast knowledge in the precious metals sector led him to Goldco Direct, where he is now one of their most recognized writers both on the site and around the web. Along with being a senior Precious Metals writer for Goldco Direct, he is frequently featured on many financial sites on the internet where they tap into his knowledge about gold. Jeremy is passionate about educating investors about the yellow metal as its price continues to rise to record breaking levels.