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Report: REINING IN WALL STREET
How Speculation is Affecting Gasoline Prices Today
Robert Pollin and James Heintz
Political Economy Research Institute
University of Massachusetts, Amherst
June 21, 2011
The average retail price of gasoline at the pump, excluding taxes, in May was $3.96. In January 2009, the average retail price was $1.96 (expressed in May 2011 dollars). In other words, consumers are now paying twice as much to fill their cars as they did 2½ years ago. Even as recently as last October, the average gas price at the pump was $2.93. The average gas price has thus risen by a full dollar—35 percent—in only seven months.
What explains thus huge run up in gas prices for consumers? To a significant extent, this is the result of the economy moving out of a deep recession, into a recovery, which has increased the demand for gasoline. But a major additional factor is the rapid growth in large-scale speculative trading around oil prices through the oil commodities futures market.
Indeed, we estimate that, without the influence of large-scale speculative trading on oil in the commodities futures market, the average price of gasoline at the pump in May would have been $3.13 rather than $3.96. This means that the average U.S. consumer paid a 83-cent-per-gallon premium in May for their gasoline purchases due to the huge rise in the speculative futures market for oil. Considering the U.S. economy as a whole, this translates into a speculation premium of over $1 billion for May alone. If the May price were to hold for a year, that would mean that the speculative premium would total $12 billion.
For the average U.S. auto owner, the speculative premium amounted to about $41 in May. This means speculative premium for the average two-car family was about $82 in May. That is, each such family spent $82 more in May than necessary for gasoline, and most of this $82 will have made its way into the pockets of large-scale speculators in the oil commodities futures market. (We present details on our data sources, statistical methods, calculations, as well as references to the relevant professional literature in the Appendix to this document).
Predicting the ups and downs of prices in global oil markets is notoriously unreliable. We have not attempted to create a new forecasting model. Rather, our estimate of where the retail price of gasoline would have been in May absent the influence of speculation is based on a straightforward exercise. We simply observed the actual long-run trend in oil prices using a standard statistical technique (the Hodrick-Prescott filter) and checked the reliability of our trend estimate by comparing it with the figure produced by the U.S. Energy Information Agency.
By definition, this long-run trend figure will automatically take account of all the long-term factors influencing global oil prices, including 1) the production of oil; 2) refining, transportation and marketing conditions; and 3) changes in global demand. That is, the long-run price trend automatically incorporates all of the factors affecting oil prices other than short-term speculation.
Indeed, our method does also take account of increases in the speculative trading of oil, but only the long-run expansion of the speculative market, not the market’s short-term ups and downs. That is the main reason why our estimate of the speculative premium today is significantly smaller than that of Exxon-Mobil CEO Rex Tillerson. Tillerson testified before the Senate on May 12 that, absent speculative market effects, the global price of crude oil today would be between $60-$70 dollars a barrel. This would translate into a price of gasoline at the pump of between $2.56 and $2.77 (assuming that these crude oil prices would have held steady at this lower level over the past several months). According to Tillerson’s informal estimate, the speculative premium for May would therefore be between $1.19 and $1.41 a gallon.
It is not likely that any two observers will agree on the exact size of the speculative premium in oil markets today. But there is no doubt that big-time traders are receiving windfalls. For example, in mid-June, Glencore, the world’s largest commodity trader reported a 47 percent surge in profits, driven, as reported in the Financial Times “by stellar results in oil trading” (FT, June 14, 2011).
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