Here come the government pitchforks, marching to the microphone erected in the town square. They and the oil industry's hecklers are already trotting out tired, ridiculous old myths as facts: That prices should not rise unless there is a shortage of physical oil supply. That if U.S. gasoline demand isn't rising, crude oil and gasoline prices shouldn't either. That speculators are to blame. Or that refineries run at less than 100% of their capacity in order to take more profit.
With the April 22 retail price 23 cents under the 2008 all-time high and consumer sentiment on fire, government officials are on the make. There have been anti-"gouging" campaigns in the past when prices zoomed, but the biggest in all history (using nine federal agencies) is now being launched.
Objective: Find, investigate, prosecute and even jail any futures traders, producers, refiners, marketers or retailers that are perceived doing wrong. In the aftermath of Hurricane Katrina's price spike of 2005, the Federal Trade Commission found zero evidence of any wrongdoing by the oil industry, including gasoline futures traders, whatsoever. Same with many earlier investigations of price run-ups. But the sheer magnitude of this year's onslaught is spun to suggest that this time, there will be criminals.
Herein we examine the price run-up and its causes, and document knee-jerk, accusatory reactions of practically everybody in the oil supply chain and the political command chain. First, the "Five Ws" of the situation.
Who (in two parts): The targets are gasoline retailers, suppliers, refiners, producers, and futures traders/hedgers. The inquisitors/enforcers are: "Oil and Gas Price Fraud Working Group" created by President Obama consisting of nine agencies: National Association of Attorneys General; the Departments of Justice, Agriculture, Treasury and Energy; the Commodity Futures Trading Commission; Federal Trade Commission; Securities & Exchange Commission; and the Federal Reserve Board. Quite a motley crew.
What: Pricing "unconscionably" high.
Where: In U.S. state and federal legal jurisdiction. (But the "where" as to investigating and accusing will be in the general news media, on political podiums, and at bureaucratic conference tables.)
When: Immediately, per Obama's announcement on April 21 this year. And any old time, since the legal infrastructure is deeply established. When prices have gone up, that is. So far in the history of such anti-gouging campaigns, investigations have occurred when prices have zoomed upward but not when they dropped.
Why: To "root out" as the President put it at a Reno, Nev., townhall meeting at a renewable energy plant, any fraud or "manipulation" in oil markets. (Like "unconscionable," "manipulation" is a crime that has no consensus as to definition.) And according to hundreds of press accounts, it is to shore up the Administration's popularity for addressing high petroleum prices at a time when consumers are struggling.
As usual, retailers are the most vulnerable, as most are not "lawyered-up" to the extent refiners and oil producers/traders are. "Confessions" brought to you by past AG witch hunts have almost been entirely by retailers trying to avoid prosecution and avoid legal fees for their legitimate passing through wholesale price hikes.
Since September 10, 2010, just days before the Fed's latest quantitative easing, the price has zoomed up 119.1 cents per gallon. Most of the hike came this year: up 79.9 cents per gallon since January 7.
Retail Price Climb
The retail price climb is the chief phenomenon that has prompted the President's new nine-agency task force to uncover and punish any "price gouging."
Tornado and related weather damage across six states did their part to start the witch-hunting mood as they prompted some state authorities to kick in anti-gouging laws. Press attention to the laws' activation and to leaping gasoline prices encouraged a public outcry for investigation of gasoline price gouging. These actions can chill or freeze free markets. (One AG warned station managers about posting credit card vs. cash prices, too. Another claimed that changing street prices more often than fuel deliveries came was "suspect." One demanded to know how price differences across town could be justified.)
The public got politicians' ears, but at the same time, politicians hammed it up to get the public's ear. Result: the new task force, consisting of some agencies that are already charged with monitoring the business and are about to have even more redundant meetings about their work--more overkill than in former bureaucrats' fondest dreams.
Who Not to Blame
Retailers: At first glance by any reasonable eye, the retail margin is a ridiculous target especially when credit-card fees and other costs are subtracted from it, revealing red ink. While suffering very low margin on average of late, retailers are also hurt by lower volumes. The higher prices appear to have chilled the modest demand growth that was forming early this year.
Retailers, the most high profile of any petroleum industry sector with their selling prices posted on giant signs for all to see, have a special rock-and-hard-place regarding "gouging" investigations: They can "eat" wholesale gasoline price increases in order to escape scrutiny by government agents, or pass them through and risk having a price above what bureaucrats deem to be "normal" or "fair" for a certain day and be prosecuted. In past witch hunts, some have just closed up.
For full calendar year 2010, retail margin on regular grade accounted for just 4.5% of the retail price. But gouging investigators' mindset is that retailers should behave like utilities, which cannot expand margin without official permission.
Refiners: For the prior three years, margin on gasoline has been very weak--weak enough to force outright closures of some refineries last year, and to impose low run rates as well, with last week's capacity utilization rate a poor 82.7%. In 2011 so far, refiners are either recovering nicely (WTI) or still ailing (Brent) depending on which crude is assumed. Actual experience is probably between 24.5 cents per gallon and 51.5 cents per gallon. Using Brent, the refiner margin on gasoline in 2011 is lower than in 2008, 2009, or 2010. That said, refiners are having a better year in 2011 than in 2010. This should be considered good news as it will beckon capacity, add to supply and reduce the risk of more refinery closures.
"Speculators": The pat term "speculators" is nebulous enough, since every business venture can be defined as such; but in terms of the government's new battle against those who would take advantage of consumers "for short-term gain," it is pregnant with implication. It usually implies futures market investors and their traders who somehow are able to "manipulate" prices higher by heavy buying, but who are not spotlighted with that ability when they sell heavily. Of course, each buy has a seller and vice versa. The oil futures market is arguably the best interpreter of oil supply and demand influences, repeatedly out-predicting those who are in the prediction business, with participants placing their "bets" anonymously.
"Mr. Obama is also taking cover on the grassiest knoll of energy politics," according to The Wall Street Journal, "suggesting last week that 'illegal activity by traders and speculators' is responsible for the oil price run-up. This gambit is known as shooting the price discovery messenger."
The President and others seem oblivious to the 2008 investigation by the CFTC that concluded traders provide liquidity and reduce volatility.
"Big Oil" and refiners still get the legal harassment and the verbal rotten tomatoes, and probably always will. Retailers, such convenient targets, will be in the AGs' crosshairs.
But speculators are the most popular to accuse: Commodity Futures Trading Commissioner Bart Chilton told the press: "Every time folks fill up their tanks, they can expect that several dollars are due to speculation." He favors position limits on commodity traders to discourage big price swings.
President Obama told a community college: "It is true that a lot of what's driving oil prices up right now is not the lack of supply. There's enough supply. The problem is, speculators and people make various bets, and they say...we're going to bet that oil is going to go up real high. And that spikes up prices significantly."
They are, as the Wall Street Journal puts it, "phantom speculators, easy villains."
The President's task force is unlikely to finger the three main culprits behind high gasoline prices: strong world oil demand, central bank dollar dilution and threats to Middle East Supply. Don't hold your breath to see task force member [Federal Reserve chairman] Ben Bernanke accused.
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Click herefor previous Lundberg Survey columns in CSP Daily News.To comment on this story, please email Greg Lindenberg at glindenberg@cspnet.com.
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