Crude reality
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Wall Street and Washington are playing a crude joke on the US economic recovery.
Higher gasoline prices have drained over $25 billion from the US economy since September, as skyrocketing oil costs have eaten into consumer’s wallets.
But the issue isn’t supply — it’s Ben Bernanke and hedge funds.
The Federal Reserve chief has kept the dollar weak with his “quantitative easing” stimulus plan. Wall Street sees commodities like oil as a security, a hedge on the watered-down greenback. They can run up oil prices on nothing more than speculation that China may suddenly need more oil.
Oil prices have hovered near $100 a barrel recently (though a disappointing jobs report brought it back down to $88 a barrel on Friday). OPEC is of course pleased with the high prices, and refuses to increase production — but privately, even they’re puzzled by the increase in prices. There hasn’t been a spike in the demand for oil recently; in fact, the recession has decreased use.
Yet New Yorkers pay more than $3.45 at the pump, and economists are forecasting $4 or even $5 a gallon gas by spring.
“That’s over a $145 billion annualized ‘hidden tax’ on the consumer,” says Peter Buetel, president of Cameron Hanover, who covers the oil industry.
“Gasoline prices at the pump have increased over 27 percent since Bernanke began telegraphing his move in September,” Buetel added.
Stephen Schork, an energy analyst who runs the Schork Report, wrote in a November posting that Bernanke’s easing started the run-up in crude oil through a weakened dollar. Then the fast money on the Street took the ball and ran with it.
But it isn’t as if the oil market suddenly had a switch turned on in September. Energy prices never really retreated during the recession, and some analysts believe the price of gasoline should now be more than a dollar lower than its current $3-plus average across the country.
While most of the equity cheerleaders have celebrated stocks’ year-end moves and said that gold and silver may be bubbles, crude oil prices have soared more than all other investments.
Precious metals were up 8 percent for the final quarter of 2010. The Standard & Poor’s 500 index gained 13 percent during the same period while crude, facing stiff headwinds of a stronger dollar as the euro weakened on Irish and Greek debt woes, gushed over 16 percent.
Cameron Hanover’s Buetel estimates that 40 percent of the run-up in crude prices by year’s end can be laid at the feet of Wall Street.
The crude reality for consumers is that this is the same Wall Street crowd chasing profits, which took crude prices to $147 a barrel in July of 2008, only to crater to $33 a barrel by December of that year as the fast money moved elsewhere.
It’s a big part — oil at $147 a barrel — of what exacerbated the recession in 2008.
“In a fragile economic recovery, $25 billion that does not buy movie tickets, pay restaurant bills or make a retail purchase could mean a longer time for economic recovery,” said Buetel.
Disappointing holiday retail sales bear this out.
Just this week Discover Card officials said that 47 percent of consumers spent less on gifts this holiday season because of higher gasoline prices and the sales figures from retailers showed declines across the board.
So where were the sales? Investors will likely get the answer when the oil companies report their earnings later this month.
Schork said that $90 a barrel translates into $3.15 a gallon and $95 a barrel to $3.30 gallon.
“At $95, we begin to see demand destruction,” said Schork, which means consumers cut back on gas purchases.
That has little effect on Wall Street banks and hedge funds that are bidding up the price to get a better return for their investors.
At the end of last year, Wall Street money mangers controlled 200 million barrels of oil in futures contracts. That level is five times the amount of oil Nymex controls in its Cushing, Okla., crude oil storage facility.
The Commodities Futures Trading Commission, under the FinReg rules passed last year. is charged with reining in Wall Street speculators by this month. But the panel will not have any subtenant rules until late spring at best.