Why Congress can't cut gas to $2 a gallon
Posted
Jun 24 2008, 12:50 PM
by
Bradley Meacham
This post was written by MSN Money columnist Tim Middleton.
Something in the water in Washington turns people into gas bags, evidently, because the idea that financial speculation has doubled the price of gasoline is ludicrous.
Yet four Wall Street analysts told a congressional committee yesterday that if Congress reined in the oil-futures market, gasoline prices would fall almost immediately to $2 a gallon.
Charles Ober, manager of T. Rowe Price New Era, said he was struck by the "incredible lack of knowledge" on display at the hearings.
When futures contracts expire and physical delivery of the product has to be taken, prices would collapse if they were being manipulated, he said. "The fact of the matter is, we don't see a big drop on that last day." He also noted that commodities not traded in futures markets, including iron ore and potash, are priced at record levels these days due entirely to demand.
"In fact, net long positions by speculators on the New York Mercantile Exchange have come down sharply, yet the price of crude is going up," Ober notes.
The testimony "sounds like an analysis somebody would give to grab headlines," says Chris Armbruster, oil analyst for the Al Frank Fund. "There's clearly a very narrow amount of (oil) production in excess of demand."
Standard & Poor's estimates that sweet crude, the type that commands the highest price, "will remain above $120 per barrel at least through the first quarter of 2009, based on fundamental supply and demand," says Tina Vital, an oil analyst.
In their testimony, the four analysts asserted that oil would fall to $60 a barrel within 30 days if Congress forbade speculation. To do so, however, lawmakers would have to ban investors -- including you and me, as well as pensions and endowments -- from participating in the market. California unions have already howled that their retirees shouldn't be punished to further Washington's political ambitions.
Oil analysts note that global oil supplies are constrained entirely by political rather than physical considerations. Mexico and Venezuela have self-inflicted the wounds to their output. Iran has been sitting for more than a month with 12 tankers full of low-grade crude because buyers won't meet its price. The United States forbids new production on its oil-rich continental shelf and in part of Alaska, and some politicians are calling for punitive taxes on windfall oil profits.
The oil industry has not "committed full-bore to producing as much as they can, partially because they are being disincentivized by the threat of windfall taxes," Armbruster notes.
Related reading:
Korea's intense hunt for oil fuels price hikes
Don't waste energy, take oil profits now
The market rally depends on oil
