Up Up and away gas prices keep rising what the HEY!
Gas prices are rising faster than a hot air balloon during Balloons on the Bays and Pioneer Days! As I sit and put my thoughts and information into this column the price of gas has increased yet again. Triple-A of Michigan says gas prices in the state have hit another record high, increasing for the fifth week in a row. According to a Triple-A survey of 2800 stations across Michigan, the average price of gasoline is $3.64 per gallon, up twelve cents from last week. That’s 68 cents higher than this time last year and surpasses the previous record of $3.52 set just last week.
I have the luck of having a board president who keeps up with current events and two fellow directors at the Commerce Center who are on top of things and in some circumstances actually see some issues coming down the pipe before they hit the nightly news. I credit conversations with all of them and in particular a conference call with Vickie Micheau and Ann Jousma Miller with Representative Bart Stupak’s office about gas prices, and what if anything we can do before it gets even worse as the inspiration for writing this article.
Representative Stupak’s office was kind enough to email me some articles and facts about gas prices and as I read them, two things jumped out.
The Enron Loop Hole
Yes this is exists. Even before I read on to find out what the loop hole was, the name alone told me, oh this can’t be good. From the Toronto Globe and Mail newspaper “Six years after the overly aggressive Enron Corp. collapsed amid recriminations about manipulation of the market, traders are still taking advantage of the "Enron loophole," a rule that allows over-the-counter traders in energy markets to avoid most regulatory scrutiny. In addition to the Enron loophole, a foreign markets loophole allows the Atlanta-based InterContinental Exchange to settle trades of U.S.-based future contracts in London and to be regulated by more laissez-faire British authorities.”
Okay, your either saying, they’re trading oil and are not regulated I am outraged! Or the government regulates too many things it’s no big deal. Closing the loop holes will save us money. Michael Greenberger, a professor and director of the University of Maryland Center for Health and Homeland Security told members of the House Energy and Commerce Oversight Committee, “If the InterContinental Exchange was subject to the same regulations as U.S. Commodities markets the price of oil would decrease $20.00 a barrel”
The Oil Speculator Premium
Instead of paraphrasing, I am going to insert a few paragraphs from Paul Roberts and the Los Angeles times about effects of speculation on the price of oil written in December.
Historically, says Fadel Gheit, a veteran oil analyst at Oppenheimer & Co. in New York, oil prices have run about three times what it costs to physically extract a barrel from the ground. Given that these extraction costs run between $15 to $19 a barrel worldwide, the "correct" price should be somewhere between $45 to $57. Indeed, as recently as 2005, OPEC itself claimed that $45 was a reasonable price. If that's true, we're paying a speculative premium of up to $45 for each barrel, or about $1 for each gallon of gasoline.
Oil is, in other words, an inherently volatile commodity, and thus highly attractive to traders, who profit by betting on the daily and even hourly fluctuations in price. And while there's nothing criminal about betting on price, it is a problem when the bets themselves influence the price. If enough traders gamble that oil prices will rise over, say, the next 30 days, then the price of 30-day oil futures contracts will rise, which will eventually pull up the current, or spot, price of oil -- the classic self-fulfilling prophecy. And because traders are always looking for anything that might warrant a price increase (and thus, the placing of a bet), the smallest events -- unrest in Nigeria, for example, or even upbeat economic news (which implies greater oil demand), become potential catalysts for a price rise.
Representative Stupak is quoted in an article in the Toronto Globe and Mail saying. “Within the last five years, the hedge managers have moved into the energy field, and they're driving up the price of energy futures.”
I think it is important to point out that hedge fund managers don't have to answer to stock-holders or even report on their business activities to the Federal Securities and Exchange Commission.
The Enron loop hole, the oil speculator premium, and hedge fund managers are not the only factors driving oil prices today. They are however large contributors that the government can act on, Representative Stupak has introduced legislation that would close the loop hole and increase oversight on the trading on oil the complete bills can be found at his website http://www.house.gov/stupak/.
I may be coming off as someone that believes regulation and oversight is the answer to the current gas crisis that we are experiencing, that is not case. I am someone who is concerned that high gas prices, high food prices, weak consumer confidence, and challenging economic conditions in the State and across the country will have a severely negative impact on Tourism and our economy and believe that you have to do everything you can to help your membership and your county and regulation coupled with over sight can only help in this situation.
References:
http://www.latimes.com/news/opinion/la-oe-roberts10dec10,0,7648253.story
http://seattlepi.nwsource.com/business/348107_roguetraders21.html
Steve Masters
Bays de Noc Convention and Visitors Bureau
http://travelbaysdenoc.com
230 Ludington Street
Escanaba, MI 49829
906-789-7862
Travel Bays de Noc is the Convention and Visitors Bureau providing information on everything to see in Michigan's Upper Peninsula.
