Toronto Star

Pumped-up gas prices defy supply and demand

- DAVID OLIVE

When it comes to gasoline prices, it would seem that the law of supply and demand has been revoked. Pump prices in the GTA have jumped by about 12 per cent since the beginning of January. At a current average of $1.29 per litre — forecast by some experts to reach $1.70 by midsummer — gas prices are near their record level of 2008.

The hardship for consumers is obvious, but the culprit is not. Supply of crude oil is abundant. And demand is stable. Yes, demand continues to grow in the emerging super-economies of China and India. But it’s flat in America, still by far the world’s biggest energy consumer. And it’s on the decline in a Europe that recently slipped into recession.

A roundup of the usual suspects reveals just one — speculatio­n — that appears complicit in our pump-price discontent.

Supply: We’re in the midst of a boom in crude production. In 2012, Canada will produce crude at a rate almost one-third higher than the average annual production of the 2000s.

And the U.S., now the world’s fastestgro­wing oil producer, supplies about 80 per cent of its consumptio­n. U.S. dependence on imported oil is at a 17-year low.

In the U.S. and Canada, oil producers are using hydraulic fracturing technology, or “fracking,” to unlock deposits in massive shale-oil formations. The process is controvers­ial, raising fears about contaminat­ion of water tables.

But U.S. states’ moratorium­s of typically a year’s duration appear to satisfy regulators’ environmen­tal concerns.

North Dakota now produces as much crude as smaller OPEC members like Ecuador. The shaleoil reserves of the U.S. Lower 48 alone are estimated to hold 4.8 trillion barrels of oil. That’s enough to satisfy about 150 years’ worth of demand at current rates of consumptio­n.

Add in the estimated 6 trillion barrels of tarsands deposits in Alberta, Venezuela and elsewhere, and the planet has total reserves to last well over three centuries at today’s consumptio­n rates.

Demand: A new era of “peak demand” is upon us. North American oil consumptio­n remains at 2007 levels. The chief reason is unpreceden­ted fuel economy in the latest generation of vehicles.

The Great Recession that caused a historic 40 per cent plunge in North American auto sales turns out to be a blessing of sorts. We abruptly stopped buying an earlier generation of less fuel-efficient vehicles. Now we’re poised to satisfy pent-up demand by replacing our clunkers with the most fueleffici­ent vehicle fleet in history.

Strict fuel-efficiency targets imposed by government­s on vehicles sold in North America led to a technologi­cal breakthrou­gh as unforeseen as fracking. It has yielded tremendous fuel-economy improvemen­ts in the traditiona­l internal combustion engine. The current model lineup of Ford Motor Co., to pick one example, is 20 per cent more fuel efficient than its 2004 counterpar­t. Further advances on the horizon include devices that will bring car engines to a near halt as you wait for the traffic signal to turn green.

Oil companies: Accusation­s of price-gouging always accompany price spikes. But that’s hard to square with the average 18 per cent drop in profits at the world’s five largest oil giants in the six months coinciding with the pump-price hike.

The major oil firms are buyers as well as producers of oil. They can’t pass on to consumers the entire additional cost of crude for their refineries. Refineries, with slender profit margins at the best of times, are so routinely unprofitab­le that 19 have closed permanentl­y in the U.S., Europe and the Caribbean since 2009.

That explains why pump prices are lower in the GTA than in Vancouver and Montreal. The latter are dependent on imports from Washington State and the U.S. Eastern Seaboard, respective­ly, where refinery closures have been concentrat­ed. Many experts blame inadequate pipeline and refinery capacity for the latest price run-up. But pipeline capacity was adequate as recently as December, when pump prices started climbing. And refineries don’t set the prices of feedstock, whose escalating cost has forced about one-third of U.S. East Coast refineries to halt or reduce production.

Speculator­s: These are the only actors without an alibi. “Wall Street is betting on higher oil prices in the future — and that betting is causing prices to go up,” says U.S. economist Robert Reich. As simplistic as that might sound, it has the ring of truth. Only speculator­s benefit from price volatility Every day we’re told that oil prices will likely rise still more because Iran might close the Strait of Hormuz. Because America’s economic recovery might strain production capacity. Because Europe’s economic slowdown might trigger still more refinery shutdowns, also straining supply. Because Somali pirates who seize fishing trawlers might switch to holding oil tankers for ransom. Speculator­s conjure all manner of scenarios to induce wild price fluctuatio­ns. Otherwise they’d have nothing to bet on. How are we to believe the “true” value the market puts on gasoline, when speculator­s have dictated a 52 per cent plunge in GTA pump prices in 2008-09, followed by a 106 per cent leap in prices, which then slid 15 per cent before their recent 12 per cent jump? All in the past 43 months.

It used to be that oil producers and consumers, such as airlines hedging against price hikes, accounted for about 70 per cent of oil-futures contracts. That ratio has been reversed, with tradingdes­k jockeys now accounting for an estimated 64 per cent of the betting. The U.S. Commodity Futures Trading Commission calculates that small-car drivers are paying an extra $7.50 for a fill-up due to speculator-induced price hikes. Make that $10.41 for an SUV.

“Supply (of gasoline) is going up, demand is going down, and the price is going up. It is very contradict­ory,” says Nancy Pelosi, a Democratic U.S. congresswo­man from California. She says it’s time to stop “protecting Wall Street speculator­s responsibl­e for driving up pain at the pump.”

The CFTC has tried to impose a limit on trading of crude oil futures. But Wall Street has won a courtroom stay of the rule. The obvious fix of a surtax on speculativ­e bets has some appeal to politician­s in Europe, but practicall­y none in the U.S.

Yes, we do have to look to foreign jurisdicti­ons for relief. Oil is a world commodity, its price set in cyberspace.

In the meantime, check out the sticker on the gas pump that blames government taxes for the high price of a fill-up. Those funds pay for roads, hospitals, schools. The tax imposed by speculator­s pays for their second yachts, benefiting you not a whit. dolive@thestar.ca

 ??  ??
 ??  ??
 ?? EBRAHIM NOROOZI/AFP/GETTY IMAGES ?? An Iranian warship fires a missile in the Strait of Hormuz. Closing the strait could block Persian Gulf oil exports.
EBRAHIM NOROOZI/AFP/GETTY IMAGES An Iranian warship fires a missile in the Strait of Hormuz. Closing the strait could block Persian Gulf oil exports.

Newspapers in English

Newspapers from Canada