$5 Gas In 2012?

By Justin Gardner | Related entries in Energy, Gas, Oil

That’s what one former oil exec is saying and based on the increased demand we’re seeing in China…this doesn’t seem unlikely.

From CNN Money:

NEW YORK (CNNMoney.com) — The former president of Shell Oil, John Hofmeister, says Americans could be paying $5 for a gallon of gasoline by 2012.

In an interview with Platt’s Energy Week television, Hofmeister predicted gasoline prices will spike as the global demand for oil increases.

“I’m predicting actually the worst outcome over the next two years which takes us to 2012 with higher gasoline prices,” he said.

Some analysts don’t agree with that timeframe…but the price?

Tom Kloza, chief oil analyst with Oil Price Information Service says Americans will see gasoline prices hit the $5 a gallon mark in the next decade, but not by 2012.

“That wolf is out there and it’s going to be at the door…I agree with him that we’ll see those numbers at some point this decade but not yet.” Kloza said.

So why did gas get so high in 2008? Speculators were artificially driving up demand. That’s why you saw prices plummet so rapidly. Yes, there was an economic downturn, but that should have pushed prices down before the spike. You simply can’t account for a $2.50 price drop in gas prices like that.

Here’s more analysis from 2008…

In June 2006, oil traded in futures markets at some $60 a barrel and the Senate investigation estimated that some $25 of that was due to pure financial speculation. One analyst estimated in August 2005 that US oil inventory levels suggested WTI crude prices should be around $25 a barrel, and not $60.

That would mean today that at least $50 to $60 or more of today’s $115 a barrel price is due to pure hedge fund and financial institution speculation. However, given the unchanged equilibrium in global oil supply and demand over recent months amid the explosive rise in oil futures prices traded on Nymex and ICE exchanges in New York and London it is more likely that as much as 60% of the today oil price is pure speculation. No one knows officially except the tiny handful of energy trading banks in New York and London and they certainly aren’t talking.

I can verify that 60%, but there’s obviously a huge amount of speculation going on the market. We’ve been taught that this is a good thing, but isn’t this what fuels this Boom/Bust economic spincycle we seem to constantly find ourselves in? Find the hot new thing to invest in, exploit the market to its fullest extent, let greed drive prices up, up, up and then CRASH!…time for another recession! Why can’t we have worthwhile regulations in these markets so people can create wealth, but stable, long term wealth?


This entry was posted on Tuesday, December 28th, 2010 and is filed under Energy, Gas, Oil. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

35 Responses to “$5 Gas In 2012?”

  1. Tweets that mention DONKLEPHANT: $5 Gas In 2012? -- Topsy.com Says:

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  2. Chris Says:

    Would regulations such as those be good for the plutocracy?

    There’s your answer.

  3. Trescml Says:

    I expect 4 buck a gallon in 2011. 5 buck a gallon if we have a bad hurricane. But honestly it is hard to predict well given the speculative nature of oil trading. You can make an argument that anything people can’t live without (water, electricity, etc.) should be regulated, but I don’t think that in the current political climate increased regulation is going to fly. The basic problem is that many people will pay for gas almost whatever the price so they can drive to work (or carpool if it gets bad enough).

  4. kranky kritter Says:

    Gas prices go up and down. After living through these sorts of fluctuations for a couple decades, most adults just get used to it, and stop whining based on some speculative right for gas to continue to cost the same.

    Just like everyone else, I’d prefer energy to be as cheap as possible. But if there’s one thing the world teaches, it’s that you don’t get what you’d prefer, you get what you get. And conspiracy has precious little to do with it.

    Every time gas prices go through a period where they rise quickly, I see the same sorts of drain clrclers club rants and evil conspiracy stories. Whatever folks. Not my first rodeo. Believe what you want.

  5. gerryf Says:

    There is a difference between prices fluctuating and people gaming the system and causing the economy to crumble just so the rich can get richer

    Repeal the Commodity Futures Modernization Act and we real fluctuations….Wall Street will never allow its dogs to do it, though

  6. kranky kritter Says:

    ….people gaming the system and causing the economy to crumble just so the rich can get richer….

    Quote-bot, why you go, girl!

  7. gerryf Says:

    name calling and lack of substance…typical

  8. Thomas Says:

    Sounds like a good reason to get ourselves off of fossil fuels.

  9. kranky kritter Says:

    Right…my point exactly.

  10. mw Says:

    Let’s see… We have a treasury secretary and federal reserve chairman that are working in concert to create inflation and devalue the currency by borrowing and printing money at a pace never before seen in history outside of Zimbabwe and/or the Weimar Republic. At the same time the ability to drill for oil in the gulf and other locations around the globe are being severely restricted, while energy demand is increasing in growing Asian economies and even some recovering Western economies.

    So when we see increasing demand for the increasingly dear oil being paid for by increasingly worthless dollars, the only logical explanation for oil going up when priced in dollar terms is:

    Evil speculators and/or a conspiracy of plutocrats.

    [HEAD SLAP] Of course!

  11. Jim S Says:

    No matter what MW writes he only betrays his ignorance. Drill all you want in places that are very difficult to work in and extract oil from and you won’t keep up with the increase in demand even as the expenses involved in exploration and drilling go up. He also obviously understands nothing of history. Maybe he’s been studying at Beck U.

  12. Tillyosu Says:

    So why did gas get so high in 2008? Speculators were artificially driving up demand.

    Justin, perhaps before making this statement of “fact” you could have checked out this report which concluded:

    This study examined whether there is any statistically significant evidence that the trading activity of commercial and non-commercial traders and their sub-categories—commercial producers, commercial manufacturers, commercial dealers, swap dealers, hedge funds, and floor brokers and traders—had a systematic influence on the price of crude oil.

    To date, there is no statistically significant evidence that the position changes of any category or subcategory of traders systematically affect prices. This is to be expected in well-functioning markets. On the contrary, there is evidence that non-commercial entities alter their position following price changes. This is also expected because new prices convey information affecting the prospects and the risks of those entities. This being an interim report, the Task Force intends to examine these findings further as it continues its work. However, to this point of the examination, the evidence supports the position that changes in fundamental factors provide the best explanation for the recent crude oil price increases. Observed increases in the speculative activity and the number of traders in the crude oil futures market do not appear to have systematically affected prices.

    Moreover, if speculative activity has pushed oil prices above the levels consistent with physical supply and demand, increases in inventories should emerge as higher prices reduce consumption and investment in productive capacity is encouraged. Although this process may take time to unfold, inventories of crude oil and petroleum products, according to available data, have declined significantly over the past year. The view that financial investors have pushed prices above fundamental values is also difficult to square with the fact that prices for other commodities that do not trade on established futures markets (such as coal, steel, and onions) have risen sharply as well.

    Just sayin…

  13. Jim S Says:

    OTOH, also from the CFTC, and not an interim report…

    http://www.cftc.gov/PressRoom/PressReleases/pr5521-08.html

    http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/enfoptiverchart.pdf

    Then there’s this from Fox News.

    A Senate report from 2006.

    Marketwatch

  14. Tillyosu Says:

    OTOH, also from the CFTC, and not an interim report…

    Indeed not even that. A press release and a chart, neither of which offer a comprehensive analysis of energy prices overall. And how is a Senate report from 2006 relevant to energy prices in 2008?

  15. Jim S Says:

    Oh, heavens, yes, we know that Wall Street commodities traders just changed their behaviors on a dime between 2006 and 2008. Are all conservatives this thick?

  16. mw Says:

    MW … 0nly betrays his ignorance… He also obviously understands nothing of history… he’s been studying at Beck U. – Jim S

    Heh. Just what I want to see first thing in the new year. Perhaps we can make this a teachable moment. If you have ever wondered about the term “knee-jerk liberal“, Jim’s spittle flecked / broken keyboard ad hominem screed is instructive. “Knee-jerk” implies a reflex reaction – without conscious thought. So in the example above, Jim apparently only sees the word “drill” in my comment and it immediately precipitates a Pavlovian reflex response, attacking the value of extreme drilling for oil, which has absolutely nothing to do with my comment. This kind of reflex apparently bypasses higher brain functions like reading comprehension.

    I am not advocating deep water drilling in that comment, nor do I hold any particular opinion about whether it makes sense. All I was saying is that making the production of oil more restrictive or expensive and putting additional limits on supply while demand is increasing, is an easy to understand reason for oil prices to go up. In fact all of Jim’s points about how difficult and expensive it is find and drill for oil, and that oil is not keeping up with demand – only supports the point I was making in the post – to whit- it is completely unnecessary to delve into the world view of “ideological fruitcakes” by invoking deep dark conspiracies of plutocrats and make bogeymen out traders who (unlike Jim) understand the basic concepts of supply and demand.

    In any case, this whole complaint about higher oil prices is very odd and irrational for those on the left who are hell-bent on getting us off of oil as soon as possible. They should be welcoming higher prices on oil, as dramatically higher prices on oil is the one and only thing that could lead to such a shift from oil to other less damaging fuels.

    Just to close the loop on what I actually do believe about extreme drilling for oil – so as not to leave Jim’s reflexive cartoon characterization stand – I have a somewhat more nuanced view. My take is that companies who are willing to take the risk of deep water drilling should reap the rewards, but should not be subsidized by the government and should also bear the full cost of liability for any damage they cause. The government should not be providing any kind of guaranteed liability cap, or minimally it should be orders of magnitude higher than the $100M limit that BP enjoyed.

    I have no doubt that if there was no liability cap, and oil companies understood that every well has the potential of putting them out of business, we would not have seen the disaster that occurred in the Gulf last year. Either BP does not drill that well, or they do it in a much more cautious manner. Yes this would have the effect of driving up the cost of oil even more. If you want to see the US become less dependent on oil, much higher prices reflecting the true cost of oil are the way to get there.

  17. Jim S Says:

    Ah, once again MW fails in English comprehension even as he accuses others of it. A post that was an entire four sentences long has now become a screed. Might I suggest that MW needs a dictionary for Xmas next year? My comment about drilling was just to point out that the easy stuff has been found and that regulation of drilling sites is a minor influence compared to the simple difficulty of extracting oil and gas from the new locations that current exploration is focusing on. But the main point of the initial post is about market manipulation, which in MW’s world does not exist, much like anything else that casts aspersions on the saints of his church, the First Church of Free Market. You see, in MW’s world there was no Enron. No Worldcom. There is no corporate corruption, no crooked businessmen, no traders in the financial world who ignore basic risk management as long as it ups their bonuses or any other malfeasance or incompetence. Free Market, his one true god, fixes all problems. Because in spite of his attempt to draw attention away from the original point, what it really comes down to is that he is claiming that there is no such thing outside of some strange conspiracy theory, as market manipulation on the part of commodities traders affecting oil prices. This in spite of the fact that energy traders were proven to have manipulated the price of electricity in California not all that long ago. This in spite of the link I posted to the findings of that Senate committee. In spite of the history of Amaranth Advisors and other known instances of commodity market speculation that just aren’t that hard to track down.

    And he even claims to have nuanced views in this area even as he fails to understand that not all mechanisms that can produce higher prices are equal. Increased costs due to actual supply and demand or a taxation system are one thing and don’t produce the kinds of fluctuations that have been observed in the oil and natural gas markets. Undue influence on the prices of commodities due to manipulation are a very different thing than other market or social forces. But understanding that would require something more nuanced than “Free market good, goverenment bad.” and is quite beyond the ability of MW to comprehend.

  18. kranky kritter Says:

    Look. MW, and Tilyosu. Everyone knows that whenever gas prices rise quickly, it’s always the fault of an insider conspiracy of evil market speculators.

    We don’t need data or analysis to show this. It’s right there in chapter 3 of the litany. Right after the part that counsels against any understanding of research methods, statistical significance, or probability distributions.

    The only part that escapes is this: there all these smart liberal folks who are sure the market is being driven in one direction by speculators. How come never seem to join in and make a killing themselves? Oh right, I forgot. They’re more scrupulous than the rest of us poor slobs. My bad.

  19. Jim S Says:

    No one claims anything as simplistic as manipulation being the only cause for price increases. But the other side in this debate does make the simplistic claim that there is no such thing as speculators driving prices in the way they want when presented with the opportunity. Sorry, kk, the simplistic arguments are being made by you and yours.

    And this
    “The only part that escapes is this: there all these smart liberal folks who are sure the market is being driven in one direction by speculators. How come never seem to join in and make a killing themselves? Oh right, I forgot. They’re more scrupulous than the rest of us poor slobs. My bad.”

    is the dumbest bit of writing that I’ve read today. Seriously stupid building of a strawman. Market manipulation is neither simple, a fiction of conspiracy theorists or always in one direction. It isn’t something that is happening every minute of every day. It also is not a grand conspiracy because it doesn’t need to be given the right circumstances and leverage. But that would take serious thought instead of attacking the evil liberals, wouldn’t it? See, none of what you wrote is claimed by anyone here. You just say it is so that you can put on a smug air of superiority while putting forth your economic theories that apparently come from Beck U.

  20. Tully Says:

    Everyone knows that whenever gas prices rise quickly, it’s always the fault of an insider conspiracy of evil market speculators. We don’t need data or analysis to show this. It’s right there in chapter 3 of the litany. Right after the part that counsels against any understanding of research methods, statistical significance, or probability distributions.

    KK, FTW.

  21. Tillyosu Says:

    No one claims anything as simplistic as manipulation being the only cause for price increases.

    Actually Jim, someone did:

    So why did gas get so high in 2008? Speculators were artificially driving up demand. That’s why you saw prices plummet so rapidly.

    -Justin Gardner

    And are you illiterate, or did you not catch this part of the report:

    To date, there is no statistically significant evidence that the position changes of any category or subcategory of traders systematically affect prices.

    So you guys are crowing on about something for which there is “no statistically significant evidence.”

  22. Jim S Says:

    I, on the other hand, am not referring to just 2008. It’s only by focusing solely on that time frame and referring to a preliminary report (The final version of which I can’t find.) that you can claim that there is no such thing as commodities market manipulation. And you accuse me of illiteracy while you ignore the following that Justin was referring to.

    “In June 2006, oil traded in futures markets at some $60 a barrel and the Senate investigation estimated that some $25 of that was due to pure financial speculation. One analyst estimated in August 2005 that US oil inventory levels suggested WTI crude prices should be around $25 a barrel, and not $60.

  23. Intercambio Cultural Says:

    I hope not, if it happens I will travel less this year and the traveling is a mode of live and education for me. I wonder when the electric car will finaly come out

  24. kranky kritter Says:

    But the other side in this debate does make the simplistic claim that there is no such thing as speculators driving prices in the way they want when presented with the opportunity.

    Good one, Jim!

    “In June 2006, oil traded in futures markets at some $60 a barrel and the Senate investigation estimated that some $25 of that was due to pure financial speculation.

    Jim, you believe this to be the objective truth. So, I’d like you to please explain to us how the Senate reached this conclusion. How did they (or more likely, their hired guns who can, you know, actually do math) evaluate reams of trading data to determine this?

    Do you fully understand the method, and are you confident that there is a sound mathematical basis for being able to make the kind of judgement that is being described?

    Because I don’t. I think they are based on mathematical presumptions about average behavior. And that’s not good enough for me.

  25. Tully Says:

    I didn’t see where anyone claimed there was no such thing as commodity market speculation. Given that commodity options and futures markets are BY DEFINITION “speculation,” that’s a very tall straw man to climb indeed. What I do see are people sneering at the idea that all or most of the price rise is due to pure-profit speculation by some cabal of greedheads just ripping off the markets.

    So, I’d like you to please explain to us how the Senate reached this conclusion.

    Don’t hold your breath on that one, KK. The 2006 Levin-Coleman Senate report does not make that finding. It simply cites some external sources as having made that claim, without any derivation supplied, and in company of other claims cited which say “no effect.” Worth noting is that in the report itself the claim cited was not that that $25 portion was due to sheer speculation, but to the sum total of ALL factors outside “normal” supply and demand, a long list which includes many things. The report itself pointedly does NOT make that “$25″ claim OR a no-effect claim. That claim comes from Justin’s linked 2008 “analysis” — which in turn comes from a hyperbolizing conspiracy-theorist LaRoucher who dishonestly and deceptively claims it was a finding of the Senate report.

    To say that claim was a “Senate finding” is like saying the Warren Commission “found” there was a second gunman on the Grassy Knoll and a third at the Dal-Tex building, just because they mention these claims in a few footnotes. One can find the actual findings of the Levin-Coleman committee in their report under the Sooper Sekrit title heading of “FINDINGS.”

    With current records and the benefit of hindsight, what it boils down to is that uncovered oil futures trading (contracts not offset with other contracts, much or most of which was certainly legitimate risk-hedging by oil consumers, and some fraction of which would have been downside sales rather than upside buys) were about $60-80 billion in 2006, that this had an effect on prices, and no one knows exactly how much that effect was. To place that $60-80B figure in context, in 2006 the overall world oil market was about $2.2 trillion. You can draw your own conclusions about the price effect on the cash market of an implied 3% demand push in the futures market.

    BTW, the CFTC has had emergency market powers since it was formed in 1976. The “worthwhile regulation” Justin dreams of is already in U.S. law. It just isn’t being used as he would wish it to be. The “Enron Loophole” mentioned in the Levin-Coleman report that somewhat exempted the energy markets from CFTC’s powers was signed into law by Bill Clinton in 2000, but was eliminated in 2008 in large part thanks to the Levin-Coleman recommendations.

    Also to note, claiming that gas got so high in 2008 due to speculators driving up demand is a technically legitimate claim as long as ANY portion of the price was due to speculation, even if that amount was only 1/100th of a percent. But it’s not exactly rant-worthy unless the portion of the increase due to out-and-out profit-seeking speculation is a bit more substantial than that.

  26. Jim S Says:

    In this article from McClatchy on oil market speculation it’s pointed out that:

    A difficulty in proving excessive speculation is the fact that two-thirds of oil trading happens in unregulated or “dark” markets called over-the-counter exchanges, which now are getting congressional scrutiny and probably face reporting requirements.

    On these “dark” exchanges, Wall Street firms enter into private bets, called swaps, with another party on what will happen to the price of oil. These Wall Street banks are called swap dealers.

    Swap dealers face market concentration limits on their bets on contracts in regulated markets, but they’ve been free from position limits when they’re hedging against their “dark” market bets on the regulated New York Mercantile Exchange.

    Remind you of anything? Like the kinds of markets that produced our most recent financial collapse?

  27. Jim S Says:

    THen of course there’s simple game playing that has little to do with the classic purposes of markets.

  28. Jim S Says:

    Just for another point of information.

    http://www.cbsnews.com/video/watch/?id=4713382n&tag=api

  29. Jim S Says:

    Normal energy market procedures.

  30. kranky kritter Says:

    Actually, no. Those “dark swaps” don’t remind me of the stuff that caused the financial crisis at all. That crisis doesn’t seem to have been caused by stuff done in secret, Instead it was stuff done in plain sight, with everyone going along for the ride, slapping each other on the back.

    Banks made the crappy loans.
    Government, if anything, seemed on board.
    Clever biz whizzes offloaded the risk downstream while everyone else seemed unconcerned.
    The entities that were supposed to judge relative risk worthiness didn’t do their jobs.

    All terrible unfortunate parts of the tale, But it doesn’t seem to be a teaching tale for how transparency could have saved everyone. Not unless you’re Captain Hindsight.

  31. kranky kritter Says:

    Here’s another thing I don’t get about the complaints about “dark” bets…

    …we’ve been discussing the idea that speculators manipulated the markets to swing prices to their benefit within the market.

    If two entities make private bets, that’s not part of the market, which is public. So those actions don’t sway market prices. The more secret the bets are, the truer that must be.

    Maybe you can make a cogent argument that big powerful financial entities ought not to do this, but it’s an unrelated argument. Private bets don’t move the market. Market activity moves it.

  32. Tully Says:

    Ah, conspiracy theorists. No matter how much of their BS “evidence” you debunk, they always have more BS “evidence” to trot out that also doesn’t mean a damn thing in reality but has THEM convinced of The Great Conspiracy. Take Jim’s link there about Optiver trading. What was the net result of Optiver’s high-speed computer arbitraging of fraction-of-a-cent moves in contract strike prices? Well, they made some money. How much? (Cue Dr. Evil … ) ONE MILLION DOLLARS!!!! Yeah. THEY were real price movers in a $2.2 trillion oil market. Sheesh.

    In any case, Jim obviously believes in The Great Oil Market Conspiracy, so any bottle of port in a storm will do for him, even though it doesn’t really mean much. It’s impossible to show that uncovered speculation didn’t affect prices (it almost certainly did, as ANY and ALL trades affect prices to some degree) but it’s relatively simple to show that the overall price effect of uncovered “speculatory” buying was (and I am being VERY generous here in my assumptions) at the very very most perhaps 20% of the difference between theoretical equilibrium inventory/demand price and the market price during the bubble, leaving at least 80% due to other factors — like the hurricane wipeouts of Gulf Production, political unrest in oil-producing states, etc..

    Not 20% of the total price, mind you, but of the diff between theoretical equilibrium and actual bubble price. In all likelihood it was perhaps half that 20% or less, with an educated guesstimate of over 3% but less than 10%. And of that uncovered contract trading of $60-80B, odds are strong that most of it was not profit-seeking speculation at all but risk insurance by oil consumers, call options purchased to cover the costs of required future consumption.

    Private bets don’t move the market. Market activity moves it.

    Bingo. BTW, the ICE/OTC markets were brought into the CFTC loop back in 2009, so the bulk of the Levin/Coleman recommendations were in force long before this most recent rise that cued Justin’s post. Major market speculation showing up NOW would be pretty obvious to the CFTC in real time. They’re not acting. What does that tell us?

  33. Jim S Says:

    kk, a large amount of the financial crisis was not in the public eye.

    http://www.city-journal.org/2010/eon0114ng.html

    http://www.newsweek.com/2008/09/26/the-monster-that-ate-wall-street.html

  34. kranky kritter Says:

    Jim, what’s your point? I see a non sequitur followed by 2 links.

    Yes, credit default swaps were one big sad part of the story. And… ?

    Derivatives? Yup, bad too. After all, they derived from all the other stupid stuff that went on. Captain hindsight now says they ought to have been better regulated. I agree. Thank-you, captain hindsight, for helping us to see how we might have prevented catastrophe if only we had foresight.

    Can you at least explain what argument you’re trying to win here, or what point you imagine you are rebutting in this thread? You’ve lost me.

  35. Treadmill Traci Says:

    It really stinks that we are facing a repeat of 2008 gas prices! As a college student that really took an immediat toll on my pocket book! :(

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