US Revives $4 Gasoline Blame Game

With retail gasoline prices already above $4 per gallon in some parts of the US, policymakers in Washington have fallen into a familiar pattern of scrambling for ways to ease the pain at the pump. While fundamentals and geopolitics are clearly the underlying reasons for the run-up in oil prices, the White House subscribes to the view that excessive speculation is exacerbating the situation. The latest weekly update from the US Energy Information Administration showed retail gasoline prices averaging $3.879 per gallon nationally, with prices on the West Coast at $4.098/gal and in California at $4.217/gal. Gasoline prices are also hovering around $4/gal in major cities like Chicago and Washington. The problem for President Barack Obama is that in the past only genuine supply disruptions, rather than price spikes, have provided enough impetus to get bipartisan agreement on energy legislation. His administration does at least have one tool at its disposal to deal with oil market speculation -- the Wall Street reform law enacted last year -- although quite how effective a tool that will be is as yet unclear. The Commodity Futures Trading Commission is working to finalize enforcement plans for position limits and derivatives-clearing requirements, but funding constraints and divisions among the agency's five commissioners are hampering progress (PIW Apr.25,p1). Moreover, despite the Wall Street law having passed a year ago, volumes and open interest on Nymex futures and options contracts have soared, refuting claims that new regulations would spook investors and discourage trading (PIW Jul.5,p1). Obama is also looking for any evidence that market fraud, manipulation or price gouging have contributed to the strength in oil prices, and has asked US Attorney General Eric Holder to investigate such possibilities. A similar study several years ago produced no results, but some observers think the mere fact of a new investigation will act as a calming signal to the market, albeit a fairly minor one. A Federal Trade Commission probe launched in 2006 cleared oil traders of illegal market manipulation in the days following Hurricane Katrina and Hurricane Rita in 2005, concluding that 15 instances where gasoline prices rose were simply a reflection of regional and local market trends. “I don’t think fraud and manipulation are driving the energy price increase that is of concern here,” says Tyson Slocum, energy coordinator for Public Citizen, a lobby group calling for tough financial reforms. "Ultimately, the issue is not illegal market activity, but legal speculation in these markets.” High oil prices mean high oil company profits, and Big Oil is once again firmly in Obama’s crosshairs. Over the past week, the president has said repeatedly that oil companies do not need an existing suite of eight tax deductions worth $30 billion-$40 billion to the industry over the next 10 years. Repealing these so-called loopholes would not require the passage of an energy bill, since it could be folded into the federal budget, and House Republican Leader John Boehner last week signaled his party's willingness to consider scrapping the deductions as part of the broader give-and-take on spending. The oil industry tax deductions at the heart of the debate include write-offs for exploration and production expenses, preferential tax rules that specifically benefit the industry and a more general deduction available to all domestic manufacturing industries.