Blame High Oil Prices On Speculators And Bernanke

It's no secret that speculators are driving up fuel prices. The surprise? It's the Fed's fault, writes Ed Wallace

Watching traffic around Dallas and Fort Worth, you'd never know the U.S. was experiencing any kind of gasoline crisis. Many drivers on the freeways apparently think Texas has already approved the proposed 85 mph speed limit.

Most don't realize that driving a vehicle that's rated at 30 mpg on the road at 85 miles an hour will cut its fuel efficiency by around 35 percent. That makes the gas they are currently paying $3.79 for cost $5.11 in reality. It's reasonable to assume, too, that if we really cared about the cost of gas, we would do everything we could to mitigate that cost. We don't. We complain about prices but seem unwilling to do anything about them.

Americans think they know whom to blame for high gas prices. The usual culprits are people who drive too fast, inefficient engines, OPEC, and even China. Sure, those are all factors, but that's like blaming the housing bubble on the lumber industry or a surfeit of carpenters. It's no great mystery who is responsible for higher gas prices. As I and others have written in the past, the biggest culprits are the speculators gaming the futures markets to line their own pockets. We know all that. What might come as a shock is that they are being enabled by the Federal Reserve.

This explains why the market for oil and gasoline is currently costing consumers and industry far more than necessary. Until recently it was impossible to tell whether the speculators were accurate in telling the media that high worldwide demand for oil has caused prices to skyrocket once again, pushing gasoline prices $1 a gallon above where they were at this time last year.

It's true that rail traffic is up in the U.S.—a sure sign of a strengthening economy—and it's equally true that cargo shipments worldwide are back to pre-Great Recession volumes. However, MasterCard (MA) and some oil analysts are saying that domestic gasoline consumption has dropped anywhere from 3 percent to 3.7 percent over the past five weeks; for a country that at times burns 400 million gallons of gasoline a day, that's no small drop. In futures trading, such a decline in demand should effect a comparable cost reduction in what buyers are willing to pay for fuel for resale. That's not happening.

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