American Realistan

There has been much discussion of gasoline prices lately, and the American right wing is crowing loudly about how this justifies the maintenance of Bush Administration economic policies:

On the economy, Bush knows he has argument, data, and momentum on his side. Oil and gasoline prices have plunged over the past month, taking away a big Democratic issue. And while investors are abandoning the energy sector, consumers are spending — making the retail stock index one of the hottest plays on Wall Street.

There is only one big problem with these assertions. There isn’t much support coming from the media outside the Beltway. In fact, there is much coming out that refutes these assertions of ‘conservative economic success’.

One of the biggest problems facing those who are claiming such validation is the widespread belief that currently lower gas prices are being manipulated:

According to a new Gallup poll, 42 percent of respondents agreed with the statement that the Bush administration “deliberately manipulated the price of gasoline so that it would decrease before this fall’s elections.”Retired farmer Jim Mohr of Lexington, Ill. said while filling up for $2.17 a gallon, “They think getting the prices down is going to help get some more incumbents re-elected.”

It isn’t just the common man in the street who is suspicious. CNN’s veteran political commentator Jack Cafferty suggested as much on August 30:

“You know, if you were a real cynic, you could also wonder if the oil companies might not be pulling the price of gas down to help the Republicans get re-elected in the midterm elections a couple of months away.”

There is reason to believe that the strategy is working - at least enough for Diebold to work its magical transmogrifying vote tricks.

This doesn’t speak well of the American people in that they can be bought off so easily by the reduction of just a few dollars in gas expenses:

Over the past 52 weeks, retail gasoline prices have averaged $2.62 a gallon, or 12 cents more than the current nationwide average of $2.50, according to Energy Department data. Or as [Peter Schiff, president of Euro Pacific Capital, Inc. of Darien, Conn.] put it: “We’re talking about $60 instead of $70. We’re not talking about $20.”

That seems to be the price for which Americans are willing to trade away their votes, unable to make any changes for two more years - $10 lousy dollars.

Oil industry experts, however, maintain that gas prices should be dropping faster, yet in places like Wyoming, and Utah, and Idaho are experiencing higher than average gas prices despite this drop elsewhere in the nation [except for Naples, Florida!].

For instance:

AAA Idaho reported Tuesday that the price of self-service regular unleaded in Idaho averaged $2.89 a gallon, or 40 cents above the U.S. average of $2.49. U.S. prices have fallen 45 cents a gallon in the last month but are down just 13 cents in Idaho.AAA spokesman Dave Carlson said the lack of pipeline competition means refiners are slow to lower the price they charge Idaho retailers. “They’re willing to drop their prices in other markets because of competition (from other pipelines). But they don’t have competition here,” Carlson said.

One Utah newspaper, the Daily Herald, insists that Gasoline price reforms needed:

Utah drivers deserve reasonable gas prices and they won’t get it unless the state pursues this matter to the fullest. [Gov.] Huntsman and [Department of Commerce Director] Giani need to make it clear that this is not a voluntary request but an official demand that cannot be put on the “Do after doomsday” list. If the documents are not produced in a timely manner, we hope that the state will find a way to obtain them through subpoena, or at least expose the hold-outs so the public knows who has something to hide.If the investigation finds that the high prices are unjustified, the state needs to do more than just point it out. The Legislature could enact laws against profiteering or cap the wholesale gasoline price. It could also require gas stations to post the wholesale price of fuel on their pumps, just as stations must display the taxes charged for gas. That would allow consumers to judge whether or not they are being gouged. The state should also punish any who took advantage of all of us by keeping prices high while wholesale costs dropped. How about a tax on retailers that would kick in when the retail price varies too much from wholesale?

Such strong taxation language coming from a Redder-than-Red State!

Elected officials of these afflicted states are seeking to take some kind of legal action, but are finding themselves with few regulations to work with against an uncooperative and uncaring industry. Wyoming’s Gov. Freudenthal said, “The state does not have the inherent jurisdiction to investigate multi-national oil companies.”

Neither is there much to expect out of the national government, as The Kansas City Star rued in a recent editorial:

Congress should act immediately to halt Big Oil’s brazen, decades-old rip-off of American motorists. It would take too long for each state to act individually. The oil industry’s opposition has paralyzed a national agency in charge of proposing standards.

This leaves only the gasoline retailer for customers to complain to, but they protest they aren’t the ones to blame for these prices:

“If you want to find out where the problem lies just follow the money,” said Mark Walker of the Lindon [UT]-based Walker Oil. “You’ve got the retailers out here scratching and scrambling to make a nickel, while the big oil companies are making billions and posting 30 percent to 40 percent gains in their profits.”

Considering the huge record profits recently reported by oil companies, they can certainly afford a few weeks of lower prices (and profits) in the quest to ensure that the GOP retains control of the government.

The smoking gun that indicates there is some domestic political shenanigan afoot comes from these two opposing pieces of evidence. In Japan during the period that gasoline prices dropped in the US, crude oil prices were increasing.

This should normally mean that investors would be buying oil stocks expecting higher profits. Yet, instead, they were pulling their money out of energy markets.

I somehow doubt that wholesale oil prices vary that much around the world with demand being what it has been of late. In fact, the industry insiders are already talking about higher wholesale prices on the way:

Don’t even think about a return to the good old days of gas for less than two bucks a gallon.The wholesale price for gasoline in the futures market trends upward over the next year. While the current October contract is at around $1.80 a gallon, the March, 2007, contract is around $1.90 and the September, 2007, contract is around $2.10.

Just a few days after these experts made their announcement, the news came out that an OPEC oil production cut is being discussed due to reduced demand (caused by higher prices?) in consuming countries. This is when investors normally dive in, and yet they did not despite this news which emerged just days after they had ‘bailed’.

There must be another reason, and I doubt that wholesale prices are the culprit. There is another reason that explains their anomalous response to favorable market conditions. The decreasing number of fuel suppliers in Montana is the clue:

When Dallas Herron purchased Valley Oil in 1977, it was one of about 18 petroleum wholesalers in the Flathead. Eventually, he started looking for another manufacturer to represent. Other local petroleum wholesalers were going through the same turmoil, scrambling to survive as one major brand after another withdrew from Montana.As the agreements evaporated, the variety of local gasoline brands began to diminish. Distributors here responded by going through a series of mergers and consolidations. “Over time, I bought up about eight competitors,” Herron said.

“From 18 distributors 30 years ago, it’s now boiled down to one fairly large marketing firm - CityServiceValcon - and one small wholesaler in Whitefish,” Herron said.

By definition, a lack of meaningful competition indicates a monopoly exists. The lack of anti-monopoly enforcement against the oil industry by the Bush Administration aids the development of a situation that hasn’t been seen since the days of John D. Rockefeller’s overwhelming dominance. It is certainly in the interest of the oil industry to maintain this economic environment for as long as they can, even to the point of ‘losing’ a few billion to ensure its continuance by offering voting consumers a few weeks of lower gas prices.

But like everything else the Bush Administration has diddled, nothing is simple or works as they expect without something else going wrong somewhere else. For instance, Economists say falling energy prices reflect weakening economic outlook in U.S.:

“Lower oil prices don’t mean that the economy is going to improve,” said David Resler, chief economist at Nomura Securities in New York.While the decline in prices will provide some relief to motorists, it also reflects the country’s weakening economic outlook. In other words, any benefit from falling pump prices may be outweighed by higher interest rates and a stagnating real-estate market.

The economists at Wachovia Securities think the economy is slowing down:

The firm has a muted growth outlook for the remainder of the year and for 2007 due to an anticipated weakness in residential construction and motor vehicle assemblies. Wachovia also believes that consumer spending will grow less rapidly.

One analyst gets specific about the looming decline:

For economist Philip Verleger, who envisions the U.S. economy mired in a recession by early next year, such a scenario is not far-fetched at all. “There is the potential for one heck of a sell-off,” Verleger said.Verleger attributes much of the phenomenal run-up in oil and gasoline prices in the past year to the billions of dollars — perhaps more than $100 billion — that were invested in commodities markets by pension funds, hedge funds and other institutional investors. And he believes that this so-called hot money could exit the market as quickly as it came in.

Pension funds in particular could be hit if the coming winter is a cold one and retired investors need their money to pay higher heating costs. But the retirees aren’t the only ones who are affected by higher energy costs:

America’s Research, based in Charleston, South Carolina, surveyed 1,000 adults each in March, May and July. It found that the percentage of shoppers who said they feel pressure from credit card bills doubled to 43 percent in July, from March.”At some point, consumers will say they are spent out,” said Britt Beemer, chairman of America’s Research. “Retailers will begin to see negative sales.”

That may hurt retailers during the pivotal holiday season, probably leaving holiday sales unchanged from last year or even leading to a decline, said Ryan Larson, head trader at Chicago-based Voyageur Asset Management.

That point may already have been reached:

Consumer spending, which has been the driving force in this economic expansion, slowed dramatically in the spring as consumers were battered by soaring gasoline prices, rising interest rates and a cooling housing market, which made homeowners feel less prosperous and less inclined to spend money.

But the effects of that condition won’t really be felt until the Bush Administration is safely past the November election.

In the mean time, voters are being distracted by playing the gas price game:

“You never know when the prices are going to go up or down,” said Cindy Napier, a Charlottesville [VA] resident. “And when they go down you almost always wind up kicking yourself because you filled up the tank when the prices were high.”

In addition to higher profits allowing for a period of politically-oriented generosity toward the ruling party, there is an added benefit for Big Oil: they are running the independent gas retailer out of business:

The pressures on some independent operators, people running small filling stations, fixing and maintaining cars, have become impossible, as irrational as the ups and downs of the price of gasoline.Robert Gubser answered the phone at H&S Auto Service Inc. and admitted he owns the place, but wasn’t so sure about the managing part. Pretty good humor under the circumstances. Gubser recently quit selling gasoline after 32 years in business, 14 as an owner, because it just doesn’t pay.

“People need to realize what it’s like to be a marketer in the retail market of gasoline,” said Gubser, who sold gas at his place at 2510 S. 48th St. “The money that we lose just pumping a gallon of gas is what’s caused me to quit.”

What is it that causes the wild price ride that forces the independent out of business? The availability of product from the refineries which are mostly owned by Big Oil. Supply - and prices - can swing wildly in just a few days.

For instance, on September 14, 2006, the Central Valley Business Times of California reported refineries increased their output of gasoline and diesel, yet just six days later, on September 20, 2006, the same source reported production of gasoline and diesel in California declined.

Only micromanaged price manipulation makes much sense as an explanation, as the experts say things are good for oil producers right now:

For crude oil markets, the global situation is about as rosy as has been the case in the last several months. Almost every concern that existed in crude oil markets this summer is much more benign now.Concerns about a possible oil disruption from Iran have faded … Mid-September has arrived without a single hurricane affecting oil facilities in the Gulf of Mexico and with no storms likely to arrive within at least the next week. Nigeria, where significant disruptions have occurred with some frequency over the past several years, has been quiet.

The oil situation in Iraq is as positive as it has been in nearly 2 years, with EIA estimating Iraqi crude oil production in July and August at its highest levels since the fall of 2004. Even the one disruption that did make news recently, the BP pipeline leak in Alaska, now appears to be much less of a problem than originally thought.

Such benign global conditions do not call for the sort of flutuation price activity that has been reported by the sources I quote above.

But political motivation to fuel the engine of continued Republican political dominance fills the tank very nicely.

To the top.

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