The spike in oil prices has not been caused by natural market supply and demand. In fact, U.S. demand for oil has declined since 2005, while global demand has grown less than four percent. In addition, the global oil reserves have been growing faster than consumption and now stand at a higher level than they have been in a quarter of a century. Today, OPEC spare capacity is almost three times as great as it was in 2008.
While the issues that resonate the loudest through the various #OccupyWallStreet protests surround bank bailouts, dirty housing foreclosure tactics and crony relationships with politicians, a new report from the Consumer Federation of America indicates that the price of oil has been artificially driven up (…way up) by Wall Street speculation as well, resulting in a direct pocketbook pinch for everyday Americans. From the report brief which appears in its entirety below:
At the end of 2003 the price of West Texas Intermediate (WTI) crude oil (the “benchmark” for U.S. oil) was about $30/bbl and the value of outstanding futures contracts (called “open interests”) for WTI was less than $20 billion. Wall Street firms like Goldman Sachs and Morgan Stanley and hundreds of hedge funds led the charge into the oil markets, creating products that “financialized” commodities. Index funds and pension funds soon followed. In July of 2008, when WTI hit its peak price above $140/bbl, the average value of open positions was over $150 billion. U.S. oil consumption declined eight percent over that period (global oil consumption was essentially flat). Eight times as much money chasing the same amount of oil is a prescription for price escalation.
The brief explains the horrible impact this has on American households in plain terms:
The oil price spike of the past year, which saw gasoline prices increase by over a dollar from the summer of 2010 to the summer of 2011, will drive household expenditures on gasoline to a record average of $2900 this year. Crude oil is about $30 higher than costs or historic trends justify, generating needlessly high prices for petroleum products that will drain about $200 billion out of the economy.
$200 billion is one percent of GDP and two percent of consumer spending…NATIONWIDE. This is a huge deal.