Explore Harvard's Nieman network Nieman Fellowships Nieman Lab Nieman Reports Nieman Storyboard

14 questions to get to the bottom of the gas price run-up

ASK THIS | April 27, 2006

Oil industry analyst Tom Kloza calls for better depth in reporting, casts doubt on gouging, and recommends some independent, reliable sources for reporters.

By Tom Kloza

Q. How much money does it cost the average oil producer to bring a barrel of crude oil to the market?

Q. How has technology impacted that price in the last fifteen years?

Q. When oil executives or politicians talk about "market forces," exactly what are they talking about?

Q. How has the explosion of futures, options, and derivatives trading for energy impacted the price of crude oil and products such as gasoline, diesel, and heating oil?

Q. Where do exploration and production profits stand in Spring 2006 compared with historical levels?

Q. How do refining profits measure up to historical levels?

Q. Where is the price of crude oil and gasoline for U.S. markets established each day?

Q. How do oil futures and options volumes compare with participation in these commodities just five years ago?

Q. How much are ethanol producers making, and how much of that profit reflects the federal subsidy?

Q. Is ethanol production really controlled by family farmers, or is much of the output tied up by conglomerates and large corporate entities?

Q. How much more are U.S. consumers paying every day for gasoline or diesel versus the same day in 2005, 2004, 2003, or 2002?  How do those sums of money compare with federal outlays for hydrogen research, fuel cell technology, new battery powered vehicle, and other alternative fuel ventures?

Q. How much of a role do hedge funds, index funds, and large investment pools of money play in the present price of oil?

Q. How much gasoline consumption would the average driver have to curb in order to have an impact on U.S. supply & demand balance?

Q. How much gasoline does the average U.S. consumer use relative to consumers in the rest of the world?

(Also see other NiemanWatchdog.org items on gas prices. )

The press is missing perhaps the greatest catalyst for $70+ per barrel and $3.00 per gallon gasoline prices. The biggest reason for the skyrocketing prices may well be the enormous movement of money into various financial instruments that directly or indirectly represent "long" buying positions in crude oil, gasoline, and heating oil futures or options.

Oil is perceived to be the 2006 version of the best hedge against inflation. That action presents a paradox. Buying oil via futures and options represents a hedge against inflation, just as gold did for decades. But money flowing into these oil instruments inflates the price of oil, subsequently fueling further inflation, and provoking yet more investment on the buy side of oil. There is a cycle at work here that may be difficult to break, and it grows greater each day as higher commodity prices reward those who made the investment, leading to yet more money chasing money.

Most striking in the news media coverage of the crude and gasoline price run-up is the lack of depth and the almost total emphasis on "gouging," with little real examination of a term that has tremendous emotional resonance but little structural definition.

Gouging is a relative term and it’s an inflammatory term. One might use it to describe unscrupulous entrepreneurs who buy chain saws en masse in Minnesota and then sell them at inflated prices in hurricane-stricken states in the southeast. The fact is, market forces have decided to reward those who have crude oil to sell with $70 per barrel and higher prices, or 90 per barrel and higher for gasoline. Is there a precise definition for gouging and how might it compare with other products and services? Intel, for example, might routinely make a 60-70 percent net profit on some of its chips, but one never hears of gouging in Silicon Valley.

Reporters are interviewing many "analysts" who have vested interests in the market's movement. I don't know how many times I have seen comments from oil futures brokers that point to more runaway prices. Many do not disclose that they, their firms, or their clients stand to benefit if prices move to $75-$80 per barrel. This cheerleading aspect is on display repeatedly in stories one reads, or views in the electronic media.

Here are some suggestions for good sources who I believe would not resort to hyperbole with a purpose (cheerleading):

  • Tom Wallin, Energy Intelligence (Petroleum Intelligence Weekly)   212-532-1112  twallin@energyintel.com
  • Dan Massey, Argus Media 713-968-0010   daniel.massey@argusmediagroup.com
  • Lrry Goldstein, Petroleum Industry Research Assn.  - 212-686-6470
  • Amy Myers Jaffe, Rice University, James A. Baker Energy
  • John Kingston, Platts OilGram, 1-800-752-8878   johnkingston@platts.com
  • Walter Zimmerman, United Energy - 201-369-8080   walterz@united-energy.com (One of the best speakers you will ever encounter on the subject of market prices)
  • Joanne Shore, EIA  - 202-586-4677
  • Ed Morse, HETCO (former publisher, now oil research head)  212-536-8665

In a nutshell, currently a lot of information is getting gleaned from advocates, mostly traders, brokers, and those within the oil commodities trading business that have a vested interest. There is depth beyond this shallow water.

so what about oil company profits
Posted by Thomas Keller - lab manager at a medical school
04/29/2006, 06:49 PM

How does this explain the huge increase in oil company profits?
My guess is that they don't pay "retail", they have a relationship with the country of origin so that they get part of that $70+ price that everyone else would have to pay.
Axis of evil?

Any end in sight?
A Knight Ridder story on speculators driving up the price of oil

The NiemanWatchdog.org website is no longer being updated. Watchdog stories have a new home in Nieman Reports.