WASHINGTON — Oil consumption has fallen, demand from U.S. motorists for gasoline is flat at best and refiners that turn crude into fuel are operating well below capacity. Yet oil prices keep marching toward $90 a barrel, pushing gasoline toward $3 a gallon in many markets, and prompting American drivers to ask, "What gives?"
Blame it on the same folks who brought you $140 oil and $4 gasoline in 2008: Wall Street speculators.
Experts attribute much of the recent rise in prices to flows of speculative money into oil markets. These bets are fueled by investor expectations that the U.S. and global economies are poised to return to growth and thus spark increased use of oil. Strong growth in China supports the narrative of rising oil consumption and tightening supplies.
"The thinking goes that rising stock (market) prices implies expanding business activity, implies growing energy demand, implies rising oil prices. I think you can make that case, but it's awfully weak," said Michael Fitzpatrick, vice president for energy for MF Global, a financial firm that brokers the sale of contracts for future delivery of oil.
While there are signs of U.S. economic recovery, such as a slight uptick in consumption and strong manufacturing data, there are plenty of ho-hum signs too, including dismal construction spending and continued high unemployment.
"I just don't think if you look across the entire spectrum of the macro-economy that it creates a picture of a growing body of incontrovertible evidence that there is a strong, sustainable recovery. I just don't see it," Fitzpatrick said. "I think it should be closer to the range we were seeing in late summer and early fall, $67 to $72" a barrel.
On the last day of July 2009, oil traded at $67.50 a barrel and gasoline sold at a nationwide average of $2.52 a gallon for regular unleaded. On Thursday, oil prices settled at $84.87 on the New York Mercantile Exchange, and regular unleaded gasoline averaged $2.80 a gallon and more than $3 on the West Coast, according to AAA.
"It's the story we've been talking about.... It's really about oil being an attractive investment for investors right now," said Troy Green, a AAA spokesman. "You've seen quite a bit of money flooding into the oil markets because of that."
What's different about today's price run-up from two or three years ago is that oil is now in ample supply.
"If you look at the fundamentals right now, there is certainly an abundance that is available (of oil) to the market for the next 12 months or so. It's not a near-term supply shortfall," said David Dismukes, the associate director of the Center for Energy Studies at Louisiana State University in Baton Rouge.
The latest data from the Energy Information Administration, the statistical arm of the Energy Department, shows that as of mid-March, U.S. refiners were operating at 81.1 percent capacity. They're making eight gallons of gasoline for every 10 they're capable of producing, a clear sign that demand is down.
Perhaps the only argument that would justify rising prices is that global consumption is expected to grow by 1.6 million barrels per day to 86.6 million bpd this year, according to the Paris-based International Energy Agency.
Even so, there's 6 million bpd of oil that's shut in, a technical way of saying that recoverable oil is being left in the ground by the world's oil producers.
"When you look at inventories and shut-in capacity, (oil) prices today are above what those would indicate," said Daniel Yergin, the author of "The Prize: The Epic Quest for Oil, Money & Power," the recently updated Pulitzer Prize-winning book that chronicles the history of oil.
When oil traded above $140 a barrel nearly two years ago and pundits warned that the world was running out of oil, Yergin suggested that a glut of oil would come onto the market in 2010 and beyond. The 6 million bpd of oil now on the sidelines suggests that he was right.
Rising oil and gasoline prices are deja vu all over again for Michael Masters. The hedge fund manager has crusaded for legislation that would prevent so much speculative money in the oil markets.
Wall Street is "gaming" the price of oil, he warns.
"If you're a bank, and you know there is going to be a large amount of investor inflows into the commodities market, you are going to position yourself ahead of them.... You want to be a seller at a higher price," explained Masters, noting that large Wall Street banks invest for themselves in these markets even as they also broker the oil investments of others.
What's abundantly clear, he and others argue, is that an oil contract's price today has little to do with the supply of and demand for oil.
"It's a capital asset now. Once the majority of participants are capital-asset folks, common sense would tell you it's going to be traded like a capital asset... and consumers pay," Masters said. "It wasn't that way in the past."