WASHINGTON -- U.S. demand for oil and refined products -- including gasoline -- is down sharply from last year, so much that United States has actually become a net exporter of gasoline, unable to consume all that it makes.
Yet oil and gasoline prices are surging.
On Tuesday, oil rose past $105 a barrel and gasoline averaged $3.57 a gallon -- thanks again in no small part to rampant financial speculation on top of fears of supply disruptions.
The ostensible reason for the climb of crude prices on the New York Mercantile Exchange, where contracts for future delivery of oil are traded, is growing fear of a military confrontation with Iran in the Persian Gulf's Strait of Hormuz, through which 20 percent of the world's oil passes.
Other factors driving up prices include last month's bankruptcy of Petroplus, a big European refiner, and a recent BP refinery fire in Washington state that's temporarily crimped gasoline supply along the West Coast; gas now costs an average of $4.04 a gallon in California.
While tension over Iran has ratcheted up in the past few months, the price of oil and gasoline has leaped far beyond conventional supply and demand variables. Financial speculators are piling into the market, torquing the Iranian fear factor into ever-higher prices.
"Speculation is now part of the DNA of oil prices. You cannot separate the two anymore. There is no demarcation," said Fadel Gheit, a 30-year veteran of energy markets and an analyst at Oppenheimer & Co. "I still remain convinced oil prices are inflated."
Consider that light, sweet crude trading on the NYMEX changed hands at $79.20 a barrel just four months ago, but soared past $105 a barrel Tuesday afternoon, partly on news that Iran would halt shipment of oil to Britain and France. But those countries already had stopped buying Iranian oil. And Didier Houssin, the International Energy Agency's director for energy markets and security, said that "there are alternative supplies that can make up for any loss of Iranian exports," The Wall Street Journal reported.
Still, oil's price shot up because it trades in financial markets, where Wall Street firms and other big financial players dominate the trading of oil, even though they have no intention of ever taking possession of the oil whose contracts they are trading.
Since oil prices are the biggest component in the price of gasoline, pump prices are soaring. AAA said Tuesday that the nationwide average price for a gallon of gasoline stood at $3.57, compared with $3.38 a month ago and $3.17 a year ago. It takes about $6 more to fill up the tank than it did this time last year -- and last year's gasoline-price surge helped take the steam out of the economic recovery.
Defining what percentage of today's high oil and gasoline prices is due to excessive speculation, driven by Iran fears, is something of a guessing game.
"I put the Iran security premium at about $8 to $10 (a barrel) at this point, which still puts crude at about $90 or $95," said John Kilduff, a veteran energy analyst at AgainCapital in New York.
The fear premium is the froth above what prices would be absent fears of a supply disruption -- somewhere in the $80 to $85 range for a barrel of crude oil. It means that even with the extra cost put on oil from Iran fears, prices are at least another $10 higher than what demand fundamentals would dictate.
Why? Financial speculators.
What should the price of oil be if left to conventional supply and demand market fundamentals? Canada's the largest supplier of imported oil to the United States, which now actually produces more than half of the oil it consumes. Production and delivery costs for a barrel of oil from Canada are about $75 a barrel. The market-fundamentals cost for a barrel of oil is in that ballpark; above that, speculation sets the prices.
Historically, financial speculators accounted for about 30 percent of oil trading in commodity markets, while producers and end users made up about 70 percent. Today it's almost the reverse.
Not surprisingly, big Wall Street traders on Tuesday projected oil will rise above $112 a barrel; some such as Swiss giant Vitol even suggested $150-a-barrel oil is coming soon. When they dominate the market, as they do, speculators' bids can make their prophecies self-fulfilling.
What's indisputable is that oil and gasoline are not in short supply, and that demand remains weak. That was crystal clear in the latest weekly energy market update by the U.S. Energy Information Administration -- published last week for the week ending Feb. 10.
"Total products supplied over the last four-week period have averaged 18.3 million barrels per day, down by 4.6 percent compared to the similar period last year. Over the last four weeks, motor gasoline product supplied has averaged nearly 8.1 million barrels per day, down by 6.4 percent from the same period last year," said the EIA, the statistical arm of the Energy Department.
Inventories of stored oil are also unusually high, the EIA said.
Hence, no shortage to explain soaring prices.