The U.S. presidential election is escalating now that summer driving season is near. At issue is what is causing near-$4 a gallon gasoline and whether anything can be done about it.

Two immediate positions are forming: The first is that speculators are flooding the market with billions of dollars, which drives up gasoline prices. The second is that this phenomenon is a function of supply and demand -- that Americans are driving more at a time when Middle Eastern turmoil is restricting supplies. To this end, many are arguing that the way around such a conundrum is to allow domestic drillers more access to areas now off limits to production.

“We will need to work extra hard to protect consumers from factors that should not affect the price of a barrel of oil,” President Obama said this week in a Rose Garden speech. By that, the president means that the “irresponsible few” are “illegally manipulating” or “rigging the energy markets for their own gain.”

In other words, speculators are buying up oil and creating the false perception that shortages exist. Prices then rise and the traders sell those “futures contracts” for quick profits, hurting American families. That's a view generally supported by the Industrial Energy Consumers of America.

Immediately, the president wants Congress to add $52 million for the Commodities Futures Trading Commission so that it can put more “cops on the beat,” as well as provide digital oversight, to keep oil markets in order. He would impose greater civil and criminal penalties while also empowering the commission to require traders to have more skin the game to avoid excessive speculation.

Those ascribing to supply and demand theories say that traders create liquid and transparent markets, buying low in one area and selling high in other regions that need the product. Efficiencies form, they say, noting that the same type of trading is done in natural gas markets where prices are extremely low.

“While American families struggle to pay gas prices that have doubled on his watch, the President’s only solutions are to target oil and gas producers for higher taxes and now to dramatically increase federal regulation,” says the presumptive Republican presidential nominee Mitt Romney. “And they will not distract the American people from the president’s consistent record of sacrificing America’s energy future to appease the environmental extremists in the Democratic Party.”

New Money

Traditional thought has held that commodity prices all correlate with oil. In fact, the Federal Reserve Bank of Dallas authored a study in 2007 that said the prices of oil and gas tend to move in tandem by a factor of 10 to 1, or $100 a barrel would mean $10 per million Btus.
 
But natural gas prices are now cheap in comparison to the price of oil. The most conspicuous explanation is that oil is a global commodity that is affected by those conflicts in oil producing nations while natural gas is largely a regional fuel that has been left unscathed by recent events.
 
At the same time, the large and accessible shale-gas deposits have kept such prices unusually low, or less than $2 per million Btus. All this is transpiring while the large pension funds are moving money into the commodity index funds and artificially driving up the price of oil. In other words, “speculators” smell blood and the ability to increase returns.
 
When “new” money floods commodities funds, it can create upward price momentum that will exacerbate any supply and demand distortions, says Valerie Wood, president of the Madison, Wis.-based consultancy, Energy Solutions.  However, falling natural gas prices don’t necessarily mean that speculation has entirely disappeared. “The shale-gas phenomenon has reduced the influence of speculation on natural gas prices.”

There are not any quick fixes to rising oil prices -- not the proposed legislative remedies nor more drilling access. In fact, President Obama says that during his tenure the country has quadrupled the number of operating rigs. The problem is that this nation uses 20 percent of the world’s oil but that it has only has 2 percent of the world’s proven oil reserves.

Beyond the current “all-of-the-above” strategy, the administration says that the most effective way that government can assist oil consumers is to take steps to prevent market manipulation. That view is to the dismay of others, who say that prices are pushed down by driving less and drilling more. As the presidential race heads into summer, the debate is bound to get hotter.


EnergyBiz Insider is the Winner of the 2011 Online Column category awarded by Media Industry News, MIN. Ken Silverstein has also been named one of the Top Economics Journalists by Wall Street Economists.

Twitter: @Ken_Silverstein

energybizinsider@energycentral.com