Energy prices defy economic logic

Over the past two weeks, gas prices on Long Island have risen nearly 8 cents per gallon, with the statewide average topping out at $3.38, the highest it’s been since October 2008. These surges don’t stop at the pump.

As we brace ourselves for another cold winter, heating oil prices have also been on the rise. According to Newsday’s figures, over the past week alone, heating oil prices rose another 9.5 cents a gallon, their highest rate in more than two years.
As we enter the holiday season, industry analysts are warning Americans that we should expect more increases.

Today, everyone subscribes to the basic laws of supply and demand: prices go up as supply dwindles or demand increases, and they go down when supplies grow or demand drops. But it seems that the oil industry is flying in the face of these immutable laws of economic gravity.

Oil prices are shooting up even as demand falls in these recessionary times, and gasoline in particular has jumped sharply even with winter driving at its annual low point and with supplies that are more than adequate.

So why is the energy pricing world topsy-turvy these days? There have been several theories that attempt to explain the market’s behavior. Some say that prices have shot up because the dollar has been destabilized against foreign currencies due to the U.S.’s deficits. Other experts claim that there isn’t enough refinery capacity on the East Coast, causing the New York markets to become more dependent on imports.

Those excuses don’t cut it for me.

As a firm believer in the power of markets, I’ve come to the conclusion that they’re being driven by voracious commodities traders who are speculating on energy in dangerous ways that threaten our economic recovery. It’s one thing for the oil market to respond rationally to the laws of supply and demand, but when prices go up in a time when near-deflation is the norm (near zero interest rates), taking a hard look at oil speculators should make sense to everyone.