WASHINGTON Gasoline should cost about $2.25 a gallon at the pump, and everything above that is "funny money" largely tacked on by speculation and manipulation in the energy markets, a consumer advocate told a Senate committee Tuesday.
"The speculative bubble in energy commodities has cost households, on average, about $1,500 over the past two years in increased costs for gasoline and natural gas," testified Mark Cooper, director of research for the Consumer Federation of America.
The total cost to the U.S. economy has been more than half a trillion dollars, he said.
As retail gas prices reached a record high for the 26th time in 27 days, Cooper was among several experts who told the Senate Committee on Commerce, Science and Transportation that speculators are helping push up prices.
Cooper said the recent $120 price for a barrel of crude oil could be split into thirds: $40 for the true economic cost, $40 added by OPEC and $40 due to speculators.
"Excessive speculation on energy trading facilities is the fuel that is driving this runaway train in crude oil prices," said Inland Oil Co. President Gerry Ramm, who spoke on behalf of the Petroleum Marketers Association of America.
Tighter federal restrictions on speculators could push down prices at the pump by 25 percent practically overnight, testified Michael Greenberger, a University of Maryland law professor and former director of the Division of Trading and Marketing at the Commodity Futures Trading Commission.
The hearing came as the motorist advocacy group AAA reported that the national average price for a gallon of regular unleaded gas was $3.978, up 0.3 cents on Sunday and the same level on Monday. That was the first time since early May that prices had not risen from one day to the next.
The hearing was aimed at finding whether market fundamentals or outside forces were driving up the prices.
"With gasoline prices well over $4 a gallon in some regions and diesel topping $5, consumers no longer have the confidence that the prices they are paying at the pump are fair or even linked to underlying supply-and-demand forces," said Sen. Maria Cantwell, D-Wash., who chaired the hearing.
The witnesses agreed that pure economic forces less crude oil and more demand for petroleum products were a factor. But they also agreed that speculators were pushing prices higher than they should be.
George Soros, the billionaire chairman of Soros Fund Management, said there are real economic reasons for oil prices to be going up.
First, there is "the increasing cost of discovering and developing new reserves and the accelerating depletion of existing oil fields as they age," he said.
Second, oil-producing countries have less incentive to sell their oil reserves which are gaining in value for dollars, which have lost value in recent months. Third, countries where demand is growing fastest, such as China, are keeping energy prices artificially low for their domestic consumers by providing subsidies.
But Soros said speculation is also artificially increasing oil prices, which have risen by more than 40 percent in the past six months. "Recently, spot prices have risen far above the marginal cost of production and far-out, forward contracts have risen much faster than spot prices," he said.
Under questioning, Soros said he had not engaged in speculation on the energy market.
He said the growth of investment funds that track the future energy prices reminded him of the portfolio insurance craze that set off the stock market crash of 1987. For that reason, he said, it would be "desirable to discourage commodity index trading while it is still inflating the bubble."
Soros said that oil price bubble is not likely to burst until a recession is deeply entrenched, leading to a decline in consumption.
Other witnesses, however, said the federal government could push down prices at the pump by squeezing speculators. They suggested taxing short-term speculative gains at up to 50 percent.
"There is nothing with the (market) fundamentals to justify what is currently happening" to oil prices, said Sen. Byron Dorgan, D-N.D. Congress and regulatory agencies must "find a way to wring the speculators out," he said.