Why we pay more and more for gas at pump

Monday, April 25, 2011

MELVILLE, N.Y. — That $4 gallon of gasoline sloshing around your tank is the product of a long journey from deep beneath the ground, through geopolitical and market forces, to the pump where consumers are asking: Why does it cost so much?

With gasoline prices up by more than a dollar a gallon from a year ago, motorists are fuming and wondering who to blame: speculators, oil companies, refiners, local gas stations, government — maybe all of the above?

Companies can buy crude oil for immediate use, or they can protect against potential market swings by locking in prices months or even years in advance on a futures exchange.

Oil producers, refiners and end users held slightly more than half of the light sweet crude oil futures and options contracts reported on the New York Mercantile Exchange in March, according to the U.S. Commodity Futures Trading Commission. But their 55 percent of the market has shrunk since January by 2.1 percentage points, while money managers who invest in the market to try to make a profit, have increased their share by a similar amount.

With the Federal Reserve keeping interest rates low, investors have searched for more fertile ground to grow their cash.

"If you're a person that has money to invest — the dollar being destroyed as it is — you're not left with very many options," said Porter Bennett, president and chief executive officer of Bentek Energy, a Colorado firm that analyzes energy markets. Oil, he said, is "probably the best investment out there."

But speculators play an important role keeping cash flowing through the market and often cushion price swings, market experts say.

"Those speculators are people that run retirement funds, pension funds, a lot of money markets funds," said Bennett.

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