GAS PAIN: Even though gas prices appear to be tumbling, we
thought our readers might appreciate a different perspective on
what made them so high in the first place.

Our information does not come from the Internet or other wacky
source but from National Public Radio which carried a report at the
end of August about an alternative explanation – beyond traditional
supply and demand theories – for the steep rise in gas prices.

NPR’s Adam Davidson reported that some oil analysts had been
taking a look at the amount of oil being held off the market in
storage. In fact, the oil market has created big incentives to hold
on to oil rather than sell it.

To understand, a little Economics 101.

Davidson reported, “They (these analysts) say other factors are
just as important as the relationship between demand and supply.
Chief among them is ‘contango,’ a market term for the situation in
which a commodity – like oil – has a higher future value than its
current price.”

“Oil companies and others like to buy futures contracts to make
sure they’ve got oil coming to them well into the future. But
lately, people who have nothing to do with the oil industry are
buying oil futures, holding them as can’t-lose investments that can
return well over 10 percent.

“Investment banks from Morgan Stanley to Goldman Sachs are
making so much money from oil futures that they’ve become a hot
investment for all sorts of big-money players.

“Some of the biggest players are U.S. pension funds, which have
put billions of dollars into oil futures. At least one analyst
thinks that pension funds have become part of the machinery driving
higher gas prices.

“‘I think if you saw all the pension funds walk away,’ says Ben
Dell, an oil analyst at Sanford Bernstein, ‘you’d probably see a
$20 drop in the crude price.’

“Dell compares removing pension funds from the oil market to
‘losing the whole of Chinese incremental demand.’

“The problem, he says, is that pension funds and other investors
are buying oil to remove it from the market – which can help drive
up demand – before selling it for a profit some months later.

“Dell believes that when the world’s oil storage capacity is
met, bankers and fund managers will look elsewhere for profits.
That, he says, would almost certainly benefit consumers.”

Angry? We could chew nails.