U.S. Consumers Have Big Banks To Blame For High Gasoline Prices

asiablues's picture

By Dian L. Chu, EconMatters

There is a bit of irony here in that the very same banks that taxpayers bailed out, and saved from going completely belly up, are now making you pay once again in the form of higher Oil prices, and the resultant higher gasoline prices at the pump (Fig. 1). Don`t be fooled by the rhetoric generated in the media by the Big Banks regarding the Middle East.

It All Started With Jackson Hole….

This run-up in oil prices started with Fed Chairman Bernanke`s Jackson Hole speech where the big banks realized they were going to get a bunch more juice in the form of POMO operations by the Federal Reserve to play around in markets with.

And what did the large financial institutions do with this newly created juice? Instead of allocating the almost zero percent money they are all borrowing to productive activities such as lending loans to small businesses which will create jobs and stimulate the economy, the big banks have decided that since the fed is electronically printing money and providing extra liquidity/juice for financial markets that this is inflationary and devalues the dollar.

All Fed Juice Leads to Commodities

And just to make things worse, the big banks have decided to take their cheap capital they borrow at basically zero percent , and invest into commodities, i.e., agricultural futures like Wheat, Corn, and Soybeans, energy futures like Oil and Gasoline (Fig. 2), and industrial and precious metals like Copper, Gold and Silver.

The unique aspect is that loose monetary policy isn`t problematic at face value when you are trying to stimulate growth, it is what the Big Banks are utilizing this cheap capital for that becomes problematic from an inflation standpoint. The very problem that the Banks are worried about in regards to inflation, they are in fact responsible for creating through self-fulfilling investment practices with regard to this cheap capital at their disposal.

Long Commodities, Short Dollar - Adding Inflation

But it gets worse because at the same time they also short the US Dollar, and going long the commodity currencies like the Canadian and Australian Dollar, which further exacerbates the slide in the US Dollar (Fig. 3), reinforcing the entire trade that they need to buy more commodities as an inflation hedge, further juicing up commodities like oil and gasoline.

Inflation Up, Purchasing Power Down

The consumer is hurt in two ways. First is that higher prices eat into their monthly budget with a higher percentage of their disposable income needed for purchasing items like milk, eggs, bread, and gasoline. Secondly, because the Dollar is losing its store of value, the consumer is losing their purchasing power, i.e., what a dollar is worth in relative terms around the world, and what it can buy. In other words, it is like getting a pay cut at work from your company, the amount hasn`t changed, but what goods that amount will be able to buy is less.

Consumers Getting Double Stiffed

The Big Banks like JPMorgan Chase, Goldman Sachs, Morgan Stanley, HSBC, UBS, and BOA-Merrill Lynch are some of the largest energy traders in the world. They all derive considerable trading revenue from the markets each quarter. So when you hear that Goldman Sachs, or BOA didn`t have a single losing trading day for a given quarter, these banks are taking a lot of money out of the market, and much of their hefty trading profits are generated from commodities like food and energy.

And guess who is footing the bill for these trading profits? Yes, the US consumer, the very same US consumer who bailed them out during the financial crisis. Talk about getting short shrifted twice. (I cleaned up the last sentence, but you get the gist.)

2008 Oil Bubble Redux

Currently, there are no supply shortages in the oil market, but what you have is a bunch of speculators going wild pushing up energy prices hyping the Middle East, Peak Oil, The Nigeria Card (remember in 2008 where every little Nigerian pipeline was under attack every day during that run-up, and all the sudden Nigerian pipeline attacks were inconsequential for two years—that`s the Nigerian Card-bring it out when traders are in Trend Trading Nirvana.)

What we have here is a 2008 redux. The Brent contract on the ICE exchange is being used to engineer prices up, as it is an unregulated exchange with no real transparency on position limits by the Big Banks. The Big Banks are also piling a bunch of money into commodity related ETF`s and mutual funds, which in turn have to buy exposure to the futures market in all these commodities. Add in the hedge funds, pension funds, money managers, and retail traders, and voila! you have these bubbles created which have no relation to the underlying fundamentals.

Trend Trading Hyper Leverage

It all comes down to fund flows, capital going into the commodity trade because it is going up, further adding fuel to fire that this is the place to be-- Welcome to the self-reinforcing cycle of Trend Trading.

However, it gets even worse, because we have one-sided markets with no substantial pullbacks which normal healthy markets have. The Big Banks are able to add to their original positions with the profits they have locked in with stops that are already hugely profitable. The Big Banks are then buying additional futures contracts, pushing these same commodities up further, until eventually the bubble bursts like 2008, when everyone runs for the exits at the same time.

The effect is that by adding to original positions via locked in profits, the Big Banks have added even more liquidity/juice to the market – a form of hyper leverage without real risk. This results in the consumer paying more at the pump, not because there is less supply of oil in the market, but largely because of a trading technique that artificially inflates prices by adding more juice to the equation.

Crude Oil – An 'Engineered' Market

I know we had a recession, but Crude Oil went from $143 dollars a barrel to $33 in six months. Now, you don`t think demand dropped off that much, do you? It didn`t, even when a consumer lost their job , which at most we went from a 5% unemployment level to slightly above 10%--did this 5% completely stop consuming fuel? I know this is an oversimplification; however you can follow where I am going with this line of reasoning-- Crude Oil should never have been $143 a barrel in the first place!

It was stage-managed to those levels the last time by the Big Banks like Goldman Sachs. Remember the infamous “$200 Oil Call” by the Goldman analyst – do you truly believe that happened by accident? It most likely served a purpose for Goldman Sachs at the time, to help ‘market’ the price of Crude Oil.

Banks Long Oil...Gee, You Think? 

You now have Nomura Securities with their $220 Oil Call, and J.P. Morgan pumping out weekly analysts forecasts regarding Crude Oil targets of $130 for the second quarter. Why make these price forecasts available to the media and the public if they aren`t used for a purpose? Wouldn`t they want to keep these reserved for their paying, private clients? Gee, I wonder if they are positioned long in the Oil Market?

You guessed it. The same Banks that won`t give you a loan, or a credit card because your credit score isn`t perfect is making your financial condition even worse by pushing up the price of Oil, Food and Gasoline when there are no real supply shortages in the market. What is taking place in the market are traders hitting revenue goals by trading commodities in order to maximize their bonuses.

Fed, The Enabler

This is not all the Big Banks fault, as just like in 2005-2007, regulations were eased to let them all lever up over 40 times base capital. Well, Chairman Bernanke and the Fed`s extremely loose monetary policies have enabled the banks to profit enormously from trading behavior and investment choices which inevitably have lead to the creation of another inflationary bubble. We still have a long way to go in recovering from the last Fed fueled bubble regarding the Housing Industry from the Alan Greenspan era of overly loose monetary policy.

Higher Margin Requirements - Not The Solution  

In addition, the CFTC was supposed to come up with position limits for the Big Banks over 3 months ago, but even the limits they were considering were not going to do any good. The CME has raised margin requirements on all the commodities, but this actually makes things worse because it squeezes out more of the smaller speculators. It concentrates more of the contract from a percentage standpoint with the Big Banks who have access to all the capital they could ever need at zero percent interest.

If you raise margins for the Big Banks, they just go borrow more money to cover the raised requirements, but they never have to reduce positions like the smaller players. This makes for less of a diverse market. Therefore, raising margins isn`t the answer either. In other word, don`t expect any relief from the CFTC or the exchanges--they really are powerless to reduce this type of speculative fervor.

Two Ways To Tame Big Bank Cats

There really are only two options:

1)  Bernanke has to immediately change his tone, and become much more hawkish regarding inflation, and he needs to do this immediately, as in, Monday morning. He needs to say something to the effect: “Due to rapidly building food and energy cost pressures, the fed needs to seriously discuss the idea of cutting short QE2 at our next monetary policy meeting on the 27th of April”.

That`s literally all Bernanke would have to say, not that they are going to cut QE2 short, just discuss the idea, and that you are worried about rising inflationary pressures in the economy exemplified by the unprecedented spike in gasoline prices. This would send the right message to the speculators, and curb much of the speculative fervor. All commodities would instantly sell off. For example, Oil would drop by $3.50 in an hour, and the RBOB contract would drop 18 cents.

This is how you can even maintain all the benefits of a relatively loose monetary policy without all of the acute negative consequences of unchecked speculation, which we are experiencing right now in commodities. It’s a one sided trade, that is crowded, unnatural, and bad for markets and consumers alike.

2)  The second option is more micro managing an individual commodity. Let`s take Oil for example. President Obama could make a statement on Monday morning stating the following: “I have decided to open up the Strategic Petroleum Reserves to the market, not because there are any supply shortages in Crude Oil, far from it, actually, but we want to target the excessive speculation that we believe is occurring right now in the Oil market”.

Again that`s all it would take and Crude Oil would be down $3.50 and gasoline would drop as well. You do not even need to sell any Oil from the reserves, it actually isn`t needed, but the important part is the message that you are sending to markets, “this is not a riskless, one way trade.”

Fed's Punchbowl Ends Here & Now

Speculation isn`t always bad, in fact, it often serves many valid purposes within markets. But excessive speculation to the point where markets diverge considerably from the underlying fundamentals is never a good thing. And it is important for those in positions of authority to manage such markets appropriately through legislative regulation, monetary policy, or simply managing market participants’ expectations by sending the right types of messages to markets.

However, our policy makers so far have mismanaged the message being sent to Wall Street. It is something along the lines of “Get drunk at the Fed inspired liquidity punchbowl, and don`t worry about the mess you make”. The message the Federal Reserve should be sending is, “Make sure you don`t drink too much at the liquidity punchbowl, or we will take it away”.

The reasoning here is that it is always much easier to prevent the mess in the first place, than to try and clean it up afterwards. We have reached the point where the Fed needs to take the punchbowl away!

EconMatters, April 1, 2011 | Facebook Page | Post Alert | Kindle

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steve from virginia's picture

This analysis is over- simplistic and incorrect.

There is no 'inflation' when demand is in the toilet.

Where are the jobs? Where are the wage increases? Where is the 'excess' money? The money sits in reserve accounts @ the Fed.

The big, money center banks are on both sides of commodity trades. The provide margin for the longs and while being bankers for the exchanges themselves. This means they also have correspondingly large short positions. Te banks are almost 'net neutral' with regard to any commodity trade. They only have to hedge the difference between the margin exposure less their short position. The longs have 100% of the risk, not the banks.

The bottom line is the banks aren't driving the market rather they are the 'house' and receive the vigorish with zero risk.

Only hedge mismatches contain risk such as duration risk between longer dated Treasury interest swaps against T-bills.

Oil is demand driven, the interface between demand and consumption is to what degree return on consumption can service 'demand'. High prices are enabled by credit which is the tool of bidders. At the same time, credit is required to afford the resulting high prices. Once credit- driven prices become unsupportable by the returns earned on the output of petroleum use, the jig is up which is where we are now.

Credit does not come from the Fed or money center banks but is lent into existence by any business that keeps account books. Money is lent against future returns: the banks' returns @ the market level is from providing margin, at the economic level is from potential real output.

hat the money establishment provides is shill- speak supporting the myth of ongoing real output. "Tomorrow, tomorrow, tomorrow! The sun will shine tomorrow!"

Perhaps it will or it may be murdered in its bed. Analysts ignore peak oil at their peril. Geology does not care about analysis or wishful thinking, unicorns or Santa Claus. The analyst says the price is too high but someone is paying the price in the form of output, what matters is whether the return on that output is able to profitably support fuel providers.

The oil markets want to retest the $147 high price of 2008 to see if there is bull or bear market. I personally don't think the world can afford $145 oil and there will be a crash first. Remember, the higher the final spike price, the deeper and more profound the crash will be. With the Fed fully committed -- provided QE is still taking place -- there will be no force to hinder debt deleveraging which will accelerate across finance, one by one eliminating all the major and minor players.

The end of QE will show the same results as only $100b per month can stave off deleveraging and the cascade of debt- driven business failures. Continuing QE means a oil- price shock crackup and crash. The end of the diving board is nigh.


Inflation is wishful thinking or the lack of thinking. As long as the US imports 70% of its petroleum there will be zero inflation and zero dollar devaluation. There is no other way: if the dollar founders or ceases to be the world's reserve currency, the US ceases to be a developed industrial country.




oldmanagain's picture

Oil at new highs at some time is a no-brainer.  Although the USA is world's largest importer, we are becoming less the driving force of prices on the downside.  Output is slowing, peaking if you will.  Emerging markets taking over demand.  We are in the unique position to feel most of price increases due to our volume and lack of intelligent populace/response.

 The largest consumer is the hardest to get lower consumption in meaningful amounts without great pain to the econ.  Our political system, ie who funds elections, almost insures the lack of meaningful responses.  It is unlikely in the age of tea party stupidity that we can accomplish much.

GFORCE's picture

Open interest on 1 exchange. Nymex. Equals 1.5bn barrels. Daily consumption in the world is 80m.

The futures are nothing but a casino.


Seasmoke's picture

as long as i live long enough to see Geithner and/or Bernanke hanged , i will die a happy man

janchup's picture

You have to look past to Big Banks to Timothy Geithner. 

Hook Line and Sphincter's picture

"And just to make things worse, the big banks have decided to take their cheap capital they borrow at basically zero percent , and invest into commodities, i.e., agricultural futures like Wheat, Corn, and Soybeans, energy futures like Oil and Gasoline (Fig. 2), and industrial and precious metals like Copper, Gold and Silver."

Small correction, uhh..that would be, invested heavily in PAPER PM's, and that's on the short side.

oldmanagain's picture

The major premise of the article that actual supply/demand for products is not operational is vastly flawed. Unlike stocks, commodity contracts have a short for every long.  And many of these are suppliers of the goods.  And many are speculators, which are needed to take the other side which results in price discovery.  These markets adjust moment by moment to the winds of the moment, and thoughts of tomorrows. 

The problem for large positions is that there are limits to daily price movement and a position is not guaranteed a graceful exit.  All day and night trading present even more problems.  The large spec or hedger or ETF all face these realities.  For the small spec, he or she must sleep periodically so cannot supervise the risk as well as trading desks that operate much quicker and 24 seven.

All studies confirm that hedging opportunity reduces violatility.  What is natural however, is fluctuations in supply and demand are constant and in some cases very quickly change.  War, droughts, freezes, etc.  Lately, outright hoarding, much like war time seems to be occuring.

Rainman's picture

"Riskless" one-way trading is heroin for the markets. Each fix requires another and another until the user eventually abstains for a short period to clean up, then overdoses and dies. Keith Richards is the only exception to this rule.

aerial view's picture

The ultimate blame goes to our govt leaders who clearly do not represent the best interests of the people but rather the elite via their lobbyists. Govt does not have and/or will not enforce adequate regulation or penalties. The quickest way to level the playing field is very simple: DEMAND FULL TRANSPARENCY by the govt and financial system so that the public can understand and recognize potential problems and demand action from our leaders (who are the last to care about anything but self-serving egomaniacal power trips and serving the elite).

SwingForce's picture

Citizens Under Attack

Everything Obama, Geithner, & Bernanke do, they do for The Banksters. Many people have lost homes. Many more are paying inflated rates on inflated properties which the banks refuse to refinance. Savers are getting lousy rates on CDs, but are charged 10%-24% on a credit card. From the top of the credit menu board to the bottom, The Banksters have FREE REIGN to suck as much blood out of the middle class as they possibly can. It’s a criminal plan that TARP was paid for by The Taxpayers to save the banks from extinction, only for them to revive and viciously attack the hands that feed them. Henry Paulson should be charged with Treason for using The Taxpayers' Money to re-arm The Banks of Mass Destruction. Everybody is a victim, even the homeowner without a mortgage, his equity is dropping in its entirety; he's losing more than the guy with a mortgage. Condos sit empty because banks don’t want to pay association’s maintenance fees, while those fees rise for the rest of unit-owners to make up the shortfall. The Banking Cartel is waging a war against every American Citizen, and it won’t be happy until every savings account is drained, every homeowner is broke & evicted, every credit card holder is paying 24.9% + $88/ mo. in overlimit and late fees, and every house is in their possession. Even the foreclosure process is financially draining for the owner, with insurance and electric payments continuing until property is taken out of owners’ name, an average of 2-3 years. (Upon repossession, the bank doesn’t book the loss until resale, artificially covering-up insolvency issues). Wake up people, its not us against each other, its Us vs. The Banksters who run their operation with impunity.

Further details of the covert TARP program, “Where the Bailout Went Wrong”, by Neil Barofsky:


max2205's picture

You ain't seen nothing yet. Pre election year is upon us and Ben will continue to goose it so obamaramma gets locked into 4 more years of pain and agony. Thank god for 2 term limits

r101958's picture

It is also much easier on the brain-housing-group to just assume that oil is not a finite resource and that there are endless fields of oil yet to be tapped. Better said, this is the route some folks take that don't do their homework. Do the homework! Check the meaning of EROEI and then follow up. Check how reliable the ME statements are regarding 'known' reserves. Also, check out what the real extraction rate is for known reserves. Then the next time you read an article about a 'huge' find of 20 billion brls you will know that the world consumes 33+ billion brls of oil a year and that the 'huge' field will have peaked at 10 billion brls of production. That is assuming that all the oil is actually extractable. Peak oil, check it out. It doesn't mean we are out of oil....it only means our production of oil has peaked and is slowly declining. This fact does not bode well for a global economy/financial paradigm that runs, indeed depends, on growth.

Kickaha's picture

Option #3 -  End QE now.  Instead issue checks to every U.S. Citizen above the age of 18 in an amount equal to a pro-rata share of the funds otherwise being wished into existence for the benefit of nobody but the TBTF banksters.  Make the checks two-party checks which would require the endorsement of a local bank at the time of presentment.  Citizen goes to local bank.  Asst. Mgr. there runs citizen's credit report.  If it shows debt, citizen must endorse check, bank endorses check, bank takes funds and distributes them to creditors pro-rata.  Maybe fine-tune that part to mimic distribution ladder in Chapter 7 bankruptcies.  If citizen is debt free, bank gives all the money to the citizen.

Any bank that receives money through this program must by law apply receipts to bank reserves (if undercapitalized) or utilize it for small business loans (if solvent).

Yes, it would be inflationary, but it would be infinitely fairer than what has happened to date. The financially prudent get a reward to offset the loss of value to their savings.  Debtors get some relief to their debt load.  Bank reserves improve.  Small businesses get loans. 

The Fed is going to print money either way.

silvertrain's picture

That would be seen as racist..Not by me, im just saying...

Kickaha's picture

You are right.  A little fine tuning is in order.  Debtors won't have to see all of the check fly away to their creditors.  They will get to keep $100.

This added feature will be expand the benefits of the program by boosting lotteries, liquor stores, and drug dealers.

apberusdisvet's picture

BIS/FED/IMF + corrupt politicians + psyops/disinformation campaigns - Rule of Law


planned incremental takeover of America and total subjugation of its people.


I wonder if everyone has seen the recent demand from the Euro chapter of the Masters of the Universe that Ireland impose a special property tax on all Irish property owners in order to secure Irish debts.  If this "test" case works, look for it to be applied to all Americans as security for the US debt.

I'm sure that our corrupt politicians will go along with this as the "only solution".

Atomizer's picture

+ ∞

Welcome aboard.

Think WTO. What just happened to Boeing? The UN has become captains to forge the World Domination agenda.

OECD --May 2010

More>  Long link


aerojet's picture

The part I resent the most is that nobody is working on behalf of the American public.  It's all been set up something like a cattle farm where the budgets of regular people are led in for slaughter at the will of the financial elite's machine. 

TimmyM's picture

I used to believe this was the situation. But this article fails to mention the fiscal point of no return. Now that all punchbowl removals are highly temporary, due to the debt monetization requirement, and the bank collateral reflation requirement, the commodity boom is permanent. Yes, it will be interrupted by brief fanciful interludes of confidence in the dying system. But, it will always come back like a recurring tumor until a system reset is imposed by the people.

Rikki-Tikki-Tavi's picture

I also think we are close to FED taking the punchbowl away but given the momentum of the market I doubt simple threats will be enough - perhaps option 1) will indeed temporarily create a $3.5 fall but what do you think will happen post 27th of April when it becomes clear that BEnron was bluffing? Does a $35 increase seem unrealistic? Regarding option 2) I can't see Obummy releasing the Strategic Petroleum Reserves - it is a one off joker which won't be wasted on $108 olie - what would they do if/when the conflict in the Middle East spreads to Saudi Arabia? Now the problem is that the Big Banks not only are buying up commodities, who do you think are buying all those ES futures? So is BEnron ready to crash the market and does he really have a choice? There won't be much to show for those $600bln except for some nice bonus payments on Wall Street by year end. If it wasn't so sad it would be funny!

MarketFox's picture

Excellent piece....

Money dilution with the ok from any form of government office...is just another form of taxation...


Savers....those who used to have real money....are being scammed both on interest payments and by dilution versus the necessities of life...



Here is another way to look at it...


The public incurs debt....does not have the money to pay for it....and renegs not by openly reneging....but by what is happening as we speak....


Yes the US has defaulted on its debts.....and is playing the BIG CON on its own populous ............



The people are being treated more like a herd of brainless cows....




The big banks have to be broken up into smaller community banks....




Breaker's picture

"Money dilution with the ok from any form of government office...is just another form of taxation..."'

I agree with you. But that's not the point the article is making. The article says that monetary expansion by the Fed is NOT the problem. It's that the banks are using all that extra money the wrong way.

I think it's much simpler. Is it possible that the the huge supply of dollars is related to: (1) increasing commodity prices; and (2) a falling dollar? Trying to blame the banks for the sins of the Fed seems like adding an unnecessary set of facts. 

The author is just another statist who cannot wrap his head around the fact that the problem IS the state. So they thrash around for someone else to blame--unions, banks, drug companies, welfare moms. Blah blah blah. An overly powerful government is at the heart of all big problems we confront. Solve that and a huge host of problems go bye bye.

pitz's picture

It would be much more simple to enact a $70,000/year pay limit on all financial sector and hedge fund employees.   Retroactive over the past decade.