I think a decline in gas prices is unsurprising for a number of reasons:
  • Consumers are getting fed up. Energy Department data show that demand for gasoline in the four weeks that ended March 30 was 3.8% below the level a year ago, as prices climbed toward that sticker-shocking four bucks. Bloomberg reports, citing another survey, that fuel use over that same period was 5.9% lower than a year earlier -- a record 54th consecutive decline. The market is beginning to flex its muscles, and may even contributing to the easing in gas prices.
  • Supplies are rising. Last week, the Energy Information Agency reported that crude oil inventories showed an unexpected rise of 9 million barrels, a 2.5% gain, to their highest level since mid-2011. Sure, you can't pick up a newspaper without reading about Iran's customers being muscled to cut their purchases, which is the primary geopolitcal reason that oil prices are increasing. But the Saudis are cooperating, and will increase their production to offset any loss of production by Iran. That is not charity, of course, but simple self-interest by a country that hates and fears Iran almost as much as Israel does.
  • The elections. President Obama can't be blamed for the increase in gas prices, but that hasn't kept it from being used against him by the Republicans. So there is an excellent chance that Obama will tap into the Strategic Petroleum Reserve -- and that Britain and France will take similar measures -- if prices don't fall of their own accord. Obama may have many shortcomings as a president, but he's still a Chicago pol. Chicago pols have been known to recruit voters from the cemeteries when it has meant the difference between victory and defeat. Tapping into the SPR is child's play by comparison.
  • Beyond 2012

    Once the trend has become bearish, that's where the speculative engines are likely to lurch into reverse, accelerating gas prices downward just as they have encouraged the upward spiral. That will be good. But the roller-coaster effect of speculation on oil prices is not, and needs to be stopped.

    In a study prepared for the Twelfth International Energy Forums a couple of years ago, Prof. Michael Greenberger of the University of Maryland pointed out that "financial investments in the crude oil market have substantially moved from capital raising equity and debt investments for production to betting on price direction." (his italics). Gambling enterprises, in other words. The result has been a ratcheting up of volatility in the oil market.

    The solution, he argued, is the establishment of position limits. Although critics of position limits maintain that there is insufficient data upon which to base them, making them an "inexact science," they are definitely needed. "The damage price volatility causes the economy by needlessly inflating energy and food prices worldwide," Greenberger maintained, "far outweighs the concerns about the precise application of what for over 70 years has been the historic regulatory technique for controlling excessive speculation in risk-shifting derivative markets."

    The Commodity Futures Trading Commission has established position limits on oil and other commodities, but they have not been implemented because of oil industry resistance. There is a push in Congress to get them implemented, at least on an emergency basis. I'd say the time for them has long passed.

    If the Republicans in Congress are serious about cutting oil prices, they should get beyond the effort to force the CFTC to enact position limits. They should join the Senate Democrats, spearheaded by Bernie Sanders of Vermont, who have been pushing that bill.

    GOP, the ball is in your court.

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