With Californians numbly wondering what has hit them, a pair of U.S. government agencies offer conflicting pictures of why oil prices rise.

California pays the highest pump prices in the nation. Folsom’s former Union 76 station on Natoma Street will reopen as Folsom Fuels after closing last November when gas was $2.89 a gallon, and owner Herman Aulakh can’t say why he’ll need to charge $4.50 or more to turn a small profit.

“It’s what everyone is charging,” Aulakh said. “I think people are used to it – they don’t like it, but ….”

People also don’t understand it.

Although federal Commodities Futures Trading Commission officials announced in late May they are investigating suspected price manipulation by traders in crude-oil contracts, federal Energy Information Agency officials when they updated their explanation of price rise June 12 held to a stock story of “supply and demand,” an agency Web posting shows.

“The CFTC puts out stats (on suspected trading abuses) every Friday,” said Doug MacIntyre, senior oil market analyst with the EIA, a division of the U.S. Department of Energy. “We follow it, but we don’t use it. That’s still something we’re working on, trying to do those reviews and then test it through models.”

The CFTC regulates oil trades conducted on U.S. soil. Its investigation concerns the West Texas Intermediate crude oil contract, one of the world’s two largest contracts, which through a curious twist is not traded on U.S. soil and is therefore unregulated by U.S. law, according to the Europe-based Reuters news service. The CFTC reports it is now concerned with the fact that the WTI contract is handled by Intercontinental Exchange Futures Europe, a London-based company out of reach of CFTC regulation. Federal investigators suspect traders and energy companies are confining their orders to floods of orders made during a particular time window used by a price-reporting company, potentially distorting the reported price of West Texas Intermediate crude, then profiting by selling oil at the distorted prices, Reuters reported May 30.

Federal energy officials at EIA, however, continue to view WTI oil only within a “supply-and-demand” model not affected by distortion, according to MacIntyre.

WTI barrel price jumped from $26.11 in 2002 to $122.15 this month, MacIntyre said. Trading in WTI crude became unregulated domestically in January 2006. An Atlanta-based group of investors bought Intercontinental Exchange Futures Europe and WTI began to be traded there. Between 2002 and the present, MacIntyre said, trading in the West Texas crude jumped from 78 million barrels a year to 86.4 million barrels. Such trading involves what are called “paper barrels.” A buyer need not take what is known as “wet delivery.”

The crux of the matter goes back to January 2006, according to the Asia Times’ William Engdahl in a May editorial.

“Then, apparently to make sure the way was opened really wide to potential market oil price manipulation, in January 2006, the George W Bush administration’s CFTC permitted the Intercontinental Exchange, the leading operator of electronic energy exchanges, to use its trading terminals in the United States for the trading of U.S. crude oil futures on the exchange in London - called “ICE Futures.”

The editorial takes the position that “how today’s oil prices are really determined is done by a process so opaque only a handful of major oil trading banks, such as Goldman Sachs or Morgan Stanley, have any idea who is buying and who is selling oil futures or derivative contracts that set physical oil prices in this strange new world of ‘paper oil.’”

Ties exist between Phil Gramm and investors, including Goldman Sachs, who helped move regulation of WTI offshore, with the ICE Futures Europe purchase.

For example, the top five contributors to Gramm in the 1997-2002 cycle of fundraising were Credit Suisse First Boston, $45,500; Morgan Stanley, $40,500; JP Morgan Chase & Co, $36,250; Security Traders Assn., $32,500 and Goldman Sachs, $29,000 -- a list that includes four major oil-trading banks and a traders association, according to the Center for Responsive Politics.

“A major contributor to high oil prices is the rise in speculation,” Sen. Carl Levin, D-Mich. said in May, estimating that speculation has added about $35 to a barrel of oil. “This is not a supply and demand issue.”

Levin said the solution can be found in closing the loopholes that allow electronic traders to buy oil outside of the United States. The “Enron loophole” was codified in the Commodity Futures Modernization Act of 2000, allowing oil futures to be traded electronically in unregulated markets outside of the jurisdiction of the Commodities Futures Trading Commission. Sen. Phil Gramm co-sponsored the Commodity Futures Modernization Act.