When President Obama took office, regular gasoline cost $1.85 a gallon. Now it’s hit $4.00 per gallon in many cities, and some analysts predict it could reach $5.00 or more this summer. Filling your tank could soon slam you for $75-$90.
Winter was warm. Our economy remains weak. People are driving less, in cars that get better mileage, even with mandatory 10% low-mileage ethanol. Gasoline is plentiful.
Misinformed politicians and pundits say prices should be falling. Our pain at the pump is due to greedy speculators, they claim, and greedier oil companies that are exporting oil and refined products.
Their explanation is superficially plausible – but wrong.
Energy Information Administration (EIA) data show that 76% of what we pay for gasoline is determined by world crude oil prices; 12% is federal and state taxes; 6% is refining; and 6% is marketing and distribution. The price that refiners pay for crude is set by global markets.
World prices are driven by supply and demand, and unstable global politics. That means today’s prices are significantly affected by expectations and fears about tomorrow.
A major factor is Asia’s growing appetite for oil – coupled with America’s refusal to produce more of its own petroleum. Prices are also whipsawed by uncertainty over potential supply disruptions, due to drilling accidents and warfare in Nigeria; disputes over Syria, Yemen and Israeli-Palestinian territories; erroneous reports of a pipeline explosion in Saudi Arabia; concern about attacks on Middle East oil pipelines and processing centers; and new Western sanctions on Iran over its nuclear program and the mullahs’ threats to close the Straits of Hormuz.
Moreover, oil is priced in US dollars, and the Federal Reserve’s easy money, low interest policies – combined with massive US indebtedness – have weakened the dollar’s value. It now costs refineries more dollars to buy a barrel of crude than it did three years ago.
Amid this uncertainty and unrest, speculators try to forecast future prices and price shocks, pay less today for crude oil that could cost more four weeks hence, and get the best possible price for clients who need reliable supplies. When they’re wrong, speculators end up buying high, selling low and losing money.
Oil speculators play a vital role, just as they do in corn and other commodities futures markets.
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