Oil speculators are being claimed to drive the price of gas? What is really behind the situation, and how does trading in futures markets effect the price of oil today? Secondly, what exactly are futures markets?
A piece we are running on Monday says that it’s a bubble caused by credit expansion – not unlike a tech-stock bubble or a housing bubble. Interesting.
I was under the impression that the vast majority of the new money was going to recapitalize the banks after they had to write off the $250 billion or so as of late.
Also, I’ve been reading that the way the commodity index funds are set up doesn’t affect the long term prices but only causes volatility in the short term since they never take delivery. They buy a futures contract or whatever and when it gets to 30 days out sell it and buy another contract to replace it all the while paying the going rate for the underlying commodity. When they get a big influx of new money into their fund they go out and increase their positions across the board causing a short term price increase but these get evened out soon enough.
Guess I’ll have to wait until Monday to find out…
Theoretically speculators should hasten the price of a commodity towards its equilibrium price. This assumes, of course that speculators are correct in anticipating the future price. However, in a an environment where the underlying fundamentals are such that the equilibrium price is rapidly rising, it’s very possible for speculators to get carried away and create a bubble, which feeds on iself.
It’s my opinion that rapidly rising demand in China, India and other countries along with limited supply, and a falling dollar, have created an environment where the fundamentals for oil are causing the equilibrium price to rise fairly rapidly. Speculators have jumped in and are to some extent causing the price to rise still further. I wouldn’t say this is a bubble though. It’s very difficult to know how much of the price of oil can be attributed to speculation, but I would guess about $20. Therefore a short term correction certainly seems possible, In the long run, though the fundamentals indicate that oil is an a long upward trend.
I think leonidia is basically correct. What I understand the contributing factors to be are -
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Crude oil is traded based on the U$. Seeing how that dollar is loosing value (inflated) world wide that means that prices are rising because of U$ falling vs. what the Euro and other currencies can buy for their monies.
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Demand is increasing in other (former 3rd world) counties while the supply of crude is/has pretty much peaked. Yes there are some new fields being found, but these are not in places easy to develop and are in fact NOT in available yet, nor likely to be in the near future either.
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Refineries are aging and not being built due mainly to enviromental restirctions. Plus with decreasing supply dynamics, the need for new refineries is questionable anyway.
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I feel that oil reserves (use) can be politically manipulated - prices artifically kept ‘down’ for election considerations - as much if not more than the ‘speculators’ reasons whipped about in the media. Being in charge of the ‘strategic reserves’, having the printing press at command and backed up by media sound bite support, puts the government in a position no bunch of speculators could match! In fact what is to stop the government from being behind such (spectulator) actions itself?!? Example being Congressional elections two years ago with Goldman Sachs (goverment?) changing their index for gas (lowering) thus causing gas prices to fall due to selling of the gas protion of that index.
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Conservation by consumers is being forced on them (by higher prices) rather than their own choices. It would not surprise me to see gas rationed as a political tool for ‘controling’ the situation. I would anticipate even higher and ‘black market’ prices if/when that happens.
Jain
I thought it might be interesting to share how the price of oil is being factoring out here in Portugal as researched by a magazine:
Gasoline | Diesel
Crude: 29% | 35%
Refining: 5% | 9%
Retailer: 7% | 9%
Taxes: 59% | 47% [1]
[1] 17% are general sales taxes; the rest is a sales tax on oil.
The actual prices per Litre (GALP - May):
Gasoline: 1.49 EUR
Diesel: 1.41 EUR
They predict gasoline will hit 2.24 EUR per litre as oil gets to the 200 USD per barrel.
Hell, all they have to do is direct the Plunge Protection Team to buy up a bunch of contracts and dump them all at the most opportune time to tank the price of oil if they really wanted to. A secretive executive branch team with secret off-shore accounts and unlimited funding through the Fed could do some serious manipulation without having to involve anyone else.
But of course the activities of the Working Group on Financial Markets are pure speculation and are classified as conspiracy theory by the ‘experts’.
Never noticed that the Chairman of the Commodity Futures Trading Commission was on the group before now…very interesting.
I was pretty young the last time they tried that but can still remember the gas lines this caused. I seriously doubt they will ever try that one again.
The only thing the public hates more than high gas prices is the inability to purchase gas at any price…
I’ve read that only around 15% of the price can be accounted for through increases in demand. I imagine most of it is caused by a falling dollar and an increase in general inflation.
I could be wrong though.