Oil prices have been steadily rising recently and in a less than solid economy this can squeeze the wallets of those who don't have money to spare. The truth is that oil has been rising steadily since the beginning of the year 2000 until the crash in oil prices at the end of 2008. With commodities this generally means that supply is going down or staying the same and demand is going up. In the United States though the opposite has happened, oil demand has gone down but prices have gone up. The root cause of this price increase? Speculators. Some analysts believe up to 60% of the current gasoline price is due to speculation.
In order to understand how the price of oil rises and falls we should first attempt to understand the process by which oil arrives at our local gas stations day in and day out. Gasoline does not come out of the ground as gasoline, what comes out of the ground is crude oil. Crude oil does not even come out of the ground the same everywhere. The best crude oil is known as light crude oil and is rather viscous which means it is more like a liquid. As crude oil becomes denser, or less viscous, it becomes known as heavy crude oil. This oil must first be heated in order for it to flow like a liquid. After finding the crude oil the oil must be refined. According to Chevron, oil goes through distillation, cracking, treating, and reforming before it is refined into a product which may be used. After the crude oil is processed into products it must finally be shipped to distributors around the world and United States. This generally happens via ships and trucks.
The people who make money off of oil are the following.
- The drillers and refiners, generally the oil companies.
- The government through taxes.
- The gas station owners
- Big banks and investors
So two of the money makers involved in gasoline are directly involved with the oil and two are not. Lets examine these for the increase in price. ExxonMobile reports that it only makes 7 cents per gallon of oil. Has supply gone down? Actually the countries that make up OPEC are producing more than they have in 2 years. Almost 30 million barrels a day. Not only that but the top two exporters of oil to the United States are actually Canada and Mexico which cannot be classified as volatile markets. Has demand gone up? No, consumption was most in 2007 and by 2010 had fallen by 2 million barrels a day. Have taxes on oil increased? The United States did recently increase taxes on each barrel of oil produced in the United States or imported. In fact, they quadrupled the tax. Fortunately the tax was a mere 8 cents and is now 34 cents. Clearly not the cause of the high oil prices. State taxes do bring the cost of gasoline up considerably though and they average 48 cents per gallon across all 50 states. These taxes increase occasionally but do not account for the rapid rise in prices. Gas station owners don't even make very much money on gasoline. Sometimes their profits are as little as one or two cents a gallon.
This leaves the big banks and investors. In the year 2000 when oil prices started climbing the United States Congress deregulated the futures market. This allowed investors and banks to trade oil futures much more extensively than previously. At this point OPEC does not set the price of oil despite being the worlds largest source of the commodity. Instead the New York Mercantile Exchange (Nymex) and the Intercontinental Exchange (ICE) in London set the prices of oil. This means Wall Street essentially sets the price of oil. United States investors who would like to trade in secret may do so through the ICE and in this way they bypass the United States regulations that are still in place. Since the deregulation of the futures market prices have steadily risen and it is no coincidence. Since the deregulation of the futures market price setting has switched from the producers to the investors and it is no coincidence. It is the big banks and investors trading in commodities futures that are causing the rapid increase in oil prices.
If you would like to see more regulation of the futures market than e-mail your representatives and our president. E-mails are easy to find with a google search. With oil being traded numerous times on paper before it reaches your gasoline station it only hurts middle and lower class Americans who do not have the money to spare. It is certainly a bubble and it will crash but when no one knows. Is it worth waiting?
For further reading check out my last source. It is an article which goes much further into the oil speculation market and how it works. It details key events, players, and more details than I could provide.
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