How does oil speculation raise gas prices?

How Stuff Works ^ | 3/1/2012 | Josh Clark

[U-238]

The next time you drive to the gas station, only to find prices are still sky high compared to just a few years ago, take notice of the rows of foreclosed houses you'll pass along the way. They may seem like two parts of a spell of economic bad luck, but high gas prices and home foreclosures are actually very much interrelated. Before most people were even aware there was an economic crisis, investment managers abandoned failing mortgage-backed securities and looked for other lucrative investments. What they settled on was oil futures.

An oil future is simply a contract between a buyer and seller, where the buyer agrees to purchase a certain amount of a commodity -- in this case oil -- at a fixed price [source: CFTC]. Futures offer a way for a purchaser to bet on whether a commodity will increase in price down the road. Once locked into a contract, a futures buyer would receive a barrel of oil for the price dictated in the future contract, even if the market price was higher when the barrel was actually delivered.

­As in all cases, Wall Street heard the word "bet" and flocked to futures, taking the market to strange new places on the fringe of legality. In the 19th and early 20th centuries it bet on grain. In the 21st century it was oil. Despite U.S. petroleum reserves being at an eight-year high, the price of oil rose dramatically beginning in 2006. While demand rose, supply kept pace. Yet, prices still skyrocketed. This means that the laws of supply and demand no longer applied in the oil markets. Instead, an artificial market developed

[Vigilanteman]

Correct.

Betting that the price of oil will go up is a no brainer with ObaMao in the white house. Anyone who has money to invest can place that bet.

Turning on the spigot from Canada would have just the opposite effect, thereby hurting ObaMao's buddies like:

1. Burlington Northern Raiload moving oil by tanker cars (gee, who owns big stock in that)?
   
2. Petrobas investments in Brazilian off-shore oil by George Soros
   
3. Oil imported from anti-American Muslim countries.

[nathanbedford]

Duh... :-)

[poobear]

What’s your 2 cents Thackney?

[thackney]

Too many people believe that supply and demand versus price means they move equally and linearly.

A small move in demand nearly equaling the total available supply will create a skyrocket in demand, of any product that doesn’t have much elasticity in demand.

The spot market is a market for actual users of the the oil. It is not a market for speculators unless they have storage capacity and see a significant contango. Even then, it is quite limited before storage capacity runs out or becomes too expensive.

Given that the spot market is not a speculators market, and that the spot market nearly always matches the near month futures market, I do not see how the claim of price driven by speculators and not real supply/demand holds any water.

[poobear]

“Given that the spot market is not a speculators market, and that the spot market nearly always matches the near month futures market, I do not see how the claim of price driven by speculators and not real supply/demand holds any water.”

Thank you kind Sir.

Guess donations from Wall Street are down so Barry is doubling down on his finger pointing game via “journalism”.

[Timocrat]

I have yet to be challenged on two timely posts on two other threads in this matter in two days. In fact, discussion more or less immediately halted:

Ahem ! http://www.freerepublic.com/focus/f-news/2854740/posts (see my #28 #29 there)

[Timocrat]

A small move in demand nearly equaling the total available supply will create a skyrocket in demand (sic)

Did you mean demand or price?

[thackney]

I meant demand.

If demand is nearly equal to available supply, a bump up in the demand can send the price climbing very fast, if there was little to no spare capacity in supply.

[Timocrat]

I meant demand.

Then I'm not sure I understand your statement. My reference was to the second "demand" in your statement. If you had said "A small move in demand nearly equaling the total available supply will create a skyrocket in price" I would agree with you otherwise I'm not sure I understand what you're saying. Why would a small increase in demand create a major increase in demand?

[thackney]

Thank you. I did mess that up.

If demand climbs when it is near or at available supply, a small increase in demand can create the price to skyrocket.

[Timocrat]

Then I agree with what you’re saying. However there is one entity that can rig the market and that is the US Government or its financial surrogates which is not beyond the bounds of possibility.

[USFRIENDINVICTORIA]

Do you know the meaning of the terms “price inelastic”, or “inelastic supply and demand”?

[PeterPrinciple]

The futures market was suppose to create stability and did in the early years when the cash market was chaotic. It requires hedgers (producer/consumer) and speculators. Unfortunately what we have in it these days is mostly speculators. Producers and consumers have turned to contracts for stability if they can.

[PeterPrinciple]

If you don’t think the futures market drives prices look at what happened in India today. They banned the export of cotton.

---

There is some correlation here, not causation. ISN’T THE REAL CAUSE THE BANNING OF EXPORT?

[jiggyboy]

If you’re saying that demand didn’t change much because of price, then I’d still want to see graphs showing how nearly equal production and supply were in the summer of 2008, and that was why everybody was fighting for the last tanker, which would be an astonishing coincidence with the known SemGroup disaster but an acceptable rebuttal.

Then I’d want to see how all of a sudden, again coincident with the SemGroup bankruptcy, and even as demand remained constant, the world was suddenly so awash in crude oil that its price collapsed by 80% in a six months.

[USFRIENDINVICTORIA]

A very small surplus (or deficit) can cause large swings in price — that's the very definition of in-elasticity. The world needn't be “awash in crude oil”, before prices plummet.

[thackney]

However there is one entity that can rig the market and that is the US Government or its financial surrogates which is not beyond the bounds of possibility.

The difficulty in even the US Government trying to rig that market is: "it is not the only market".

Crude oil and other petroleum products are traded in multiple cities around the world. Greatly restricting or otherwise playing games with one market would only drive the traders to the others, and it would be done in hours if not minutes. All can be reached electronically.