Rising gasoline prices seem to make headlines every day. Congressmen clamor for President Barack Obama to release crude oil from the Strategic Petroleum Reserve to lower prices. One might conclude that there is a shortage of crude oil or an increased demand for gasoline as presidential candidates clamor for more domestic oil drilling. But the truth of the matter is that there is plenty of crude oil available.
So what makes crude oil and gasoline prices increase? The answer can be found in the commodity futures market, where speculators can move both oil and gasoline prices by buying contracts for future delivery. These speculators neither intend to deliver nor accept delivery of petroleum but are gambling that their contracts will increase in value. The laws of supply and demand don’t apply to actual gasoline or oil, only to the supply and demand for contracts. So when you’re pumping expensive gas, the blame for it doesn’t belong in Washington; it belongs in New York.
One has to only look at Canada to get a clear picture. Canada has drilled its little heart out and is a major exporter of oil. Gasoline in Canada costs $4.70 a gallon versus about $3.60 in the United States. Now, I’ll admit some of the difference is due to Canadian tax structure, but even Newt Gingrich couldn’t get their prices down to $2.50 per gallon.
The last thing I would point out is no one has ever explained exactly what financial incentive an oil company has to purposely take action that would reduce the price of its product.