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Letter to the editor:

President can’t control oil prices

Thu, Mar 1, 2012 (2:01 a.m.)

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.

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Discussion: 55 comments so far…

  1. High gas prices hurt the economy and they are tough on the middle class and the poor but that isn't the biggest concern.

    As I have said before, America and the world will be running on oil, natual gas and coal for a long time into the future, no matter what we do. Even if a new magical energy source just dropped out of the sky, it would take years to create the infrastructure to deliver it worldwide. If a global warming catastropy strikes us before we go all green, then it does. That die is already cast.

    I worry most about our economic security and our physical security. To have both of those at optimum levels, it is foolish not to do everything reasonably possible to develop our own sources of fossil fuel energy along with developing green energy.

    President Obama and Steven Chu I am sure also want economic security and physical security for America but they place at an even higher priority... forcing Americans off fossil fuels because we are too stupid to do it fast enough ourselves.

    To 'really' have an 'all in' energy policy would work counter the the goals of the President and Steven Chu to 'force' the change away from fossil fuels and that is why we don't really have an 'all in' policy under this administration, even though they claim otherwise.

    I am not stupid enough to believe the claims that Obama could bring oil prices down all by himself. However, as with many things with this President, I feel his priorities are in the wrong order and I don't agree with his overall philosophy.

    If we really had an 'all in' energy policy, gas prices might be lower and they might not be, but we would all have more ecomonic and physical security and without both of those, we have nothing.

    Michael

  2. Dennis,

    Don't you ever read what I write before you spout?

    I wrote... 'I am not stupid enough to believe the claims that Obama could bring oil prices down all by himself.' Most people could connect the dots and know that if I don't believe Obama could bring down oil prices by himself, I don't think Gingrich could either.

    Michael

  3. Re Freeman,

    Thanks for your note to Dennis, but like Frank and many others that write, Dennis provides only one path for everyone, and if you stray from it, you're toast, you're unreasonable, you're stupid and nothing you might say has any merit. As you and I both know...that's the definition of a closed mind. Too bad, because a human being cannot grow intellectually with a closed mind.

    Michael

  4. The Iraq war has already $1 trillion in immediate damages and never lowered the price of oil - which was Cheney's initial plan. Cheney wanted to save America - we were in imminent danger. Move Now and don't think. The war had to begin ASAP without planning, stop them before then get the bomb.

    The same idiots want to get back in the White House to stop Satan from gaining ground. The minute they hit the front steps the Bibles will come out of their coats and the preparation for wars will begin.

    Better to pay higher gas prices then another trillion $ dollar war on Faith and credit.

  5. Red Rocky,
    I wonder if the market crash and subsequent collapse of demand in the economy might have had something to do with your claim of Bush's power to reduce the price of gasoline??? Hmmmm...
    Meanwhile, back in reality:
    http://www.whitehouse.gov/blog/2012/03/0...

  6. Between speculative buyer and speculative seller, gain or loss is a zero sum game. But when a price in a real market set based on the speculative market price, it is NOT a zero sum game.

  7. The only countries that are able to control their gas prices have nationalized oil companies. Is that how Gingrich plans on bringing gas down to $2.50?

    NO! That would be too against everything that republicans stand for... How else would he do it?

    The only other way would be to depress demand by collapsing the world economy again! Is that Newt's plan??

  8. For every entity that actually takes delivery of of a commodity that trades in the futures market millions speculate on the price swings. Speculators absolutely drive prices up and down on world markets 24 hours a day.
    MF Global, John Corzines outfit, was part of the "Man Group". They have been been speculating in futures for over 200 years.

  9. http://www.urbandigs.com/2006/10/fed_upd...
    The above chart reflects just few trading days in 2005. The speculative volatility was enormous and had nothing to do with crude usage.

  10. Fact; a barrel of oil was trading at $25 a barrel when George W Bush started his presidency, The price of a barrel increased 600 percent to $147 a barrel and did not drop until the Bush economy came crashing down. A fact that the Republicans like to go away.

  11. Joe: (1) How can the federal government decree that 80% of petroleum be sold in the U.S.? We have signed treaties that prevent (according to our interpretation of them when we want them applied to other countries' embargoes of goods to the U.S.) just this sort of embargo. And,
    (2) as a practical matter, once pete from any source can get access to a shipping point, its' price will be a world price, minus tankerage. And every place that gets' its supply from a refinery will reflect essentially the world price plus transport via pipeline, rail or truck as applicable, unless that refinery is landlocked (in which case, its' pricing will be essentially local supply and demand).

  12. So, let's look at Las Vegas: We are served by a pipeline that has its source at a place which is near a port, so we pay world market plus pipeline charges. We could put a pipeline into the Rocky Mountains or the Great Plains, in which case , for a little while -- until Keystone XL links up the Bakken and Alberta with the Gulf Coast refineries -- we would enjoy the lower prices from the currently landlocked Midwest refineries.

    At high enough prices, we could be profitably converting relatively local coal to oil and enjoying prices lower than other places because of our proximity to the source(s).

  13. Pertinent to the discussion is analyzing the Republican energy policy of drilling for more oil and mining coal. Both are a finite resource that will eventually be exhausted, likewise most of the oil resources are in other countries who will use that fact to hurt our economy and is also a national security problem. Lets forget for sake of a discussion the air pollution caused by oil and coal.
    Or do we go with the president's plan to start the ball rolling towards developing a new source of energy that is clean and infinite that does not put our nation hostage to the whims of madmen like Iran? While in the meantime increasing our domestic oil production to buy us time to develop a new source of energy.
    We already know the futures and commodities traders on wall street prefer the Republican plan. I prefer to start preparing for independence from oil now not later as a preventable hurricane Katrina energy disaster would be in our near future.

  14. The crying, moaning, whining, hypocrites blaming Obama for high gasoline prices, sure have no problem handing oil companies billions in subsidies, get friggin real.

    I believe the GOP/Tea Party will do everything they can to keep the economy from improving, hoping they will regain control of the White House and Congress. Once back in control, we all will get hosed from them continuing the same policies that got us in this mess. Oh, add the social warfare they will wage on voters, religious and womens rights.

  15. Gas was 35 cents a gallon when I started driving in 71. Today it is over 10 times that. Most of the increase in price has come without the enormous demand coming from China and India today. Gas will be 10 bucks a gallon within a few years. It's over 11 bucks a gallon in Norway currently.
    A sky high price is the only factor that will reduce amount demanded.
    Hey Jim, what exchange and when? I would love to call them and see if you were an actual member or just having a Republican senior moment.

  16. http://www.treehugger.com/environmental-...
    I can't challenge your premise??? I don't have to. Read the statements made by the oil folks at the top of the article. Even Saudi Arabia says 40% of the price of a barrel of oil is due to speculation.

  17. What group was pushing the price of silver between 1.80 and 3.00......speculators

  18. In your 1:12 post you said that my view that speculation drives price is so ignorant it is hopeless. Exxon, Saudi Arabia and Delta share my view.
    Who shares YOURS????

  19. Look at the history of US industry. Used to be hundreds of airplane companies, many car companies, 7000 dot coms. Most businesses eventually fail. Green is the future. Fossils are currently dirt cheap, green is still expensive. Eventually this will flip. We can either be part of the future or buy it from China, Germany, France and India.
    You are absolutely correct. Speculators will drive prices down when they finish driving them up but oil prices will trend higher in the next few years I believe.

  20. I have a simple question for all the people who deny that future traders Are not responsible for the run up in oil prices. Back in 2006, the united states oil and gas supply was at a 8 year high and the supply was more then the demand. How did the price of oil increase from $40 a barrel to $147 a barrel in 2 years?

  21. 6.5 billion is chicken feed. We are spending 14 billion on the Gerald Ford aircraft carrier. If we can spend that on one ship we can give some support to long term energy projects. Every major nation is working on energy issues.

  22. Harley.....exactly correct! This country needs it all.

  23. As usual with shrillmoellers comments you will find a rambling incoherent Montague of flatulence and emotional pain devoid of fact. The supply of oil is higher then demand now and back in 2006 thru 2008. He did however unwittingly give the reason why oil is overpriced. Future traders on wall street are manipulating oil prices based on there own high ball projections of global demand in the future thus translating in to a 40% hike in our current fuel prices. Gotta hate those economy killing traders on wall street.

  24. Moderator

    You must be recognized for your fair and balanced track record.

  25. What is the secret to lowering gas prices?

  26. Eat more beans.

  27. GOGO
    Believe it or not I do know that futures trading is a zero-sum game. I just object to paying fifty cents a gallon more for gasoline so that the traders can play their stupid game.

    LVfacts 101
    Do you really believe there's real competition between oil companies for customers? Have you been unconscious for the last 30 years?

  28. Jimbo

    Still no answer from you, what exchange were you a member of and when? Or was your comment yesterday at 1:12 another example of mis-speaking? You know full well there is more supply of oil on the market and that wall street is manipulating oil for profit that Americans pay for at the pump.

  29. The primary services that speculators provide are to assume risks, to speed market adjustments and to provide liquidity. In these ways, speculators help the market (or whatever specific sub-market one chooses to define) function more efficiently.

    Let's first examine the adjustment process. Market prices adjust fundamentally to the forces of supply and demand, that is, to buyers and sellers freely interacting. The buyers and sellers purchase goods ultimately for two reasons: consumption/use or exchange. The higher value on the individual's preference scale will be the determining factor for a given economic actor. If prices are low, speculators may realize that they may buy the good now and sell it later for a profit. So, to the extent that buyers and sellers anticipate prices, they will refrain from buying at a higher price and instead will buy at a lower price. The more this anticipatory, or speculative, element enters into supply and demand, the more quickly will the market price tend toward equilibrium," or the most efficient market clearing price. Thus, the market tends inexorably toward the establishment of the genuine market-clearing price. Speculation reduces the gap between the high prices and the low prices. Far from causing greater fluctuations, the speculator tightens the band around which prices may fluctuate and provides stability.

    It is in this buying and selling that speculators help to better allocate resources to their highest uses. As Carret articulated it, speculators do so by "opening reservoirs of capital to the growing enterprise, shutting of the supply of capital from enterprises which have not profitably used that which they already possess." In this respect, the speculator is an "advance agent" directing capital to its highest uses.