It is the mantra of certain groups, that increased oil production will result in lower gasoline prices. ‘Drill, baby, drill!’
Oil production in the U.S. has hit its highest level in over a decade – and gasoline prices are going up. Of course, people won’t believe that oil companies are shipping their product to where they can get a better price. They’ll believe we need to do more drilling.
Notice how they always find a reason to increase the prices, but you never hear of reasons to lower the prices?
I think the major problem is Wall Street investing in future prices of oil…based on, well, nothing. If they say a barrel will cost $112 in five months, well, sure enough, that is what it costs.
If they made it illegal to invest in future oil prices, I think there would be far less gouging…but I am not an economist, so who knows, maybe my sources of info are not all that solid.
It’s more that prices have been affecting domestic oil production than the other way around. Most of the surge in US production has been from unconventional plays that are expensive and risky and usually only viable with a high crude price.
Another thing that they conveniently forget is that oil is a global commodity. US Production is only a small percentage of global production. Prices will rise around the world to pretty much the same extent; it doesn’t matter where you buy your oil from.
Supposedly, when the Fed increases the interest rate, the price of gasoline is supposed to go down. Let’s see how that works out, though.
[QUOTE=DMark]
I think the major problem is Wall Street investing in future prices of oil…based on, well, nothing. If they say a barrel will cost $112 in five months, well, sure enough, that is what it costs.
[/QUOTE]
Which is why I loathe the financial sector, as their decisions have too much of a disproportionate impact on the rest of us, compared to their size of the economy.
Indeed, crude oil is an excellent example of a fungible product.
The other thing that people tend to forget about is the demand side of the equation. As second-world and third-world countries improve their economies, demand for crude oil and gasoline in those countries expands. If the US reduces its gasoline demands a bit while India expands its gasoline demands significantly, well…
Actually, the opposite.
I wish that buying futures of $200 a barrel oil would insure $200 oil in 5 months. If I was to buy $200 5 month futures in oil, I think I’d find a lot of takers.
Future speculation (which I think is what you are referring to) can affect the price of futures when there is too much money chasing too few futures (inflation), but if the market can’t support the price for the commodity, the bubble will burst. This activity can cause instability in the financial markets, but not much so for the actual commodity market, since in the end, the people buying the commodity are the people using it.
Now, you are correct, that with the money managers controlling large amount of money trying to chase the highest return, they can influence the future markets, but if there isn’t a base support in the actual commodity market, these inflated prices can’t hold. That is, they can cause a blip in the spot (daily) price, but if the market can’t support that price, it will not hold.
What is happening now in the US is that there has been a lot of domestic production due to the shale play discoveries that has not been able to make it to the world market. That is, the oil has had to be sold to refineries at a lower than market price because the production has been higher than projected. This increased supply has lowered the price. The world market has caught up, though, and where this domestic oil was being sold to refineries at $90/bbl just because that is all they would pay since they had to honor futures they bought at $100, now that the market adjustments have worked through they contracts, the domestic oil can now be sold at market prices ($100/bbl). Of course, this pushes up the market price, since it isn’t being diluted by lower cost oil anymore, increasing the market price.
Funny. Most of the world would love $1 per liter gasoline ($4/US gallon), but we bitch.
excavating (for a mind)
What I find interesting about US gasoline prices and consumers - everyone was peeing their pants when the price shot up so fast to nearly $5/gallon, so now that the national average is around $3.60, it doesn’t seem so horrible. Coincidence?? Maybe.
I chuckle when I think back to the oil embargo and shortages in the 70s. I remember the outrage and speculation that gas would cost $1 a gallon!!! :eek: Good times…