I've been trying to understand why gas prices are so high. If you read the papers or listen to cable news, you've probably come to the conclusion that those nasty Russians, Saudis, Mexicans, and Venezuelans and other oil producing countries just aren't producing enough oil to keep up with the ever increasing demands of China, India and other rapidly growing economies. While those are valid points and are part of the problem, they are not the major reason for the astronomical price increases in oil since 2003. Below the fold, I will explain the real reason.
On Monday C-Span had a congressional hearing which dealt with why oil prices have increased so much in the past few years. The bottom line consensus among the experts is that the main problem is...US.
Not necessarily our consumption, but our 401Ks and other average American investments in oil futures. Approx. 70% of the price of the increase in gasoline prices and oil in general is a result of pure speculation in the markets by our retirement funds and vehicles of investment that the average American citizen is invested in.
Hedge funds and big Wall Street banks are taking advantage of loopholes in federal trading limits to buy massive amounts of oil contracts, according to a growing number of lawmakers and prominent investors, who blame the practice for helping to push oil prices to record highs.
The federal agency that oversees oil trading, the Commodity Futures Trading Commission, has exempted these firms from rules that limit speculative buying, a prerogative traditionally reserved for airlines and trucking companies that need to lock in future fuel costs.
(Thanks to smkngman for this reference)
The result is an upward spiral that has been feeding upon itself. The more money the speculators bet on the price of oil going up, the higher it will go. They actually broke it down this way:
(1) The first $15-$25 of the price of a barrel of oil is because of deflation of the dollar. In other words, if a dollar was actually worth a dollar, the price of oil would be $15-$25 dollars cheaper.
(2) The actual cost of oil, based upon supply and demand, should be somewhere between $60-$80 a barrel.
(3) The difference between the $60-$80 oil and the $130+, that it actually costs is because of pure speculation on the stock market.
The experts broke it down into two types of investors, those large corporate investors who are users of oil, while wanting to make a profit, also want to keep oil prices as stable and as low as possible. Then there are those investors who are simply investing in oil as a vehicle to make money. It is the latter group who have had the largest impact on the spiraling oil price increases.
I am not a fan of large corporations and have written a diary on the subject lambasting them because of their greed, so don't get me confused with those who are. But, after hearing independent experts on the subject, I have to agree that most corporations, who actually use oil to do business have no incentive to see prices increase. They have to either eat the price increases or have to pass them on to us. They do not benefit from high oil prices. Take airlines and Trucking industries as an example. They have absolutely nothing to gain from higher oil prices and everything to lose.
There are Trillions of dollars in the markets because of 401ks and other types of citizen investments. Whether you realize it or not, most of you are major players in the world economy. When the money in your 401k is added to millions of others, it represents an incredible force in the markets of the world. For a long time those who invested our money stayed out of the commodities market because of its volatility. But the amount of money they have to invest became so large that the commodities market provided a good target for investments.
It is my understanding (from the hearings) that 1% or less of those funds being invested for us go into the commodities market, but even that sum is so large that, if concentrated in any one particular area of investment, will cause the stock to rise far beyond its actual value. That is what we are currently seeing in the oil industry.
The experts, the congressmen heard, agreed that there a few things that congress could do that would have an immediate impact on lowering prices. Most are fairly standard stuff that we all know:
(1) Decrease consumption
(2) Increase spending on alternate sources
(3) Auto fuel efficiency
(4) blah..blah..blah..
But the one that would make the biggest difference, and have the most immediate impact on fuel prices, would be to:
(5) REGULATE the speculation in oil futures in the Stock Market by non-users, to make oil-for-profit not as attractive. Every one of the experts emphatically stated that this would immediately cause pure speculators to shift their funds to other investments and immediately reduce gas prices by up to 50%.
According to the experts, this would have little affect on the funds we have invested, because those who invest our funds for us, would simply shift them to another type of (hopefully) profitable investment.
The Republicans are arguing that we have high oil prices, because oil companies are not allowed to drill wherever they want to. After listening to the experts, whose insites this diary is based upon, their arguments are ridiculous.
Oil companies already own 50,000,000 acres of land (on shore and off) that they have drilling rights to, but refuse to drill on. Why should they have more ??? If the land they have is not good enough to drill on, then why did they lease it ??? After listening to actual experts talk about the subject, the Republican arguments are transparent and the real reason seems obvious. The other day, I heard someone state it quite clearly: "its not about the oil, its about the property rights". That seems to be accurate.
Congress's problem in the past 8 years has been that they refuse to listen to, or pass legislation based upon, expert opinion. Here we have a partial solution to a major problem agreed upon by a number of experts in that field. Congress has been told exactly what they should do to temporarily ease gas prices for the average American citizen, but will they listen ??? Even if Congress does craft legislation based upon this expert opinion, you and I both know (based upon 8 years of the SOS) that it will be watered down by lobbyist greed to the point where it will be totally ineffective, or have loop holes for major investors and/or special interest groups big enough to PUSH trucks and airplanes through.
Business as usual. And they wonder why we think they are all incompetent assholes...Even on issues like this one, where there is very little disagreement among the experts, I have every confidence that they will find a way to screw it up.....Go figure.
Here is a CNN article about the Congressional hearing. Read about it from an expert.