As recently as 2005, gas prices were less than $2.00 per gallon. At this point they’ve almost doubled, and even a drop of ten or twenty cents has people ecstatic. We’ve gotten so used to the high prices that we don’t stop to think about why they are so high compared to what they were less than a decade ago.
Oil production in the U.S. is at an all-time high. In fact, we are even exporting more oil than we ever have in the past. Demand has gone down in the U.S., due to more high efficiency vehicles on the road and consumers driving less during the current economic recession. Demand is growing in other parts of the world, especially Asia, but it hasn’t grown enough to warrant an almost doubling of prices.
As usual, our politicians are more interested in arguing with each other, and blaming the other party, than in figuring out the cause of the problem and dealing with it.
For instance, President Obama recently called for greater oversight of oil speculation by investors. Immediately, the Republicans shot it down, saying it was a waste of time and money, that there’s no proof that’s the cause of higher prices, and that the answer is to do more drilling and to build the Keystone Pipeline that the President rejected.
So what exactly is oil speculation? It’s something that has grown drastically in the past few years, since the housing crisis caused investment in mortgage backed securities to become scarce. The oil futures market was the next best bet for lucrative profits.
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. It’s really a bet on whether oil prices will go up or down. No matter what the future price, the owner of a futures contract can buy it at an agreed upon price. In other words, if you buy a futures contract that allows you to buy a barrel at $75, and the price goes up to $100, you will be able to buy them for the cheaper price and immediately sell them for a large profit.
A small amount of futures contracts won’t have an affect on the market, but when huge amounts are bought, it can affect the price. Investment firms that are able to influence the oil futures market can make massive profits, and oil companies that both produce the product and drive prices up of their product through oil futures derivatives will make even more.
It should be no surprise that firms such as Goldman Sachs and Citigroup have been heavily invested in oil futures. But an investigation revealed that some energy producing companies actually owned large percentages of oil futures contracts on the New York Mercantile Exchange. That seems like a pretty big conflict of interest.
President Bush previously ordered an investigation into gas price gouging, due to the possibility of it affecting gas prices. At the time, the study found that speculation, which was a lot less back then, didn’t greatly affect the price. But even an oil man like the previous President thought it was worth a look.
Independent studies have been inconclusive. A 60 Minutes investigation found that there was a great connection between the speculators and gas prices, while a CNN report found that wasn’t the case.
It seems to me that we should be doing everything we can to get the price of oil down. It would be a major boost for the economy if oil prices were a dollar or two less. State and local governments wouldn’t be facing such big deficits if they had lower fuel prices, and consumers would have more spending money, further fueling the economy, no pun intended. We should be leaving no stone unturned to find the answers. Let’s have increased control and regulation over the oil futures market, and let’s also drill and build the Keystone Pipeline.
Instead, we get bickering and campaign rhetoric. Republican candidate Mitt Romney recently said that President Obama is doing everything he can to raise the cost of gasoline, and Rick Santorum said that the President “has done everything possible to shut down energy production.” Funny, since our production is at the highest level it’s ever been.
Meanwhile, and I’m sure it’s because of the large campaign contributions and their army of lobbyists, the oil companies are making massive, record profits, at the same time they are getting massive tax breaks ordered by Congress.
Does anyone think it’s a little strange that all the oil companies charge basically the same price at the pump? Our market system should lead to one company lowering their price a little bit, in order to draw customers away from their competitors. But that doesn’t happen, yet no one is asking if there is any collusion going on.
There are a lot of things we could be trying to do to rein in prices. Regulate the commodities market. Drill more. Investigate collusion among the oil companies. Form a cartel of oil purchasing countries to fight against OPEC, the cartel of oil exporting countries that tries to keep the price high.
Here’s a radical idea. We have public utility companies that are either public or public/private partnerships to deliver water and electricity to our homes, because it’s more efficient and because it’s in the national interest for those things to be considered necessities that must be kept flowing. Perhaps it’s time to consider making stable oil prices a national interest, and making oil companies operate as public utilities as well.
Why are our politicians not taking any action to try and remedy this problem? Are they controlled by the oil companies? They would rather use the issue for political gain? Yes and yes. They are incompetent and corrupt, and we pay the price.