Contact
Mix of market forces, government policies drive gas prices
Paul Gessing
When it comes to prices at the pump, there is no conspiracy, but there are a number of complicated factors at play.
Gas prices. The mere mention brings to mind conspiracy theories and worries over “big oil” among many Americans. After a lengthy run-up earlier in the spring, prices have declined several weeks in a row, causing the media to focus attention elsewhere, but it is worth discussing factors affecting gas prices, even when they are declining.
To that end, I will speak as part of a panel at a luncheon with several national and local experts in Albuquerque on May 30.
Despite recent declines, gas prices remain relatively elevated in historical terms. Below, I’ll discuss various players in terms of gas prices and will explain the impact of each in determining the prices we pay at the pump.
President Obama and congressional Democrats
The Obama Administration has pushed a variety of anti-energy policies since his election. The most prominent and controversial of these was “cap and trade.” Fortunately, “cap and trade” failed, but that does not clear Obama and his allies in Congress who have continued to oppose drilling in the Arctic National Wildlife Refuge and recently killed the Keystone XL pipeline. The Obama Administration has also placed strict limits on offshore drilling.
It is true enough, as liberals may respond, that changing these policies tomorrow would not have an immediate impact on oil prices, but having leadership in this country that is pro-energy development would signal to the markets that America is serious about leading on energy. This would put downward pressure on high prices.
Lastly, the Obama Administration’s monetary policies must be mentioned. According to Congress’ Joint Economic Committee, the weakening of the dollar since 2008 has added 56.5 cents to the price of a gallon of gasoline.
Price fixing and collusion by the ‘evil’ oil and gas companies
Sorry folks (including populist conservatives like Bill O’Reilly), there is just no evidence for this. People have been accusing and Congress has been investigating the oil companies for conspiring to raise the price of oil. Never once have they found any evidence.
If the oil companies were able to fix prices, what happened during the 1990s, when gas prices were at historic lows? Why did prices drop precipitously during the recent recession? Why have prices dropped recently when all of the so-called “experts” were predicting more expensive gas this summer? Why do gas stations prominently display their prices rather than concealing them, as is done in some industries? I’m looking at you, auto industry.
The economy
This one is the classic good news/bad news scenario and explains much of the recent decline in gas prices. Before the economic crisis in 2008, prices at the pump had risen to stratospheric levels. The economy tanked and people all over the globe were out of work, stopped traveling, and generally kept closer to home. This resulted in oil consumption in the United States declining by eight percent.
Economists see slower economic growth in China, Western Europe falling deeper into crisis, and a disappointing recovery in the United States, and see gas prices easing.
China
Because it was so backwards for so long, economic growth in China defies the traditional boom-and-bust cycle. So, even though economists see growth in China slowing, the fact is that millions of Chinese are joining the middle class annually due to liberalized economic policies.
More than 500,000 new private automobiles are added to China’s roads every month. Such growth is destined to put upward pressure on oil supplies for the foreseeable future.
War worries
President Obama wants to ratchet up pressure on Iran slowly and has not ruled out war. Iran accounts for 13 percent of world oil supplies and the region accounts for about 35 percent of global oil output. War could significantly disrupt production and shipment of oil in and from that region.
Recently, these tensions have waned, further contributing to lower prices at the pump.
Domestic supply growth
Prices could come down dramatically in the future due to vast new shale fields coming online from states like North Dakota. The state just became the 2nd-largest oil producing state behind Texas.
America could, if policymakers are willing, dramatically expand its presence in oil and gas markets worldwide, reducing dependence on imported oil and creating thousands and thousands of jobs at the same time.
No conspiracy
Will prices at the pump be lower or higher in six months or a year? If I knew the answer to that, I could quit my job and make a lot of money.
When it comes to prices at the pump, there is no conspiracy, but there are a number of complicated factors at play.
Paul J. Gessing is the president of New Mexico’s Rio Grande Foundation, an independent, nonpartisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.
25 comments so far. Scroll down to submit your own comment.
Leave a response
You must be logged in to post a comment.
Mr. Gessing, thanks for the link.
Speculators exist separately from the oil and gas industry. - Without a Market, there is no oil and gas industry. Markets are good. Unregulated Markets are not so good. Speculation is not of itself a bad thing. Speculation in an honest market is what makes the Price Discovery Function quickly find the Market Price. As I have said on these pages, many serious oil men do not believe the current price is supported by market fundamentals. For sources, just listen to last years Energy Hearings on CSPAN. Ask some oil men at your upcoming luncheon.
I suppose collusion could be considered a bad thing, but I’m not really sure that it does any long-terms harm to the marketplace. - What! Collusion is the cornerstone of Crony Capitalism. Collusion is the opposite of Competition. An Honest Market and a Market with Collusion are exact opposites. Collusion, by definition, means the game is rigged.
That you would even suggest that collusion could be considered a bad thing, as opposed to saying something like, Free Market Capitalism cannot tolerate collusion, tells me where you mind and heart are. Would you do business with a broker who gave you five “competitive bids” for which he had already arranged for the outcome with the five bid submitters?
We’ve probably worn this thread out. I enjoy your inputs and I enjoy hearing opinions that do not agree with my own.
Respectfully, Michael J. Flynn
For more indepth reading on the dynamics of oil and gas prices, check out this report from the Federal Trade Commission.
Mr. Flynn,
Speculators exist separately from the oil and gas industry. Certainly, just because they government says something to be so and bad doesn’t mean that it is necessarily the case. The airlines speculate about the price of oil and gas as do many businesses. I’m personally not sure how speculation can actually harm consumers in the long-term and why it would be considered bad. I’m open to ideas on this, but if I am betting on something driving the cost higher or lower in a given product’s price (whatever it may be), that is generally legal and legitimate. I suppose collusion could be considered a bad thing, but I’m not really sure that it does any long-terms harm to the marketplace.
Broken link. My apologies, the link I gave earlier does not seem to link.
http://www.cftc.gov/PressRoom/PressReleases/pr6239-12 [the http://www.cftc.gov will get you to an interesting web site that includes the press release to which I was trying to link.
A simple Google search [oil price manipulation site:.gov] will yield this press release and others like it from the US Commodity Futures Trading Commission that document the kind of market manipulation that Mr. Gessing insists does not exist. I and the commission beg to differ.
Peace.
Michael J. Flynn
@ Gessing:Price fixing and collusion by the ‘evil’ oil and gas companies
Sorry folks (including populist conservatives like Bill O’Reilly), there is just no evidence for this. People have been accusing and Congress has been investigating the oil companies for conspiring to raise the price of oil. Never once have they found any evidence.
This is wrong on the facts, unless, Mr. Gessing, you are parsing your words to cleverly separate Oil Speculators from Oil Companies. As I have said, oil companies need not join the Cartel or the Speculators to reap the benefits of Market Manipulation.
Mr. Gessing, you use a subtle parsing of words (I would prefer to think you are not just lying), but that does not change the facts, there are numerous documented cases of market manipulation. See, for example:
http://www.cftc.gov/PressRoom/PressReleases/pr6239-12
Please, Mr. Gessing; facts, and not propaganda, should be the basis of civic discussion.
Michael J. Flynn
I’d like to see a show of hands. How many commenters think that the raging fires in New Mexico are caused by global warming attributed to the exorbitant use of fossil fuels and how many think it is God’s way of simulating hell in New Mexico? I’d bet the Democrats would vote for science and the Republicans for religious fanaticism.
Either way excusing gas price fixing and commodities fraud is one pathetic excuse for allowing the citizenry to continue to victimize…itself.
@ Skeptic – Your coffee purchase at Albertson’s.
Unlike a speculator, you took physical delivery of a good that you will actually use. You actually bought it at today’s price, so there is no future contract. The extra cans you bought are not future purchases; you own them.
As to your concept that, “Both the buyer and the seller are ‘speculators’ and every contract has a buyer and a seller.” This isn’t exactly how it works. In general, the sellers are taking a certain price today against an uncertain price tomorrow. Farmers do this as insurance (a hedge). In that case they will eventually actually deliver the physical goods, the outcome of their efforts. In this case the farmer is not a speculator. He has, in fact, opted for certainty. In most agricultural commodity markets I am guessing that there is not a large spread between the quantity of products contracted for and the actual quantity bought and delivered.
I am pretty sure that in the oil commodity futures crap game that you will find there is a significantly larger number of paper barrels traded than there are actual barrels delivered. I’ll get back to you on that.
Forgive me for lecturing, but any ECON 101 text book has a Monopoly Supply and Demand Curve and a discussion of Cartel Behavior. This discussion always shows that a disciplined cartel takes abnormal profits out of what is not a competitive market by virtue of their predatory practice. That same discussion will say why the Cartel cannot just raise prices to whatever limit they choose; even Monopolies are subject to Supply and Demand.
Mr. Gessing is disingenuous or he is ignorant if he is advancing the argument the a weak dollar and Obama energy policy are more significant reasons for high oil prices than are the OPEC Cartel and market speculators. Mr. Obama gets some blame for not forcefully regulating speculators.
Respectfully, Michael J. Flynn
“…try to stick to the facts and the topic.”
This coming from the commenter who obsesses over others’ personal attributes rather than actual evidence and who decided to only discuss an unproven conspiracy about illegitimate voters on a column about gas prices…
Really, Qui Tam? Are you seriously that lacking in self-awareness? I must say, the hypocrisy of that statement is truly impressive, particularly coming as it did as the response to me already pointing out that every single comment you’ve made on this thread has nothing to do with Mr. Gessing’s column.
IcarusPhoenix – I think you babble so much that no one can take you seriously. You are so busy attacking people thread after thread that you add nothing to anything. In the future please try to stick to the facts and the topic. Thanks.
Mick, you’re also ignoring the other half of the equation.
I just got back from the grocery store, so let’s use coffee as an example.
Coffee was on sale for $7.99. It’s been $12.99 in recent months, so I got four containers.
In effect I was speculating with Albertsons. If I run out of coffee, I have to buy,
no matter what the market price ( I have to have my coffee ).
In effect, Albertsons and I are in a futures market.
Leaving aside for the moment that it was a sale, Albertsons would be better served
if prices of coffee go down because I already committed my $7.99.
I on the other hand will be better off for buying now if prices go up, because I locked in the $7.99 price.
Both Albertsons and I are speculating on what the future price of coffee will be and it pays if we are right.
The airlines, which are the biggest players in the oil futures, do the exact same thing.
In the oil futures, regardless of whether any party takes delivery, there are two parties to the transaction.
So half of the speculations are that oil will be lower in price in the future.
Qui Tam:
I’ve missed nothing, but you clearly have if you’re linking to a story that you apparently didn’t actually read. First of all, in case you missed the memo, Sunland Park is an embarrassing aberration that thankfully isn’t indicative of the rest of New Mexico, but, more importantly, that was a single poorly-executed plan to inefficiently sway the results of a local election in an already wildly-corrupt town… in which the alleged perpetrators have been caught. None of this in any way demonstrates the bizarre conspiracy theory that large numbers of ineligible voters are voting in and having any real result on elections on a regular basis, a theory that, despite a decade-and-a-half of failed attempts to prove it by the New Mexico GOP led to our current Secretary of State’s decision to prove that she’s not much more ethical than her predecessors by insisting on investigating claims for which there is still no evidence and an undisclosed expense to the taxpayer in which she found – by her own admission – exactly one such voter and in which she has repeatedly violated the Inspection of Public Records Act by refusing to prove anything about the investigation. Despite that, the right-wing Kool-Aid that you drank is still used as a perennial excuse by Republican legislators to attempt to force through red herring laws that demonstrably disenfranchise significant numbers of voters to prevent a problem that they themselves have proven has no tangible effect on our elections – and that anyone with an elementary grasp of logic would instantly realize would have no hope of swaying an election (after all, we have enough trouble getting legitimate voters to even show up to vote). Nor does any of that change the fact that, as usual, you’ve hijacked the comments thread of a column that is in no way related to what you wanted to whine about with, as usual, zero evidence.
Dr. J:
Strictly-speaking, African Americans are very much a minority here (something like 2% of the population, I think, though that figure is, admittedly, from memory), though you are correct in the case of New Mexico Hispanics. Of course, if you’re implying disenfranchisement of Anglos, then I would point out there is no evidence of that. As far as the so far mostly failed attempts to push potentially-disenfranchising laws in New Mexico go, the probable victims really aren’t determined by racial and ethnic means so much as they are economic and ageist ones. I was, however, thinking more nationally on that front, for much the same reason; most of the more draconian laws don’t exist here.
Has anyone noticed that when gas prices increase, the price of everything else, like groceries goes up? Shipping prices increase. But, has everyone noticed that the prices don’t really drop when the cost of gas drops?
I want to point out that two of Mr. Gessings points are at loggerheads. He states that increasing domestic supply will lower prices. But, he also says that China’s rapid growth has put pressure on supply and increased prices. The fact is, our domestic production is being exported as Americans get in line turning out their pockets. The only domestic supply that is guaranteed to be used domestically is green energy. Alternative energy will lower oil prices as demand for oil eases at home.
You would think that dumping a trillion into Iraq would have eased demand for Americans but, George Bush got NADA in return on that deal. American based multi-national oil companies got no advantage whatsoever in Iraq. The American people got no dibs on any of that Iraqi oil whatsoever either.
Price fixing? Does anyone remember OPEC? We would be naive the think that energy cartels are a thing of the past.
The Obama administration and congress has no effect as any regulation is effectively obstructed and enforcement of the laws already on the books are underfunded and grotesquely understaffed. The Democrats are just as paid off as the Republicans.
Easing threats to Iran does help. I do think that de-stablizing the region can increase prices. Arab Spring and wars cause prices to go up. The neo-cons never seem to understand that foreign policy should be about promoting stability, not promoting corporate colonialism.
@ Skeptic: If you believe that speculation only drives up the price, then you believe that half the speculators (the sellers ) want to suffer losses in order to give money to the other half ( the buyers).
It’s not that simple. Energy consumers, who are actually the productive members in the economy (folks like airlines, work commuters, manufacturers, farmers, and so forth) are usually consuming energy as part of the means of production. They have skin in the game. These folks have a legitimate reason to hedge. In the energy market, allowing someone to enter the game who has no means, or desire, to actually receive and use the commodity, is like allowing me to go out in the parking lot and see which of my coworkers drive fast motorcycles. I cannot buy life insurance on a coworker who drives a fast motorcycle just as an economic bet.
Do a little homework. Serious oilmen have said that the current climate of speculation has distorted the Price Discovery Function. Mr. Gessing would have us believe that scary Democrats are driving the Market. Energy producers (oilmen) say that the present fundamentals of supply and demand do not support the current price.
Go ask a few real oilman if they would sink a hole in the ground to get oil at an extraction price equivalent to a market price of $80 a barrel. They would not. There are plentiful supplies for much less. There will be even larger supplies as we transition to more natural gas (Market Substitution).
Do some more homework and you will find that some commodity markets have tighter regulations on margins than the oil market has. If a speculator can enter the market with 5% down, then you’ve just created 20 paper barrels of oil for every real barrel.
As ever, Michael J. Flynn (Pragmatist with a realistic amount of skepticism)
“An oil future is 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. Commodity futures provide a way for a purchaser to actually bet on whether a commodity will increase in price in the days and weeks ahead. The price is locked into a contract, a futures buyer would receive a barrel of oil for the price dictated in the future contract, even if the market price was higher when the barrel was actually delivered. This financial speculation will drive up the price of gas and oil artificially.”
Good.
But you are only considering the effect of the buyer.
Both the buyer and the seller are ‘speculators’ and every contract has a buyer and a seller.
If the future price is higher than the agreed upon price, the buyer makes money (at the expense of the seller ).
If the future price is lower than the agreed upon price, the seller makes money ( at the expense of the buyer).
If you believe that speculation only drives up the price, then you believe that half the speculators (the sellers ) want to
suffer losses in order to give money to the other half ( the buyers).
Why do you believe the sellers would be so generous?
They’re not, of course.
Sellers have just as much desire to see prices go down as buyers have to see prices go up.
IcarusPhoenix – in case you missed it or conveniently want to continue to pretend voter fraud in New Mexico doesn’t exist: http://www.nmpolitics.net/index/2012/03/two-more-charged-in-sunland-park-voter-fraud-scheme/ That was two months ago but as rampant as it is, I believe it really wasn’t cared for during criminally charged former Secretary of State Rebecca Vigil Giron’s tenure and nor does it seem to have been during former Secretary of State Mary Herrera’s tenure which is riddled with criminal accusations, some of which were alledged by a whistleblower. Obviously both political parties want certain issues to go away or be excused, but as a voter and payer of astronomical gas prices I am tired of it.
Advice to all, think twice before you eat shrimp or seafood from the Gulf of Mexico were the BP oil spill occured. And the next time you gas up, consider buying an alternative energy vehicle for if President Obama isn’t there in the future to lead investigations into price fixing and commodity brokers – you’ll certainly be in for a “fix”.
President Obama has fullfilled his promises for hope and change. We all hoped Osama bin Laden’s life would be ended, most of us in the know hoped commodity brokers would have the spotlight put on them so that gas prices may stop skyrocketing, forty million uninsured people hoped for reasonably priced health insurance, almost every sane person hoped for an exit out of the bogus Iraq war, we all hoped to recover from the Bush induced Great recession. And there is more, too numerous to mention, on the list of things we hoped would change and did.
Hemingway says: ”This artificial market is extremely volatile. It is very difficult to predict when these markets will change. ” Hummmmm… sounds like Facebook stock.
Ten years ago speculators controlled only about 30% of the oil futures market. Today, these speculators control nearly 80% of this market.
An oil future is 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. Commodity futures provide a way for a purchaser to actually bet on whether a commodity will increase in price in the days and weeks ahead. The price is locked into a contract, a futures buyer would receive a barrel of oil for the price dictated in the future contract, even if the market price was higher when the barrel was actually delivered. This financial speculation will drive up the price of gas and oil artificially.
This artificial market is extremely volatile. It is very difficult to predict when these markets will change. Mr. Gessing needs to study commodity futures before he “speculates” on the cause of oil prices.
QT says: ”I am trying to think of a reason why our Patriots are dying in oil rich nations while their votes are being disenfranchised”. You mean like Afghanistan? Actually IP, I should have said “minority” voter suppression, and of course in some parts of our illustrious state, a minority is not always African American or Hispanic, is it?
Mr. Gessing does not even mention the speculative commodity contracts that drove up gas prices.
It’s a reaonably straight piece and he hits most of the issues. There might be price fixing in certain localities but its not collusion on the part of the boogeymen (you know, the “big evil oil corporations”). Also, Dr. J got it right, although Rio Arriba county might be en exception.
Dr. J:
I think certain suppression tactics are noticeable; I do not, however, think that they can necessarily be classified as “suppression” simply because that implies malicious intent. I do not honestly think that most conservatives are attempting to keep legitimate voters from voting, but that is certainly a noticeable side-effect of many of their misguided actions. As for “voter fraud”, Qui Tam was probably being facetious; unless the poster in question has finally noticed that in a decade-and-a-half the New Mexico GOP has yet to be able to prove that particular wild (and wildly-unfeasible) conspiracy theory, he’s usually a strong proponent of that truly bizarre view… hence its completely non sequitorial appearance in the very first comment on this completely unrelated column.
Qui Tam’s post does beg one legitimate question, though: how can anyone respect an organization that claims to be nonpartisan but that only supports extreme right-wing Republicans, that claims to be an educational organization but is constantly spreading misinformation and making demonstrably-false statements (sometimes even ones culled from chain e-mails), is so obsessed with “limited” government that their president (Mr. Gessing himself) once wrote an entire column where he tried to ascribe the ideals of the Articles of Confederation to the Constitution, and that claims to be dedicated to “economic freedom” but are so dedicated to the “freedom” part of the concept that they gloss over their complete lack of understanding of basic economic theory… or, for that matter, elementary mathematics?
This commentary is not worthy of an Economic 101 course paper. It is all partisan claptrap.
Ah yes Dr. J, and who cares if a person’s vote is disenfranchised because of a few cases of voter fraud? Might it be the middle class single parent who pays half a paycheck for gas to get to to a job? I am trying to think of a reason why our Patriots are dying in oil rich nations while their votes are being disenfranchised. hmmmm.
Yes, interesting how conservatives always claim voter fraud exists and liberals all claim that voter suppression exists, both are political fallacies of extremists and neither exists to any extent that is significant.
lol! you forgot to mention there is no voter fraud taking place in New Mexico
I still respect the Rio Grande Foundation but this really is a bit ridiculous.