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Oil Markets, How Market Manipulation affects Gas Prices

Updated on June 19, 2013

Gas Canister

Typical portable gas canister
Typical portable gas canister | Source

Oil Speculation

Who exactly are oil speculators? Speculators are parties that have a direct, or indirect, connection to the prices of crude oil that is being traded on the open market. They have investments tied into the cost of oil and are doing what any good business person should do; they are trying to get the best possible price on their product.

Oil Production in the World

The problem arises when these same individuals manipulate the information on their product to artificially inflate the value of the goods. This issue gets magnified when a verbal spat from an oil producing country starts rumors of a supply disruption, like Iran threatening access in the Strait of Hormuz. It also occurred when Libyan’s were rising up and revolting against Moammar Gaddafi even though Libya is a relatively small player in the world’s oil supply market.

So far in 2012 we have seen prices hitting highs that are usually saved for the summer driving season. Gas prices in February are averaging higher than usual and the trend is continuing to inch upwards. Here is California, where I live, we are already averaging higher than $4 a gallon and some places in Southern California (Los Angeles) have eclipsed $5 a gallon.

Not everyone understands why this spike in oil prices is different than the ones that have exploited our wallets in the past. The different factors are supposed to be directly connected to supply and demand here in the USA.

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Oil Supply and Demand

We have always been told by the major oil companies that the prices are driven by supply and demand. Demand is up because China’s economy is booming or supply is down because refineries are offline; maybe some political turmoil in a Middle Eastern nation has caused disruptions in their output of oil? We have all heard the excuses; I mean reasons, why prices do what they do. I have always found it very confusing to see prices climb so aggressively but never seem to drop as aggressively.

What makes these recent spikes so mind boggling is that current US domestic oil production is at a high not seen in many years. The US is estimated to have passed two billion barrels of oil in 2011, a threshold not passed since 2003. Increased production is not the only key in prices, so is demand. The demand in the US is also down, almost 5% from this time last year. Putting these two factors together clearly points to a bigger problem than what we are being told.

When people feel like they are getting taken advantage of, and it sure seems like we are, finger pointing starts. Blame is being directed at the President, Congress, oil companies, people with big SUV’s etc. People are going to blame who they decide to blame but it is not always as easy as it seems.

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Energy Manipulation

Being a resident of California these manipulations sure remind me of what we went through back in 2000 and 2001. Energy companies played the market by creating false shortages by shutting down power plants and then selling the power at inflated prices because of the falsified shortages. Major companies like Enron were exposed as manipulators and conspirators in the energy shortage; we all remember what happened to them shortly after their exposure in the crisis.

Usually when our gas prices go up we hear increased rumblings about more domestic production to reduce our demand for foreign oil. This time we are in a different boat. With our production at a recent high our oil companies are actually selling oil to other countries. The numbers haven’t been released by the U.S. Energy Information Administration yet but the US could have exports of about one billion barrels of oil and fuels in 2011.

What it all comes down to is we need to get the speculators under control. If we continue to allow people to just say whatever they want to dramatically affect these prices we are going to get manipulated like puppets on a string. Our economy is still very fragile; I do not want to see what will happen to it if gas prices hit the highs that the experts are predicting.

How does Oil Speculation Raise Gas Prices

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    • profile image

      Larry Wall 5 years ago

      Being on display is now always an ideal place to me, but I accept your good wishes.

    • adjkp25 profile image
      Author

      David 5 years ago from Northern California

      Larry - Your background on the industry is definitely on display. Thanks for sharing with all of us what you know.

    • profile image

      Larry Wall 5 years ago

      There are a lot of factors affecting prices. The OPEC basket price, which is the average of all OPEC members was $119.33 today. OPEC sets this price. Next there is Brent, which is produced in the North Sea, which today ws $119 and finally there is the U.S. Benchmark of West Texas Intermediate, which was down today to $103. Now there is not enough WTI to satisfy the country. All refineries cannot handle the high sulfur oil from OPEC, so other oils from different countries are use, which will all sell for the market prices, with variations because of sulfur content, specific gravity and distance to transport.

      Also, all of the prices quoted above are future prices--the price set today that the traders hope to collect when it arrives at its destination. The ownership of that oil can change several times in a matter of hours or days, depending on what the world political atmosphere is like, the possibility of any key refineries being out of action, blockades at key ports and so on and so on.

      I have been watching and commenting on oil prices for 22 years and I learn new things everyday.

      Finally, if U.S. drilling increases, we are still going to see high price oil because it is going to be sold at market price. That is what the shareholders and the domestic royalty owners expect. It is also what the federal government expects. Royalties from federal lands and water bottoms, including the Gulf are the second largest source of income for the country after the income tax. States, which collect severance taxes on all the oil produced in their state and royalties from oil produced on state lands and water bottoms, will also expect the companies to charge the market price are end up in court.

      Years ago, the old Texaco company, had a long term contract to sell natural gas at 35 cents per thousand cubic feet. The price shot up to $6 or something like that. Texaco was bound by the contract. The state said that Texaco was underselling the product and after a long and protracted suit, a settlement was reached where Texaco had to pay royalties on the natural gas it sold during a certain time period, even though it was sold under contract at a lower price. There are no long term contracts today. Virtually everything is sold on the spot market which adds to the volatility of the whole situation.

      Now I have probably told you much more than you wanted to say. Like a boss from many years ago said, "You asked me the time and I told you how to build a watch."

      If my detail was too excessive, I apologize. I just get the feeling that you like to have as much info as possible.

      Larry

    • adjkp25 profile image
      Author

      David 5 years ago from Northern California

      Larry - it is the artificial fluctuations that really get me. If we had legitimate shortages then I would understand the prices going up. If it is going up because of verbal rumors only that isn't right.

    • profile image

      Larry Wall 5 years ago

      I worked in the oil industry for 22 years in the PR capacity, and I find the speculation as frustrating as you, because it is driving up the price artificially, but there is nothing you can do in a free market about that, especially when you need more than you make. I have a Hub about oil companies making money, Sometimes You Just Can"t Help But Make Money" or something like that. You might find it interesting. I am all far drilling, but until east and west coasts, the western coast of Florida, the Rockey Mountains and the Arctic National Wildlife Refuge, we are going to be dependent upon imported oil. We are the only nation that puts so much of our resources off limits. In addition, offshore drilling has not fully recovered from the excessive sanctions that were imposed after the BP-Transocean Explosion.

    • adjkp25 profile image
      Author

      David 5 years ago from Northern California

      Larry - I recognize that we do import a huge amount of our oil here. I guess I'm just not one of the drill baby drill guys. I am frustrated that the prices at the pump are as high as they are and the oil companies continue to make such huge profits. It is also very irritating that all it takes to make prices jump is someone whispering about a shortage or war, that is the speculation that drives me batty.

    • profile image

      Larry Wall 5 years ago

      First, glad to have you as a follower.

      Secondly, the amount of crude oil exported is negligible, with most of it going to Canada as a convenience. Most of the exports you mentioned are refined products, not necessarily gasoline. We do export diesel, aviation fuel, solvents, waxes, fuel grade coke and other products. Some gasoline may be exported to Canada, again because of convenience and some to the Philippines, which is a U.S. Commonwealth. We are importing about 35 percent of our daily crude oil demand. That will probably increase as the shale oil plays come on line--however, shale plays do not last for ever and as domestic supplies increase, prices will fall and domestic demand will increase, starting the whole cycle over again. As long as we are importing 15 percent or more of our crude oil supply (my estimate) OPEC is going to control the price. As a nationalized oil company, they can cut back production as they please. In the U.S. oil companies are publicly traded companies, owned by stockholders. They cannot be told to stop producing, except perhaps in times of national emergency, but I cannot imagine that happening.

    • adjkp25 profile image
      Author

      David 5 years ago from Northern California

      ElizaDoole – it technically isn’t a surplus but we are exporting more fuel than we have in many years, if not decades. Fuel is actually a top export for the US right now.

      It is not mentioned because too many people think that extra drilling here will address the excessive fluctuations of our gas prices. Since crude is traded on the open market what is stopping the oil companies from drilling more oil, just to ship it out of the country for a bigger profit than they can get using it here? We all know how critical the bottom line is to the oil companies making billions off of consumers right now.

      Thanks for your comment.

    • ElizaDoole profile image

      Lisa McKnight 5 years ago from London

      Interesting hub. I did not know the US had an oil surplus right now. Voted up.