Comodities Futures 101: How the Obama Administration can (and should) control the price of gas at the pump

Why does the price of gas go up and down ‘ you’ (which means almost everybody) might ask.  Someone will pop up and say it is all a matter of supply and demand, and think that is all that there is to it. Wrong! But not entirely wrong.  It is not the supply and demand of today that causes the price of gas at the pump to rise or fall; it is the perception by Oil speculators in the commodity futures market guessing what the future supply and demand will be. They are not buying Oil for today, they are buying based upon what they think the price might be in a month, or 6 months or a year and that is what determines the price at the pump today.  Now join me on a trip to the here and now.

The United States, more years ago than even I can remember, but certainly during the early stages of the Cold War, began to buy Oil and created the ‘Strategic Oil Reserve’. It was to make sure that our supply of Oil and Gas would not be interrupted by a war or other major catastrophe.  While no one (at least that I know who will actually tell me)  knows the measure of the amount of Oil and gas deemed ‘strategic’,  common sense suggests that it is a percentage of consumption and as consumption has increased,  presumably so has the size of the reserve.

Now keep in mind that the reserve was primarily in place in case a war of sufficient magnitude interrupted out ability to import enough to meet our needs however those ‘needs’ may be defined, but that was then and this is now.  I think it is reasonable to assume that the supply in our strategic oil reserve is more than prudence says we need ‘just in case’. So, if you are with me so far, it is not a huge leap of faith to assume that the government can control the futures market simply by letting the commodities market know that when the price at the pump reaches say $3.75 a gallon the government will release whatever percentage of its’ reserves  necessary to  insure that the price does not exceed that amount.  If as a result of government intervention in the market, the price drops to say $3.25 a gallon the government can then become a buyer to replenish the reserve.  By taking out the speculation in the commodities futures market the price of gas at the pump would actually be what it should; a price based upon present supply and demand. If that were so, the world supply if priced against world demand today, as surprising as it may seem,  would probably cut the price of gas at the pump by around 75 cents a gallon.

Why the imbalance you might ask? Well we have some concerns about Libia and other oil-producing nations in the region, drug lords running amuck in Mexico, instability in Venezuela, unknown future demand in China and India, all make futures traders salivate. Of course coincidentally we are seeing advertisements daily from Exxon and others telling us that we have lots of domestic oil in oil sands and natural gas here to last us for the next hundred years. I did get a bit confused when I saw a spokesman for Exxon on TV telling us that we had all this ‘hidden’ petroleum in ‘oil sands’ to last us for all that time, and all the jobs it would create……….in Canada (???)

Now a lot of  ‘main  street folks’ are really pissed off that the banks got money and Wall Street got money and we are going to have to pay it back or put it on the backs of our children, while the one common denominator that effects all Americans is that they are now paying on average, about 8% of their weekly income on gas, up 100% in just two years.  Nothing touches the economy more fundamentally than the availability and cost of petroleum based products which include everything from home heating oil to plastics to fertilizers.

The President tells us that the economy isn’t adversely effected until gas at the pump exceeds $4.00 and he might be right.  Where he is missing the point, is that if $4.00 gas won’t hurt us, $3.00 gas would certainly help us, especially if we knew that the cost had a ceiling so we were not taking a crap shoot on a line item in the business budgets of almost every employer (and potential employer) in the country?  Cheap gasoline drove our economy in the past and it can again.  We just need a bit more creative thinking at the top which, I thought, was why we elected him in the first place.

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