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President Obama, speaking at a community college in Virginia yesterday...
"It is true that a lot of what's driving oil prices up right now is not the lack of supply. There's enough supply. There's enough oil out there for world demand," Obama said.
"The problem is ... speculators and people make various bets, and they say, you know what, we think that maybe there's a 20 percent chance that something might happen in the Middle East that might disrupt oil supply, so we're going to bet that oil is going to go up real high. And that spikes up prices significantly."
This past Sunday....
Saudi Arabia's oil minister said on Sunday the kingdom had slashed output by 800,000 barrels per day in March due to oversupply, sending the strongest signal yet that OPEC will not act to quell soaring prices.
Two Saudi-based industry sources told Reuters last week the kingdom had cut output due to poor demand, prompting selling by traders who saw it as a sign of a well-supplied market.
But crude rebounded later in the week on optimism about the state of the U.S. economy.
Oil closed at $111 a barrel in yesterday's commodity trading. National average retail price of gasoline is at $3.837 per gallon.
So, oil supply is plentiful. So much so that Saudi had to curtail it's February increase in production because there was not enough demand. And yet prices still soar.
Crude oil and refined gasoline are traded in what are known as futures contracts. Many commodities are. Futures contracts allow people who produce or use commodities like oil or corn to hedge. Basically, they can lock in the price of the raw material they use or price a producer will sell at.
The original intent of futures contracts.....
.....allows farmers to lock in a sales price before they plant crops. Or, a famous example in oil, Southwest Airlines' CEO hedged a huge portion of the airline's fuel cost in 2008 by buying oil at $51 a barrel. That's what the airline paid as oil prices soared well above 100 dollars a barrel that summer and his competitors suffered.
Locking in a price for commodities months in advance of actually taking ownership of those commodities. On the surface, it doesn't seem all that nefarious.
Suffice it to say that the original intent of futures buying and selling was not intended to be manipulative. It was intended as a hedge for large consumers or sellers of goods classified as commodities.
What has gone wrong?
The problem is that anyone can take out a futures contract without ever producing or taking delivery of a commodity. That allows traders to park money in the contracts, without worrying how to sell any actual oil.
Bringing about this counterintuitive result....
If demand is higher on one side of the contracts, it raises the price of the product without any actual supply or demand issue.
When did all this begin?
Enron's Ken Lay pushed for relaxed regulation of energy futures trading. This was incorporated in the Commodity Futures Modernization Act of 2000, passed in the waning legislative days of 2000. This came to be called the "Enron loophole." It took futures trading in energy outside the regulation of the CFTC, and it enabled Enron to drive up electricity cost to Californians as much as 300 percent.
How did that "modernization" work out?
CBS' "60 Minutes" quoted hedge fund manager Michael Masters to the effect that, in 2007, 27 barrels of crude were being traded every day on the New York Mercantile Exchange for every one barrel of oil that was actually being consumed in the United States. Both of these figures are measures of how many times speculators buy a shipment of oil before it reaches its true market. This ran crude oil prices to over $140 a barrel before the economic collapse of 2008.
Why doesn't someone do something about this?
To correct these abuses, Congress passed the Dodd-Frank Act in 2010. This act contained provisions to bring energy futures trading clearly under control of the CFTC (Commodities Futures Trading Commission) to correct speculative abuses. The implementation rules are being crafted by the CFTC now. The 60-day comment period from the public ended March 28. These rules are not finalized or published and may be weaker than Congress intended.
I'm guessing those last few words will turn out to be prophetic.....what with our corrupt political bribery system and all.
Anyway....when someone brings up the high price of gasoline in a casual conversation over this Easter weekend.....remind them of this....
One CFTC commissioner, Bart Chilton said, as reported in the Oil and Gas Journal, "We have more speculative positions in commodities markets than we have ever had in the past — in fact, they are up 64 percent in the energy complex from June of 2008."
Just as Americans were forced to suffer because of the uncontrollable and reckless gambling by Wall Street banksters....so too gasoline prices and commodities gamblers.
Land of the free and home of the exploited.