As the graph below shows, the price of gas is languishing just above $4.00 per thousand cubic feet.
Huh? What’s that? You don’t think that’s the kind of “gas” he was talking about? That can’t possibly be. We all refer to gasoline as “gas” informally, but the use of the phrase “oil and gas” (as in “the oil and gas industry”, or in the name of the President’s recently-announced “Oil and Gas Price Fraud Working Group”) always connotes oil and natural gas. At least among knowledgeable people.
Obviously, the price of motor gasoline tracks the price of crude oil pretty closely. The crude oil price is set on the world market. Some contend that the price of oil is controlled by some nefarious group, usually either “Big Oil” or “speculators”.
- If Big Oil controls the price, why did it fall in 2008? They had it at $140, right where they wanted it, but it fell to below $40.
- If Big Oil controls the oil price, what about the price for natural gas? One would think that natural gas, as an almost totally domestic product, would present an easier market to control, if one were playing that game. At the current price of natural gas relative to crude oil, natural gas is a bargain. If crude oil were equated to natural gas based on energy content, oil would be about $25 per barrel!
- If speculators control the price, who are they betting against? The answer is: other speculators. Speculators rarely take physical possession of the commodity; they strike a contractual deal with another speculator. One is essentially betting that the price will go up, the other is betting that the price will go down. The “price will go down” guys cleaned up in 2008. The two bets cancel each other out.
No, the things that truly swing price are supply, demand and (perceived) risk.
Say, just as an example, that the government decided to curtail drilling in an important producing area like the Gulf of Mexico, and as a result total domestic production dropped by 300- to 550,000 barrels per day, compared to expectations. That might cause the crude oil price to go up. Just as an example.
What is this, like the 27th time Washington has looked into allegations of fraud or price fixing? What have they ever turned up?
Fraud? Physician, heal thyself.
Cross-posted at stevemaley.com.