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Are High Fuel Prices Necessary?

July 31, 2008

Perhaps at no time in recent history has more emotion and contention erupted over the demand for gasoline and fuel during a time of record high prices. Government, business and citizens struggle to cope with the stress as personal and fiscal budgets strain to meet the need. High fuel prices have changed the climate of business and daily life of Americans in a very real way. High fuel and the resulting high food prices are impeding the goals of many government and humanitarian organizations on a global basis. The high cost of gasoline is not about environmental issues or even a real lack of resources, as some would proclaim. High gas prices are not necessary for consumers as far as necessity is concerned. However, high gas prices have become a “necessary” symptom to sustain a hierarchy of investors, speculators, businesses and government infrastructure that have been empowered around an important staple of modern life with the goal of generating income.

Currently, the federal government plays both sides of the fence, producing, storing and selling on the business side, while taxing and regulating on the government side. The government has a massive stock of oil called the Strategic Petroleum Reserve. The Department of Energy fills this reserve from a percentage of oil taxed on oil pumped from federal lands by oil companies in addition to the cost of any leases to these same producers. This is all coordinated through the U.S. Interior Department through the royalty-in-kind program. The government trades the oil for suitable oil in stockpile as needed and rotates the Strategic Reserve on a regular basis, selling the “old oil” on the open market.

In much the same way, the federal and state governments also have a “use tax” on gasoline that varies from state to state. This tax is to provide additional revenue, typically for anything from highways to special projects. This is the federal tax that drew such hot debate as the “summer tax holiday” in pre-summer election rhetoric.

The federal government has been jealous of large oil company profits for some time. This year, a combination of record price hikes and record profits led to Congressional investigation. The reality is that Big Oil doesn’t make money on gasoline based on production for a barrel of oil. Each barrel produces roughly 21 gallons of gasoline, which is half of the yield of the barrel. The remainder is used for other profitable products from jet fuel to lubricants. The fact is that the other products being produced from each barrel of oil are what generate the huge oil company profits. The price of gasoline is already partly subsidized from profit made on more profitable products. Otherwise, the price of gasoline would be higher. For example, if the price of oil is $112.00 a barrel, the final cost per gallon of gasoline is $5.33 a gallon for raw materials alone. This does not include any additives or special processing needed to meet government standards.

A speculator is a person who does not produce or use a given commodity, but risks personal resources by trading futures in that commodity with the intention of making a profit on price changes.

Forty years ago, the world was not involved in a global marketplace of speculation where oil was concerned. That is not the case today. The price of crude oil today is no longer dependent on any traditional scheme of supply and demand. Prices are manipulated by an elaborate financial market system masterminded by Wall Street and other investment bankers. As much as 60% of today’s crude oil price is pure speculation driven by large investment trading banks and banking hedge funds. NYMEX (New York Mercantile Exchange) in New York and the ICE Futures in London control global oil prices through oil futures contracts which sets the cost for freely traded oil cargo. NYMEX was created so that farmers could gauge what their unharvested crops would be worth months in advance, so that factories could lock in the best price for raw materials and airlines could manage their fuel costs.  In the last several years, speculators and speculative entities have become an influential factor in the market for their own profit through commodities futures.

With the development of unregulated international derivatives trading in oil futures over the past decade, the present speculative market has developed new flexibility and volatility because of investment action. The world of paper oil is operated by Wall Street’s investment bankers. The government has refused to resolve the issue through more regulation, possibly due to profiteering within the ranks of lawmakers and politicians.

In the latest jump of energy prices, large financial institutions, a multitude of investors as well as hedge fund and pension fund administrators have been pouring billions of dollars into energy commodities markets in an effort to take advantage of price changes or hedge against them in a global gambling venture.

As far as the investment market is concerned, the demand for a barrel of oil that results from the purchase of a futures contract by a speculator is just as real as the demand for a barrel that results from the purchase of a futures contract by a refiner or other user of petroleum. Supply and demand of the actual product is no longer relevant to the cost. Simply said, when large futures contracts are in demand, the cost of oil goes up.

Investors are working with oil refiners in the futures market to insure a profit at any price at any given time, wherever possible, as long as market confidence allows. This is exactly what is happening during upward price spirals.

The devaluation of the dollar has made the lure of oil speculation even larger as investment funds and speculators seek to buy and sell futures contracts. They need profits coming in during the current mortgage and financing crisis. The lure of futures profits tempts most investors with the limited quick-money investment opportunities in the ailing U.S. economy. Ultimately this speculative market could be the undoing of the global marketplace as any real supply and demand proves a figment of the imagination. In effect, virtual reality has become the new reality in commodities: a virtual reality that impacts the world.

~ E. Manning

Other top-rated energy related articles by E. Manning…

An Unlikely Hero in Big Oil
Hemming in Big Oil Criminals
Gas Prices & Currency Issues
Bipartisans: Fuel & Climate Security
Is Cap and Trade Legislation a Sure Thing?
Energy: U.S. Survival at Stake

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