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Oil Prices, Gas Prices, Diesel Prices: No, It’s Not All Relative

I try, I really, really try, to follow the markets and read as much as I can.  I try so very hard to understand what the so-called experts are saying.  I have to conclude that, in the grand scheme of things, this is just that-a scheme!  Demand is in the dumper.  Depending on who you talk to and when you talk to them, we either have a lot of oil on the market or a helluva a lot of oil on the market.  In spite of the wild ups and downs of this market, prices at the pump have remained over $3 per gallon.  We’ve seen prices swing $25 plus in a matter of months.  You don’t know who to believe anymore.  One financial insider tells you the market is set to rally, another says outlook is bleak.  Stability is gone, it seems and the high price of gas and diesel is holding our economy back.  As long as you have to spend so much for fuel, you’re going to cut back elsewhere.  It’s Economics 101, right?  According to an article by commodities writer Sammy Robinson

“Crude futures began trading on the NYMEX in 1983 and are now one of the most heavily traded commodities in the world. Futures, by definition mean that you’re trading the price of oil months into the future at a later date. Traders speculate that the price in the future will be higher or lower.  Crude futures trade 30 consecutive months plus long-dated futures initially listed 36, 48, 60, 72, and 84 months prior to delivery.  Crude Futures trade in units of 1,000 U.S. barrels (42,000 gallons).”

The rub is this: the speculator never has to take delivery.  Ever.  Over 90% of these contracts are closed out before delivery.  Seems counter-productive in a way, doesn’t it?  Even though we’ve been trading oil this way for almost 30 years, it’s still relatively new territory.  Just as some blame the repeal of the Glass-Steagall act for creating the ‘too big to fail’ mentality that led to the bailout of Goldman-Sachs, GM and others, I do wonder if regulation of the commodities market would do anything for the oil speculation game?  I’m not big on regulation at all.  I am, in fact, very much a ‘less is more’ kind of a guy when it comes to government.  Big government only means big spending, which is how we got so deep into the financial mess in the first place.  But something’s got to give.  For whatever reason, this market is totally disregarding supply and demand fundamentals in favor of huge what if’s and maybe’s in a market that is dominated by speculators betting against the US dollar (since oil is traded in dollars globally).  Until gas and diesel prices fall, you won’t see much movement in consumer spending to the upside.  Whatever happens within the market structure, it had better happen soon.  If the government takes over, you won’t like the results.  Or could that be the real intent?  2012 is going to be a very, very strange year.

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