Is Oil Speculation Responsible for High Gas Prices?

Is Oil Speculation Responsible for High Gas Prices?

As Americans watch their wallets empty as quickly as gas prices climb, we all search for answers. Some experts say the seemingly endless rise in gas prices is being driven largely by oil speculation, the practice of buying and trading oil futures -- in an attempt to predict the cost of oil at a later date. Should you blame speculation for your pain at the pump?

Next question in The Recession

  • “Yes”
  • No Objections Yet

Consumer Federation of America

There is a Large Speculative Premium in the Price of Oil

Consumer Federation of America

The analysis of the current oil market must start from the recognition that oil prices have been rising for quite some time, as the following exhibit shows. The price increases between 2002 and 2005 reflected a tight market situation that produced the sharpest sustained increase in prices since the Arab oil embargo. Between January 2002 and December 2005, prices tripled from just over $17/bbl to just over $52/bb, or about $0.73 per month. The 2005 price of just over $50 per barrel is right in the middle of the range where the oil industry executives have told Congress that the economic cost of delivering a barrel of oil is today. In the two and a half years after January 2005, however, prices have been increasing over four times as fast, over $3.00 a month, rising to about $145/bbl in recent weeks. If the 2002-2005 trend had continued, the price of oil today would be about $65/bbl.

Thus, we are not saying that markets are not tight or that prices should not have increased, but we are suggesting that the explosion of prices on top of an already rapid price increase was excessive. Speculation would not be having the effect it is if fundamentals were not so tight, but there is no doubt that speculation is making matters much worse. With the real marginal economic cost of a barrel of oil is in the range of $35 to $60 per barrel, adding a cartel rent for OPEC which is targeting $70 to $80 per barrel, and even a geopolitical risk premium, we conclude that the current price includes a large speculative premium. We think a speculative premium of $40 to $50 per barrel is excessive.

  • Market models based on fundamentals at the U.S. Energy Information Administration and the Japanese Ministry of Economy, Trade and Industry show a premium of $40 to $60 above fundamentals.
  • Analysis of the economic cost of crude suggests a premium of similar magnitude, as does a simple trend line extended from 2002 to 2006.

Last, and probably least, oil company executives and OPEC oil ministers say there is a premium of $40 to $60 that is not explained by fundamentals.

Evidence

IcoimageImage
Crude Prices Compared to Trend Lane (1/02-1/05)
3_1_main
IcoimageImage
The Price of Crude Vastly Exceeds Estimates of Cost
3_2_main
Post a Comment

Next Argument Previous Next