The price of gas has finally leveled off at $3.91 at the Arco by my house. It is the cheapest in town, and other stations are already over the $4 mark. Prices often fluctuate through the year, but it was surprising how stable the price was over the last year. It seemed to fluctuate between $2.97 and $3.03 forever. It has shot up over the past couple of months, and with my long commute, it puts a pretty big dent in the wallet.
There was a Seattle Times article a couple of weeks ago that tried to explain all that goes into gas prices. It does not follow strict supply and demand pressures, as most of the oil producing countries collude to set prices. The article mentions that the price of a barrel of oil is influenced not only by supply and demand, but geopolitics, the value of the dollar, and even weather.
It went on to say that the local gas station owner does not have much control over pricing. They are limited by the wholesale rack rate that can change every 24 hours, as well as what the station across the street is charging. Most live on margins of a few pennies a gallon. Like movie theaters, gas station operators make most of their money on the snacks we buy.
One major factor of pricing that was not mentioned in the article is the speculative market. Companies can buy oil futures to lock in pricing for large deliveries months down the line. This helps them smooth out pricing and allows for a little planning stability. Airlines are major buyers for example.
But I have read that up to 80% of the people who buy oil futures never have any intention of taking delivery. They are just speculators, gambling whether prices will go up or down. They not only fuel dramatic swings in the price of oil and gas, alternately creating and bursting bubbles, but they make an already unnatural market all that more insane. A butterfly farts halfway around the world, and the price of a gallon of gas goes up 30%.
A prime example of this was the spike in oil prices in 2008. With no sudden geopolitical instabilities, and no major shifts in supply or demand (demand was actually off, which would reduce prices in a normal market), the price for a barrel of oil shot up over 60% to peak at $147 before crashing back down to $40 by the end of the year. And while speculators gambled up the value of oil, we paid for it at the pump.
Like the unnatural market of credit default swaps that nearly brought down our economy, the oil futures market is similarly out of hand. Credit default swaps are essentially insurance against loss on an investment. But as an extra perversion to give them something else to bet on, people are allowed to take out insurance on things they don't even own. It would be like me taking out insurance on your house, betting that you would fall asleep while smoking and burn it down. Actually it would be like a hundred people taking out insurance on your house.
The size of the credit default swap (or insurance) market far exceeded the value of what was being insured. At $50 trillion dollars, it was three times the size of everything produced in the U.S., and larger than all the U.S credit markets put together. When the bubble burst, it just about took down the world economy. By comparison, while the speculators were pumping up the oil bubble in 2008, the average trading volume in oil futures was about 15 times the daily world production of oil.
Wall Street continues to make up new ways to gamble like Vegas does with the Super Bowl (although at a better tax rate). It has long since perverted the purpose of gathering together investment capital to help companies grow, and allowing the investing public to share in that growth. They continue to make up things to gamble on, and the ramifications of these bubbles spread far and wide to we little people just trying to get by. While they pump up bubbles of imaginary value, the cost of doing business goes up, prices increase, and it is more expensive for us to drive to our jobs where our paychecks are not similarly increasing.
This is a form of trickle down economics that actually works, but what is trickling down to us near the bottom is not money, but something much more foul smelling.
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