Author: Sylvia Burley
Any mobile person knows exactly how expensive gas is these days. It affects us whether we are driving, riding the train/bus or heating our homes, which means less money to spend elsewhere. It’s so bad many are asking, why is gas so #$%* high?
Although we can all agree gas prices are too high, there has been much disagreement as to exactly why. The correct answer is probably a mix of many things including unrest in the Middle East, domestic energy production restrictions, energy regulations and taxes as well as the falling value of the U.S. dollar.
The one factor many want to ignore is the role speculators or traders are playing in this. Traders are those “think they’re more clever than everyone else” people found on Wall Street (remember Gordon Gekko in the movie Wall Street?). Even actor Michael Douglas, who was recently tapped to assist the FBI in tackling insider trading, can’t believe that unscrupulous business aficionados are patterning themselves after the character he played, then reprised. Some of the very same people responsible for tanking the economy in 2008 by dabbling in derivatives are directly impacting the price of gas.
(Start watching video at 13:17 ” Politics of the Pump”)
Derivatives are financial instruments that have no intrinsic value, but derive their value from something else. They hedge the risk of owning things that are subject to unexpected price fluctuations such as foreign currencies, stocks and government bonds. Here’s how it affects oil prices:
“A futures contract is an agreement between two parties to exchange an asset in the future at an agreed upon price today. If a trader who owns oil believes the price is likely to increase in the future, he may offer to sell his oil at a higher price at some future date.
A buyer who agrees to buy it at that price is speculating (or guessing) the price of oil will go even higher than the price being offered, which means the price will be a bargain for him on the date he must make the purchase. It will also be a source of immediate profit for him when he resells it into the market at the going price.
Note what happens. The oil speculator never has to take delivery of the oil he purchased. He simply resells it or rolls it over into another futures contract. He doesn’t really care about the oil as a commodity. He has no use for it other than to gamble on it. But his gambling drives up the spot price.”
Even if you understand very little of that direct quote , that last sentence should have grabbed your attention.
Traders also use current events to make it appear that the gas supply is low even when production and supply are high, creating the fear of a gas shortage. With oil production steady and the supply of gas high, prices at the pump should be much lower than the current prices. This allows oil companies like BP, Exxon, and Chevron to raise their current prices with impunity in response to the fear-mongering caused by the traders.
Author Linda Davies, who wrote Into the Fire, a novel about fraudulent trading in derivatives, says “the job of a derivatives trader is like that of a bookie once removed, taking bets on people making bets.”
In a joint press release, several Senators are now calling for more oversight of the market in derivatives.
“The derivatives market has done so much damage to our economy and is nothing more than a very high-stakes casino – except that casinos have to abide by regulations,” wrote Senator Maria Cantwell (D-WA).
“Even in Las Vegas at the Blackjack tables, both the House and the player have to have capital behind their bets. But we allow Wall Street to continue to operate in the dark…”
Yet again, the traders gamble but the American people take all of the risk and are left empty-handed .
Sources: International Trade @ Suite 101, Huffington Post, CNN.com
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