Given the way they have increased in recent years it appears that the old axiom “what goes up, must come down†no longer applies to oil prices. Judging by the amount of oil trading in the financial markets, it seems that investors have figured that out- much to the detriment of consumers at the pump and the economy as a whole. What I’m referring to is the enormous volume of trading of oil futures â€" that is the trading of oil on paper only (or, more likely, electronically) and not the trading of the actual physical barrel of oil.
Oil is such a safe bet for commodity traders these days that recently a barrel of oil was traded an average of 27 times before it was actually delivered and consumed. Given the volume of trades, it’s probably safe to assume that a profit was made after each trade along the way; a profit that was ultimately paid for by hardworking Americans at the pump.
All of these trades, and the profits and fees they generate for traders, place upward pressure on the price of oil regardless of actual supply and demand conditions. This phenomenon was on full display last year when a “drunk trader†managed to trade 7 million barrels of oil, causing the price of Brent Crude to rise by over $1.50 in a short period of time. This price fluctuation was not the result of a global supply disruption or a sharp increase in consumption; it was purely a price manipulation, albeit alcohol-induced in this case.
To better understand the detrimental effects of price manipulation, it is worthwhile to note that for every 25 cent increase in the price of a barrel of oil, the Department of Defense, the single largest purchaser of oil in the world, has to spend an additional $1 billion per year to meet its fuel needs. Thus, if the actions of the drunken oil trader had a lasting impact, it could have cost American taxpayers over $6 billion in increased military spending. That $6 billion is in addition to the increased cost of gasoline at the pump and higher inflation and trade deficits associated with the increase in oil prices.
Speculation and commodities trading aren’t the only reason for the run-up in oil prices; rather, they are symptoms of the ills associated with being wholly dependent on oil as the dominant fuel for our transportation sector.
The vast majority of drivers on the road don’t have an option beyond oil to fuel their cars. The virtual guarantee that oil will be consumed at most any price minimizes risks for oil traders regardless of how many times a barrel of oil is traded, or isn’t traded, before the finished product reaches your gas tank.
So, as more struggling American families are faced with difficult financial decisions such as whether to pay for gas or feed their children and pay for healthcare, oil traders are making up to 27 separate profits for each barrel of oil consumed, financed by the driving public.
How long are we going to put up with this? Fuel Freedom cofounder Eyal Aronoff, an experienced investor and self-described “oil addiction therapist,†will be speaking about these ills and discuss solutions this week in his monthly Fueling the Future webinar series.
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Authored by:
Gal Sitty
Gal comes to Fuel Freedom with a track record of being a trailblazer. After successful experiences in finance at Morgan Stanley and an AIG company, Gal continued to graduate school where he became the first person to receive a joint Master's in Public Policy from the University of Chicago and Tel Aviv University. There he excelled in research, analytics and communication in public policy. He ...
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