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Tuesday, December 09, 2008

The Facts about Oil Prices

Josh Landis and Mitch Butler of The Fast Draw narrated the tale of "Gus" -- a gallon of gas -- in a brief animation portraying crude oil's journey from the ground to your car's tank.

The animation traces Gus' travels across the sea to the United States, explaining how his initial five-cent -- that's right -- five-cent value grows through -- speculation -- and the law of supply and demand. Add the cost of refining and delivering the product, not to mention taxes, marketing, and your local gas station's cut, and Gus goes from five-cents to $4.

"We were most surprised," Landis later told co-anchor Harry Smith, by the fact that, before the oil even reaches the shores here, speculators and the law of supply and demand have already priced the final price up to within 80 percent of its final amount. ... (And local gas stations only) make pennies on each gallon."



Smith then spoke to an oil trader and a consumer watchdog about just who trades oil in financial markets and how much impact that activity has on the price of crude and, by extension, gas.



Ray Carbone, an oil trader and broker at Paramount Options, told Smith, "We buy and sell oil. I trade options on the oil futures market. We're watching the price and all of the components that go into making that price up."

How is it, Smith asked, that the price of crude has shot up from the $30-$35 levels it seemed to hover at for so long -- not that long ago?

"Look at the trajectory of the downward fall in the dollar from 2003, on," Carbone suggested. "If we look at the price of oil, it mirrors that. So, the price of the Euro, the price of gas goes up. Demand. Geopolitical concerns. We've got an Israeli minister talking about attacking Iran on Friday. All of these go into the price of oil. Geopolitical concerns, the dollar, and strong, strong demand.

And, Smith inquired, who are these so-called speculators who seem to be contributing so much to the price of oil?

"People trade oil," Carbone replied. "There are industry players that trade oil. There are banks that trade oil. Many players in the oil market, as in all commodity markets -- gold, silver, grains -- everyone's trading commodities. And (oil) is just ... an asset class now, and we have to look at it that way."

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