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."

Send Congress an S.O.S.

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Speculators and investment banks can game the energy trading markets, using loopholes in commodities law to drive up the cost of energy and reap record profits… at the expense of American families and small businesses!

One of the biggest factors in high oil prices, according to many experts, is that investors, such as hedge funds and investment bankers, can use loopholes in commodities law to manipulate the market and drive crude oil, heating oil, gasoline and diesel fuel prices to new heights.

Congress is aware of the problem and lawmakers recently passed legislation to address the “Enron Loophole,” one of the major loopholes that opens the door to abusive trading practices, but the law didn’t go far enough.

Unfortunately, other loopholes exist that allow energy trading on completely “dark” exchanges. For example, the “Foreign Markets Loophole” allows American energy commodities to be traded overseas – exempt from U.S. oversight.

These so-called “Dark Markets” – commodities markets that are not policed by U.S. authorities provide for an open the door to manipulation, even outright control of the markets.

For example, speculative investors can buy and sell millions of barrels of U.S. destined oil and other energy products every day in the United Kingdom and even in Dubai… but are not made subject to the transparency and accountability laws that govern exchanges here in the United States!

Additionally, through the so-called “swaps loophole,” financial investors can “game the markets” for pure profit by buying up positions in the energy markets, without any limitation on the size of the positions they can take. One recent estimate suggested that they now control one third of the commodities markets, or $150 billion - a 1,000% increase in less than five years!

Some experts believe that as much as 60 percent of the cost of a gallon of gasoline or heating oil can be attributed to pure speculation and abusive –even manipulative – trading practices, yet most trading is “dark” and federal authorities can neither fully police or see the data in the majority of the trading markets.

The energy trading markets were originally set up to provide energy producers and distributors with an environment to manage risk and produce the best possible price for their customers. But they are clearly no longer the driving force in the market. Profiteering speculators and investment banks care little about establishing a price for energy based on supply and demand fundamentals – they care about turning a PROFIT.

The Enron Loophole

I had meant to blog about this earlier this week, but got sidetracked by other stories. Now I don't need to as Keith Olbermann has done it for me. People, THIS is why oil is as high as it is right now. Supply and demand has NOTHING to do with it! Watch, learn, and be sick to your stomach: