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Speculators Main Reason for High Price

Let’s not kid anyone. The oil companies are making a killing. They claim their profit margins are only 6 percent, but they’re all posting record profits while gas prices shoot out of sight. They’re making a ton of dough, but are they to blame for record gas prices?

They were recently hauled before Congress to explain themselves. They basically told Congress what was happening. Despite the high profits, it all boils down to supply and demand. At least that’s their story and they’re sticking to it. Even though our demand in America is down a bit, they say, it’s not enough to offset the demand in China. That’s not entirely correct, but China’s insatiable appetite for oil is part of the problem.

Why aren’t the Chinese curbing their oil consumption? Because their communist government subsidizes the gas. The Chinese should be feeling the squeeze just like us, but they’re paying the equivalent to a buck-fifty a gallon. If you were paying $1.50 per gallon would you be thinking about cutting back? Venezuela and Saudi Arabia do the same. Their people are paying somewhere around 15 cents per gallon. Keeping the price low not only short-circuits the market, it artificially drives up demand.

Sen. Chuck Schumer of New York says if the Saudis increase their oil production by a million barrels per day, we would see prices at the pump drop by 60 cents. Yet, Schumer and the Democrats have repeatedly blocked attempts to drill in a miniscule patch of the Arctic National Wildlife Refuge, which experts say would yield twice that amount per day for the next 25 years.

It’s not like we haven’t seen this coming. Republicans in Congress have tried to open up drilling in ANWR for well over a decade. They actually passed a bill allowing it in 1995, but Bill Clinton vetoed it.

To have a Democrat-controlled Congress now drag oil executives before them and demand answers is absurd. Yes, the oil folks are making a lot of money, but they’re making it because of our failure to plan for our future energy demands. The liberals in Congress have managed to bog down the refinery process with so much red tape that we haven’t seen a new refinery built in the United States since 1976. The U.S. Geological Survey recently issued a report confirming that there are major new oil reserves in an area called the Bakken. This area stretches across North Dakota, Montana and southeastern Saskatchewan. They estimate there is something like 3.65 billion barrels of oil there. Of course, the dirt people are blocking our getting at that oil, too.

But, the primary reason the oil prices are high isn’t the fault of Congress or Big Oil. There is the huge problem with oil speculators who are able to leverage their buying at a rate of 16-to-1. In other words, a $130 barrel of oil only costs them $8. They borrow?or leverage?the rest. Conservative estimates say speculators are driving the price of oil up by 60 percent! That means the $130-plus per barrel price that we’re seeing should actually be around $55.

Speculation is an important part of commodity trading when it’s limited to those actually planning to take delivery of the product. When speculators overrun the market looking for short-term gains, they artificially inflate the price. Perhaps we should require that speculators take delivery of the oil they buy. When a tanker truck shows up at someone’s house with about 1,000 barrels of oil to offload, maybe some of this nonsense will stop.

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About the Author

Phil Valentine is heard each weekday afternoon on SuperTalk 99.7FM in Nashville and online at 997wtn.com. For more of his commentary and articles, visit philvalentine.com.

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