Today, it's $1.89.
Almost every day, I have breakfast at Duke's Chevron on Jacksboro Highway. Sausage biscuit, cold tea that I bring from home (see my post about my too-expensive diet cola habit) and a newspaper, specifically, the Fort Worth Star-Telegram. Today there was an article in the Star-Telegram explaining this spectacular drop, complete with a quote from the president of the National Petrochemical and Refiners Association. "It's supply and demand....this summer there was a monumental shift [downward] in driving habits."
The gentleman has an interesting definition of "monumental." According to the rest of the article, we've cut our gas use by a less-than-staggering average of 3.3% during the last ten months, including a 5.6% drop in August.
Does something strike you as odd in this equation? A less than 6% drop in gas use in the last few months results in a nearly 50% drop in gas prices?
Excuse me if I'm a bit skeptical, especially when the main source quoted is, essentially, a Washington lobbyist working for the oil and gas industries.
Could there possibly be another factor at work here?
In less than six months, the price per barrel has dropped from a high of $140 to less than $60, so low that OPEC has already cut production once and is thinking of cutting it again. So... did that tiny drop in demand (sorry, but I am not...repeat, not... going to call a decrease of less than 6% "monumental") take us from oil being as scarce as roses in the desert to a situation where we're now swimming in in the stuff?
I don't think so. Despite the cries of "Drill, baby, drill!" we haven’t recently added a few dozen new offshore oil rigs. (These take seven to ten years to start producing.) No one has reported the discovery of massive new oil fields. Peace has not suddenly broken out among the oil-rich countries of the Middle East, nor has there been any scientific breakthroughs that will let us turn water into gas.
So why this huge drop?
Can you say “oil futures?”
The Star-Telegram also runs the work of an award-winning journalist called Ed Wallace. Wallace reports on the auto industry, but he talks about a lot more than the newest models and who’s making a profit this week. Read Wallace and you’ll often get a very interesting take on the whole U.S. economy.
Which I got back on May 19th, when I read a Wallace piece called “ICE, ICE, Baby.” In this article, Wallace reports that the zooming gas prices in the first part of this year were not the result of short supply, but were caused by the gutting of regulations designed to control not only speculation in the oil market, but also speculation in natural gas futures. Speculators were allowed to buy oil futures, often millions of barrels worth, then hold them while prices rose, thereby creating an artificial scarcity.
This, according to Wallace, is why prices increased, and it became evident in a Senate investigation as far back as 2006...but no one did anything about it.
How did it pass under the radar that both the Senate and the House studied the issue of price manipulation in our energy markets and both concluded that it was unregulated, massive trading in one futures market that was really driving up the price of oil and natural gas?
I suggest you read both this article and Wallace's follow-up, which we now know asked questions that should have been asked by a lot more than one reporter:
We started as a society that worships hard labor and the basic business ethic of building value into the goods you create. How’d we get from there to worshiping Wall Street’s billion-dollar boys — who create nothing, build nothing, own nothing and deliver no goods, and yet can throw so much money into products made by others that they determine what we consumers will pay for those goods?
When you read those articles, I think a lot of things involved with our current economic meltdown will begin to make sense…especially when you read Wallace’s comments about ICE, the Intercontinental Exchange. Basically, Wallace makes a pretty good case that prices throughout the energy market climbed because deregulation allowed speculators to go crazy buying and holding energy futures...and these speculators then fed misleading stories about "scarcity" to media outlets that accepted them with few questions asked.
Now all of Wall Street, including those who bought up huge blocks of oil futures, are scrambling for cash. Is it too much of a stretch to wonder if they are dumping those futures at fire-sale prices, and this, rather than a small drop in demand, is the reason for the astonishing plunge in gas prices?
If so, let’s hope that our incoming Congress and new president will re-impose sensible regulation. But even if this happens, it’ll take time, so don’t go back to your old wasteful driving habits. Fire sales are temporary...but greed is always with us
Enjoy $2 a gallon gas now….but don’t expect it to last. Let's hope that--with a little luck and a different attitude in Washington--while the cost of gas may soon begin to inch up as true supply-and-demand comes into play, we won't see anything near $4 for a long, long time.
Update: My thanks to the folks of the Money Hacks Carnival for including this post in their latest edition.
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