Spike in Gas Prices that Defies the Law of Supply and Demand

by Don Azarias
March 1, 2012
Why are gas prices still high despite huge supplies and declining demand? A question, like this, where the prices of gas are tied to the law of supply and demand, is quite difficult to answer because it really defies logic. Associated Press (AP)reports that retail gas prices are at their highest levels ever for this time of year despite ample supplies and declining demand. 
The tension in the Persian Gulf has kept crude oil prices around $100 per barrel for most of the month. Analysts say oil prices are likely to remain at those levels until there is more clarity about what will happen in the Gulf, where Iran has threatened to close the Strait of Hormuz, if the U.S. and other countries impose more sanctions on its nuclear program.   
Well, that’s what those so called “analysts” say and I don’t know if I would even want to believe them. Lately, they seem to have been “wishy-washy” on their predictions. Leading energy demand forecasting agencies are divided on whether the prospects for demand growth are improving or deteriorating. The three——the International Energy Agency (IEA) for consumer nations, the Organization of the Petroleum Exporting Counties (OPEC) and the U.S. government’s Energy Information Administration (EIA)——have long struggled to accurately predict global oil demand changes.
While it’s true that Iran supplies 2.2 million barrels of oil per day to the rest of the world, mainly Asia and Europe, the United States had imposed an embargo on its oil and, consequently, our country’s reliance on Iran’s oil is non-existent. We don’t import even a drop of oil from Iran in almost the same way that we only receive 3 percent of oil from Libya. But we may recall that, during the radical agitation in Libya that ultimately led to Moammar Gadhafi’s downfall, the price of a gallon of gasoline went up in this country. If we were only receiving 3 percent of oil from Libya, why, in the world, would that Libyan uprising even affect us?
While Iran is being hurt by trade sanctions imposed by the United States and its Western allies and is doing saber-rattling of its own that proves to be worrisome, investors are also concerned about the European debt crisis. And with the members of the European Union expected to discuss an oil embargo, supplies could tighten up in that part of the world. However, Saudi Arabia and other members of the OPEC felt threatened by Iran’s nuclear ambition, promise to pump more oil to make up for any supply shortages. Isn’t that good enough assurance to those European countries? And who would really be affected by tight supplies of oil caused by problems in Iran? Not the United States. Like I said earlier, we don’t import Iranian oil.
With all forecasters saying that OPEC will pump oil way above the current market need, it would be logical to predict that the world might be heading for a large crude oversupply and potentially an oil price crash. So what’s really the reason for the spike in gas prices if it is not the law on supply and demand? Like some analysts, I believe that the spike in oil and gas prices is being caused by the same people who brought us the $140 per barrel oil and $4 per gallon gasoline in 2008: Wall Street speculators.  
The mechanics of oil futures speculations are really complex and have lots of variables even for an economist, let alone a lay person, to understand. However, I’ll try to simplify its definition. In layman’s term, a speculator in the oil markets is defined as a buyer of oil futures contracts. Just bear in mind that these are just paper transactions and not actual oil, with the hope of selling that oil in the spot market at some future date at a higher price. A speculator hopes that when the contract expires (or at anytime within that period), he will be able to sell the oil committed in the contract for a price greater than the contract price. Taken collectively, speculators who buy large amounts of oil futures can swing the price one way or another. Speculators who buy oil futures at higher than the current market price can cause oil producers to horde their oil supply so they can sell it later at the new, higher “future” price. This cuts the current supply of oil on the market and drives up both present and future prices.
Most experts agree that the recent rise in oil prices is due to the flows of money that those traders who, in reality, are oil speculators pump into oil markets. These bets are fueled by investor expectations that the U.S. and global economies are poised to return to growth and thus spark increased use of oil. Some politicians and economists blame Big Oil and the Organization of Petroleum Exporting Countries(OPEC) for raking in huge profits. They also cite the weakening dollar as a contributing factor. Some industry analysts even blame thinning supplies on developing countries like India and China that are consuming more, while oil production can’t keep up the pace. These opinions, however, are being debunked by Wall Street’s own economists, independent analysts and the OPEC itself.
OPEC claims the high prices seen these days are the fault of speculators that have snapped up billions of dollars in oil futures, as other sectors of the economy suffer. OPEC knows very well that raising the price of crude oil is not good for the economic recovery of the United States, the largest economy in the world and OPEC’s largest customer. OPEC argues that it would result in a massive financial loss for them should the United States economy go in crisis again. Another thing that we have to understand is that during the advent of oil futures trading, control of oil prices has left OPEC and gone to Wall Street. Those greedy Wall Street investors and speculators, those institutional funds, hedge funds, pension funds and other large Wall Street investment vehicles and banks are getting richer and richer by the day while hardworking taxpayers and consumers, like us, are always the ones getting the shaft.
Sometimes, the free market concept in the United States’ economy has its drawbacks too. Unknown to many, the “pain” in the pump is being caused by Wall Street with the help of those political leaders in the nation’s capital. Like I said earlier, Iran, like Libya, is not the United States’ main oil supplier. Therefore, any disruption in the flow of oil from Iran is not supposed to have any major impact on the price and supply of oil in this country. 
Also, I don’t know if you’re aware that the U.S. oil industry is exporting its gasoline, diesel and jet fuel products despite the fact that their prices are rising daily due to the purported “shortage” in supply. As to why our political leaders in the nation’s capital are not doing anything about it is beyond me. But no matter what those economists and analysts say, I will never waver from my belief that those powerful oil speculators are the ones causing high gas prices.