One year ago Crude oil was $120 per barrel and never broke $3.25 at the pump. Currently, Crude Oil is resting at $102 per barrel and the average price at the pump is over $4.00. Therefore, since April 2011, oil companies are saving $20 a barrel while gas prices have risen 23%. This equals a profit increase of 40%. Real demand has been very steady, so we have to assume that prices are merely profit based.
Several Senators and Congressmen and women have come out to attack “rampid speculation.” Senator Bernie Sanders has gained popularity just for his stance against Wall Street on this issue. Sanders is sponsoring the End Excessive Oil Speculation Now Act. Now I don’t see any problem with this idea, but they are so far off the point here. It is like Papa Bear getting mad at Mamma Bear because Goldilocks ate Baby Bear’s breakfast.
Speculation does have a piece of the blame here, but it is minute compared to the almighty profit of big oil companies. Also, speculation drives the price down just as much as it drives the price up. The major fault with speculation is that it swings the prices more dramatically than it would otherwise be. For example, at the end of 2008 we thought the financial world was collapsing. Because everything in speculation is anticipation, speculators figured that demand would diminish further than it actually had. This assumption led to the price of oil to fall to $32 a barrel. In actuality, it had dropped, but only minimally in the grand scheme of things. Within a year, prices had gotten back to $80 a barrel. At that price, everyone was pretty happy. You see, $80 is the breaking point for big oil companies to make money. They were returning to big profits and we were still under $3.00 per gallon at the pump… a far cry from being over the $4.00 we were seeing in the summer of 2008.
Exxon Mobile, a company I love, makes 17 billion dollars a year before taxes. Knowing that they are losing money in Natural Gas, where do you think they are getting record profits?