I will profess my ignorance when it comes to this issue so I don’t mind anybody setting me straight if I am misinformed but this is what I understand so far.
1) normal supply and demand is not the only factor driving the price of oil.
2) Much of the price we are paying at the pump is due to wall street firms buying shares in corporations that are selling agents (ie, chevron, shell, etc) based on predictions about the future profit margins of those corporations.
3) That this speculation in futures is represented by one of the indexes on the NY stock exchange and is what both the selling agents use to set the price per gallon at the pump and what the oil producers use to set the price of crude oil per barrel that exon, chevron, etc buys from them.
4) That while this index is not an accurate measurement of the current value of oil (rather the future value), and is external to the corporations and producers such as OPEC themselves, this index is used by both of them to justify the prices they are setting. That if this index wasn’t used, they’d just use another in some other nation’s stock market. For a lack of a better way to put it, it’s as if they are just using this index to legitimize the prices they are charging.
5) About 40% of our oil consumption already comes from domestic production but oil from our own domestic supply is sold for the same price as foreign bought oil and the only way it wouldn’t be is if we were to nationalize our domestic oil production. (I am not advocating that).
So what is unclear in my mind, since I only have a basic understanding of how the stock market works, is how would an increase in supply of domestic oil stop the type of futures speculation that has been driving up the price of oil? Normal supply and demand is not what seems to be driving much of the price in the first place. Market manipulation seems responsible for much of it. If it is not true supply and demand of a product that is driving the price in the first place, what is to stop the investors from bidding up the price of oil shares in order to increase profit margins for the oil companies so that the shares they are buying are worth more and more?
It’s a win/win for everyone except for those of us who can’t afford to buy so many shares of stocks in oil companies that we are happy to see the price of gas at $4.25 a gallon. I guess if I could afford to buy that many shares in oil companies, I’d be happy to see gas prices at these prices.
I will stand corrected if someone can explain why I am wrong.
There are two different markets. A) Equity or asset market such as NY stock exchange that deals with companies produce oil or are in some oil related field. B) The commodity market which deals the actual products such as oil gasoline, corn, wheat, sugar, and so on based on supply and demand.
If you buy stock in oil companies then you are buying their risk and rewards. On average, the reward has been only 10% profit.
If you are a “player” in the commodity market then you are only buying and selling the product. Lets say Mobil needs rise money. They need to sell one barrel of oil but that barrel is still in the ground and and it will take three months to get it out. You, as a “player”, buy a contract for $100.00 for that barrel and will take delivery three months now. You, the player, have no intention of taking delivery, you are going to sell your barrel to highest bidder before your contract expires in three months. At this point, due to supply and demand, your barrel could be worth $120.00 or $80.00. Now, Mobil oil makes gasoline and will buy that barrel oil back from you. At $120.00 per barrel, higher price at the pump. At $80.00 per barrel lower price at the pump. For every trade on the commodity market you have “player” making money and a “player” losing money.
The answer is to increase supply and, to the extent possible, decrease demand on a world wide basis through conservation. That would bring the market back into balance, when compared to historical levels. Anything short of doing those two things will not have any significant impact on the price of gas over the long haul because demand is going to continue to grow. Another comment: Much of the price we are paying at the pump is due to wall street firms buying shares in corporations that are selling agents (ie, chevron, shell, etc) based on predictions about the future profit margins of those corporations.
Wall Street firms are not the owners of "Big Oil". Pension funds, IRA's, individuals, etc. own the stock in those companies. Oil is subject to the law of supply and demand just like all other commodities.
More on the commodity market.
As a “player” you do not have to be an oil company or farmer.
Any “player” can buy or sell contracts.
Or the “player” can buy a put or sell a put or buy a call or sell a call.
Then there is a sub-commodity market called option trading which is based on the price of the contract itself not on the price of the product.