It looks like we have repealed at least part of the law of supply and demand.
Lessening of demand is supposed to cause a drop in the price of goods sold.
Not so with gasoline.
Our weak economy, ethanol usage and an increase in fuel-efficient vehicles on our roads has resulted in a reduction of 2.5 percent in the demand for gasoline during 2011.
Compared to one year ago today, the national average price per gallon of gasoline has increased 34.8 cents per gallon, or 10.8 percent.
Reduced demand is coupled with increased prices while at the same time, the United States has become a net exporter of gasoline, diesel and jet fuel.
If refining is producing more gasoline than is being consumed, perhaps the answer to increased price at the pump must lie in the price of crude oil, and it does.
But looking at the current world supply of crude, there is a second paradox.
There is no shortage of crude oil, yet the price of crude is again hovering around $100 per barrel, up from $26 per barrel as little as 10 years ago.
Despite all the publicity about the growth of the Chinese economy, there has not been a four-fold increase in the global demand for crude oil during this time.
What has changed since 2000 is the way crude oil futures contracts are traded.
Futures contracts, the ability to buy goods for delivery at a later date for a price fixed today, have been in place for many years.
This allowed commercial consumers of a given commodity to plan ahead, knowing what that commodity will cost their business in the future.
Investors were allowed to purchase a limited amount of futures contracts to have supply available to consumers who found a greater-than-planned need for the commodity.
Crude oil was considered a strategic commodity due to the damage runaway pricing could inflict on the U.S. and global economy.
Thus, futures contracts were tightly regulated until Congress decided to let the big hedge funds and investment banks wreak havoc in the name of modernization.
The Commodities Modernization Act of 2000 allowed unregulated speculation in oil futures.
Before long, despite ample supply, the price of crude oil soared, as up to 60 to 70 percent of futures contracts traded were bought and sold by investors who never intended to take delivery of the contracts they owned.
With this much crude “off the market,” actual consumers were dragged along and had no recourse but to pay artificially high prices for crude and to pass along those higher costs to the public by way of increased prices for refined products such as gasoline, diesel and jet fuel.
Welcome to the world of high prices at the pump as a direct result of high returns on crude oil speculation.
Billions of dollars of added cost are being tacked on to practically everything that we consume.
According to OPEC, at least $30 to $40 per barrel of the cost of crude is caused by speculation.
If, in direct proportion, this would translate to a savings of $1.41 per gallon of gasoline it would bring the national average down to $2.11 per gallon.
The truth is we are being had and it is not all the oil industry’s fault.
Are they taking advantage of the situation to earn record profits?
Of course they are.
Corporations are duty bound to maximize returns to their investors.
But they are only playing the game according to the rules set forth by Congress.
Congress knows what it has done and does not have the courage to undo it.
This glaring concession to the financial industry could be reversed by a bill to overturn H.R. 5660, and return to restrictions on over-the-counter derivative transactions that kept a check on crude oil prices from 1936 to 2000.
We can legislate the way to lower gas prices faster than by any other means.
Unfortunately, while there is a way there is no will.
Acceptance of campaign contributions from the financial sector overcomes the duty of Congress to pass legislation that curtails their speculative activity in energy markets for the betterment of our economy and national security.
- Special to the Press Herald