*In February the news headlines blared “Gasoline pump prices hit a 28-month high.”
The February high has been exceeded in the past two months. Congress and the Obama Administration worry that the surge will drive down consumer spending, dampen business investment and hiring, further weaken housing sales, plunge the dollar, and pummel stocks which have been roaring the past few months.
The standard reasons for the relentless oil price leap is war in Libya, unrest in Bahrain and potentially Saudi Arabia, political instability in Nigeria and Venezuela, and the perennial jitter that global oil supplies are fast running out.
They’re all wrong.
Oil and gas prices jumped during most of the 30 month period when there was no turmoil in Egypt, war in Libya, political instability in other oil producing countries, proven world oil reserves grew, and demand for oil and gas products remained weak.
Speculators drove the prices up, reaped phenomenal profits, gamed the public on the real reason for the price rise, and stymied efforts to toughen regulations to rein in their activities. Speculators buy and sell oil future contracts, better known as derivatives. The value of the oil futures derivative is based on nothing more than the value of the barrel of oil bought. The buyer essentially bets that the oil will hit the purchase price at a future point in time. By pouring billions into such futures, speculators are in a powerful position to manipulate the upward price of the oil.
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