How Oil Speculation and Energy Policy Impact the Price of Gas

Deegan Marie/CC BY-ND 2.0

This is the second part in a series about what actually determines the price of gasoline. See the first part here.

Financial speculation

Financial speculators gamble on the oil futures market, effectively spurring the market price to rise and fall apart from the laws of supply and demand. Experts assert that net impact has typically been the overinflation of the price of oil. The U.S. Senator Bernie Sanders recently penned an op-ed in CNN describing the impact this process has on oil markets:

The CEO of Exxon-Mobil, Rex Tillerson, told a Senate hearing last year that speculation was driving up the price of a barrel of oil by as much as 40%. The general counsel of Delta Airlines, Ben Hirst, and the experts at Goldman Sachs also said excessive speculation is causing oil prices to spike by up to 40%. Even Saudi Arabia, the largest exporter of oil in the world, told the Bush administration back in 2008, during the last major spike in oil prices, that speculation was responsible for about $40 of a barrel of oil.

I won’t get into the details about how betting on oil futures works here, but see HowStuffWorks for an elementary introduction.

ST33VO/CC BY 2.0

Domestic energy policies

And here, way down near the bottom, we get to domestic energy policy. And that’s because there’s very little that a government can do to reduce the price of oil on the market. But governments can, of course, make gasoline cheaper by subsidizing its sale (nations like Venezuela do this in extreme measures to provide citizens with dirt cheap gas). And they can make it more expensive by taxing it. In fact, high gas taxes can have the longterm effect of buffering citizens from oil shocks— transportation planning evolves to accommodate higher petroleum costs, the market incentivizes more efficient cars, and folks aren’t as vulnerable when gas prices rise. In the United States, the gas tax is extremely low—it’s the lowest in the industrialized world. As such, citizens here remain quite vulnerable to the whims of the forces described above.

It’s also important to note that expanding domestic drilling would have almost no discernible impact on gas prices in the near-term, and a very small one in the longterm. It would take years before the sought after oil could be drilled, refined, transported, and taken to market, during which the market could care less about bombastic GOP rhetoric. But even opening every last remaining parcel of land in the U.S. to drilling would hardly yield a drop in the bucket in terms of the global marketplace—our proven reserves are minuscule by comparison. So it wouldn’t be enough volume to meaningfully beef up the supply level on the global scale.

Seasonal factors

It also needs to be mentioned that seasonal conditions can influence the price of gas. Gasoline typically gets around $0.20-0.50 more expensive in the summer for instance, because, as Brad Plumer explains in the Washington Post, "refiners stop blending gasoline with cheap butane and swap in more expensive ingredients that don’t evaporate as easily in the heat."

White House/Public Domain

Not even the U.S. president can control the price of gas

That's the bottom line. Nothing Barack Obama—or the U.S. Congress—does will have much of an impact on the price of oil tomorrow. Globalized trade has created a web of various interlocking forces that instead determine the price of oil, much as has happened with other commodities. The president can tap the strategic reserve—as Obama's fellow Democrats are leaning on him to do now—and he can lean on OPEC to release more oil supply into the market. He can approve the aforementioned drilling measures that would trickle into the market years down the road, but that wouldn't impact today's gas prices.

It's also worth mentioning the myriad costs that don't factor into the price we pay at the pump. Extracting, transporting, and burning gasoline creates all kinds of externalities that we pay for elsewhere—in health costs at the hospital, in wear and tear in roads, in environmental cleanup after disasters like the BP spill, and for the pollution that impacts society at large. Studies have shown that gasoline should be up to $11 more expensive because of these unaccounted-for costs. Of course, we're actually already paying those costs—we just don't notice it immediately as we fill up at the pump. So keep that in mind next time prices rise: if they reflected their true cost, you'd be paying some $150 to fill up your car. That $0.50 spike suddenly won't seem as bad by comparison.

Tags: Barack Obama | Oil | United States

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