The Real Reason Gas Prices Are Soaring

gas pricesHave you ever wondered why when you go to the gas station to fill up the family car, the price of gas at the pump has just jumped 25 cents a gallon over the past three days? Perhaps you thought the oil companies were just being greedy. Or you believed the nightly news pundit who said that gas prices went up because the crisis in Libya was affecting supplies of oil. One professional oil trader says that you'd be wrong on both counts.

Dan Dicker, who has spent nearly three decades in the oil market, has a profoundly disturbing explanation of why the price of oil, and the gasoline that comes from the crude product, has risen so dramatically in recent months. It turns out, Dicker says, that the price has nothing to do with supply and demand for oil. It's the financial market for oil, filled with both professional speculators and amateur investors betting on poorly understood oil exchange-traded funds, who have ratcheted up the price of gas to such sky high levels.

"There is no supply issue going on here - what you have is the perception of the possibility of a supply issue," Dicker says. "A whole bunch of people are pouring money into an oil market trying to take advantage of what they perceive to be a real risk in supply. It's a marketplace that I argue should not be allowed to be wagered on like a stock or bond."

Dicker notes that Libya produces only 1.3 million barrels of oil a day, just a tiny fraction of the world oil market. Even if Libyan crude were lost to the world market in the current turmoil, and there is no sign that it is, Saudi Arabia has 5 million barrels a day to use in case of an emergency.

Dicker, who has just published a book called Oil's Endless Bid: Taming The Price of Oil To Secure Our Economy, makes a strong case that if the government stepped in and regulated oil trading so that only investors with a genuine interest in the physical product, such as airlines and heating oil companies, could buy and sell oil futures, then the price of oil would fall by 50% overnight and our economy would be much better off.

Why Greater Regulation Is Needed

"You have to make it so the original intent of commodity markets, to be used almost exclusively as hedging tools, is returned," he says.

Though Dicker acknowledges that is not likely to happen, he points out that when the 2008 economic crisis froze all financial markets and investors stampeded to the sidelines, the true price of a barrel of crude oil became known: $32. It's now hovering at around $110 thanks entirely to investor demand, he says.

One of the reasons Dicker is calling for greater regulation of the oil market is that no one really knows how large it is or what is going on it on a day-to-day basis. In fact, it reminds Dicker of the market for credit default swaps, which brought down the insurance giant AIG and forced the government into a $180 billion bailout.

The market for oil traded financial instruments has been estimated at between $8 trillion and $30 trillion, but there are no concrete numbers because traders don't have to tell anyone how much they are betting either for or against the oil price. Dicker says if the government minimally required oil trading to be conducted in a transparent manner on exchanges instead of the current over-the-counter system, a large number of speculators would leave the market and the price of would fall sharply.

He also notes that the major shift in oil trading has been relatively recent. First, financial firms such as asset managers and pension funds realized they needed to diversify their holdings of stocks and bonds, which had performed badly over the previous few years.

The move was made easier by the arrival in 2006 of electronic trading of oil futures. The formerly cumbersome process of trading oil with a floor trader at the New York Mercantile Exchange was suddenly replaced by a streamlined process requiring only a few keystrokes on Chicago Mercantile Exchange's Globex computer platform.

From a few thousand trades an hour at the old NYMEX, traders now process millions of trades an hour by computer. Dicker estimates the financial market for oil is 15 times greater than the amount of actual oil being traded, with 75 types of futures being sold on exchanges. That doesn't even include all the private, over the counter transactions that take place.

"The amount of money pouring into hard assets, particularly oil, is outsized because it's new and fresh, so you get these outsized moves from $68 a barrel in the summer of 2010 to $100 now," Dicker says.

Why does all this trading drive up the price, when buyers and sellers should theoretically cancel each other out? Dicker says that is primarily because almost all oil investments being sold by the big investment banks are long trades - bets that the price will go up. While it's also possible to short oil ETFs, no one does. So that's heads ever skyward.

"There is no shorting of the market and the commodity market is not like a stock market," he says. "It is not designed to have only one half of a trade. It is designed to inspire both halves, that's how you arrive at a correct price." Dicker gives the following example: Let's say you live in a neighborhood where all the homes are priced at $200,000. Suddenly an army of buyers arrives who want desperately to move into the neighborhood. You were not really interested in selling before, but now a buyer offers you $400,000 for your $200,000 house. What are you going to say?

"That's what's going on in oil," Dicker says. "You have this army of people who have been flooding into a brand new neighborhood and they've had to inspire somebody to sell and the only way you can do that is pay an outrageous price for it."

The Biggest Winners

Among the biggest winners of the new oil markets are investment banks like Goldman Sachs (GS) and Morgan Stanley (MS), which create new products for clients and then use that information to trade on the products. In 2004 and 2005, Goldman Sachs made $1.5 billion a year trading oil, Dicker says. In the first half of 2009 alone, the firm made $3.4 billion oil trading profits. Firms like Goldman are not taking bets that oil will move lower or higher. Trading simply means naming a spread of buy and sell prices from which they can eke out tiny but regular profits, a business without risk.

Dicker is particularly contemptuous of oil ETFs of the kind that many small investors have used as vehicles to diversify their holdings. "In these markets, they way they are set up, with all the edges with investment banks, the regular investor is just fodder," Dicker says. "The ETFs are the world's worst investment. They've only lasted this long because oil prices continue to rally."

So if gas prices would come down sharply with minimal regulation, why doesn't the government step in and impose limitations as it has done recently for other derivatives, forcing most firms to conduct their trading on exchanges? Dicker believes it is largely because large financial firms with a direct interest in oil trading have made so much money with oil that they can afford to lobby Congress to block any significant reforms.

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kathy wooring

--- "The Government selling us out what else is new"--- Reply --- This administration is new, partially because many people are more concerned about votes for who can sing or dance better, than who is stealing their wealth; - the left, and far left have not been sitting at home, watching TV, - they have ruthlessly pushed their progressive agenda, which by their actions includes giving America's wealth to the proper owners/poorer countries that help America by producing goods for resale - totally ignoring that the government in control can be much more selfish than the citizen's and corporations of America.
--- There may be some help, even if Obama and his cronies get re-elected - if the Senate goes Republican we at least are headed in the right direction/away from a big oppressive government. - Please know what your reps are doing - it's not hard to comprehend their e-mails, and descriptions of oppressive bills.
-For insight into Obama's views on the courts and the Constitution, see the AT piece, "Obama the Justifier", by Selwyn Duke, 10/3/08.
-examiner-com June 3 2010 President Obama and the DOW: Both the Destruction of Wealth; both truly unbelievable’
-townhallmob-com 8 12 2009 was democrats' health care strategy written in federal prison?
-townhallmob-com 12 2009 A White House Power Grab that Congress and America Doesn’t See 12 10 2009 The Omnibus Bill: Bad Government at its Worst

April 06 2012 at 3:00 PM Report abuse rate up rate down Reply
kathy wooring

Obama, this administration and Goldman Sachs are symbiotic – Chief of Staff Rham Emanuel was a chief proponent of the $700 billion Wall Street bailout in 2008 – GS and JP Morgan have given millions to Obama and Emanuel. Emanuel received more money from the securities and investment industry - $600,500 as of Sep. 30, 2008 - than did any other member of the US House, and it was more than either presidential candidate received.
- dailycapitalist-com Obama Declares War on Wall Street January 21, 2010 “On the same day Goldman Sachs (NYSE: GS) reported record profits, President Obama dropped a bomb on Wall Street. Obama is proposing limits on the size and scope of the nation's largest banks to put an end to "risky practices that contributed significantly to the financial crisis."
Rushlimbaugh-com Soros, Schumer, and Shorting April 27, 2010
RUSH: Chuck-U Schumer who goes public with how IndyMac is not solvent, it's a big problem. He created a run on the bank. Guess who gets in there and buys it? You're exactly right: George Soros and John Paulson who is also the hedge fund guy who made the billion dollars here shorting the collateralized debt obligations of Goldman.”

April 06 2012 at 12:08 PM Report abuse +1 rate up rate down Reply

The American people have power, they refuse to use it. If there were enough people who would exercise that power at the pump, buy only a maginal amount of gas to get by with you would see a change. They have chnaged govt ,a prime example is the last election, they voted out the dems and put in rebulicans. No one is willing to make due with less. I only buy enough to get from pint A to point B and back no more..I used to fill up constantly . Do your bit and you can tame this beast.

July 12 2011 at 10:03 AM Report abuse rate up rate down Reply

Gas prices are rising due to GREED by the OIL Companies and Investors running the price up for their own gain.

This type of activity should be stopped now, before we destroy the economy.

Take Oil off the market and let the price float and settle or LOOSE what economy we have left.

By the way where are the Senators and Congress that we elected to SERVE the people of this country.

I pay you salarys and I don't like what I'am getting! Get it !!

May 30 2011 at 9:37 PM Report abuse rate up rate down Reply
1 reply to cbrownhvac's comment

eue undermine yer credabilaty wiff awl thoze spehling errors!!

June 21 2011 at 8:38 PM Report abuse rate up rate down Reply
Sean Yamazaki

Just a quick side comment - WTF is the "liberal agenda"? Seriously, is this some thing the talking heads on TV/radio say in place of an argument?

April 26 2011 at 8:13 PM Report abuse rate up rate down Reply
2 replies to Sean Yamazaki's comment
Jarrod Bullis

Yea! No **** man. I agree.

June 03 2013 at 11:00 AM Report abuse rate up rate down Reply
Jarrod Bullis

Yea! No **** man. I agree.

June 03 2013 at 11:00 AM Report abuse rate up rate down Reply
Sean Yamazaki

Hell, at this point I'd be happy to see gas back to the prices in the picture.

April 26 2011 at 3:41 PM Report abuse rate up rate down Reply

"there is no shorting of the market" "and the only way you can do that (sell oil) is to pay an outrageous price for it"

Two of the dumbest statements I have ever heard. Three decades in the oil market?? He calls for more regulation? Dicker certainly lives up to his name.

April 05 2011 at 9:52 AM Report abuse +1 rate up rate down Reply

God and Obama Do not belong in the same sentence!!! God Bless us Americans though!!!And no..the unemployment rate has NOT went down...That's another lie from the government!!!!...The truth of the matter is unemployment rates are measured by ppl actually receiving unemployment benefits...Therefore when your unemployment benefits stop...Guess what??? the unemployment rate just went down....doesn't mean you found a job though..does it!! So basically, there down because you are no longer a documented person getting it anymore!!!

April 04 2011 at 1:42 PM Report abuse +2 rate up rate down Reply
2 replies to Jo's comment
Jarrod Bullis

What? U must be a Republican!

June 03 2013 at 11:03 AM Report abuse rate up rate down Reply
Jarrod Bullis

What? U must be a Republican!

June 03 2013 at 11:03 AM Report abuse rate up rate down Reply
FCI Fincl Serv

So, the investment firms that caused the economic meltdown are now sticking it to us at the gas pump? When John Dillinger was robbing banks the US Government sent the FBI to chase him down. The investment bankers who are screwing us should be added to the FBI's most wanted list!

April 03 2011 at 6:46 PM Report abuse +8 rate up rate down Reply

The free market will eliminate amateur-speculators, far more quickly than contrived articles, which advocate the leftist agenda. If they aren't any good at investing, they'll soon be writing articles for Huffy Post.

April 03 2011 at 4:48 AM Report abuse +2 rate up rate down Reply
1 reply to MSmailbox's comment

gimme a break! The "free" market is like an undisciplined teenager; they only learn a lesson after someone gets hurt!! I dont want to be their guinea pig!! If taking the role of a concerned parent is assuming a "leftist agenda", then heck yeah...Im all in!!

June 21 2011 at 8:46 PM Report abuse -1 rate up rate down Reply