Gambling on oil

It isn’t often that Senator Bernie Sanders, Independent from Vermont, and “Forbes” magazine agree with one another. A recent column by Sanders maintains that it is not the laws of supply and demand that are driving gasoline prices to average around four dollars a gallon across the country. “Forbes” magazine staff writer, Robert Lenzer, agrees in his article dated February 27, 2012. Their opinions, however, differ on whether this is a good thing.

If the cost of filling up your vehicle in recent days has made your wallet feel like a helium balloon, consider that as much as 56 cents is estimated to be the result of speculation on Wall Street. This money does not go to fixing roads. It is not part of the cost of drilling oil wells or transporting crude oil to refineries. It is not part of the cost of turning the thick, sticky stuff that comes out of western North Dakota into gasoline. Those 56 cents are gambling profits which go to speculators playing the commodities markets.

Senator Sanders and “Forbes” both maintain that speculation in the market adds about $23 on a barrel of oil which was valued at $107 in the US and more than $123 on the world market as of March 1. That is 21 percent of the total price. Sanders maintains that ten years ago speculators controlled only about 30% of the oil futures market. “Today, Wall Street speculators control nearly 80% of this market,” says the Senator. Those who have gained from these speculative sales of oil futures will never take possession of a single gallon of crude oil. Their hands will never get dirty. They will not own a tanker truck or hire a drilling crew. They simply make bets on the rising and falling price of oil.

Right now the US oil supplies are greater than our domestic demand. The free market and simple laws of supply and demand would suggest that the price should fall under these circumstances. US prices, of course, are not immune from the influence of the world market. Global prices, contrary to the reality of reduced supplies and increasing demand, have fallen in recent months, only to make a recovery in the last few days of February.

The price of gasoline is also affected by the refining capacity of the industry. Currently, oil companies have closed refineries. Industry analysts attribute these closings to a response to declining demand for gasoline. Others maintain it is an effort to limit supply and push the prices upward.

Oil company profits, subsidies, rules, environmental regulations, labor costs all contribute to the price of a gallon of gas. Speculation in the marketplace is only one of those factors. Taxes on gasoline in North Dakota amount to about 41 cents per gallon with the state collecting 23 cents and the federal government getting 18. Compare that to paying 56 cents to speculators who profit from gambling on the price of oil. This money does not contribute to the growth of our economy because it is limited to a small sector of investors who can afford to take risk. The wealth generated by the 56 cents of speculation cost in the price of gasoline does not trickle back to the majority of us who are filling up our tanks to get to work, to drive our trucks or plow our fields. So, next time you fill up your tank, think about the more than 20% going to payoff a gambling debt in a game you can only lose.

Speculation in the marketplace skews the marketplace and twists the laws of supply and demand. Unregulated gambling in the oil and other commodity markets should be ended.
Copyright © 2012 Janet Jacobson and Sustaining the Northern Plains


One thought on “Gambling on oil

  1. Marcy Svenningsen

    I couldn’t agree more that we need to end speculation in commodity markets! Thanks for the article, Janet.

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