Speculation’s Influence on Gas Prices

The weak American economy is receiving yet another blow as gas prices are quickly approaching $4 a gallon nationally. Americans are getting squeezed at the pump while large oil companies have seen a surge of profits. Indeed, ExxonMobil earned $10.7 billion in the first quarter, a 69 percent increase from a year ago. Other oil companies have seen similar increases as well.

This has led much unrest among American voters, forcing government policy makers to take notice of the issue. The person who has been feeling the heat the most has been President Barack Obama, whose poll numbers have been dropping over the past several months. With gasoline prices more than doubling since he took office, some voters have begun to question his ability to take control of the issue.

In order to ease concerns, the President recently announced a task force to investigate possible manipulation in the oil markets by speculators looking to make easy profits. As well, Democrats in Congress have been looking to eliminate $4 billion in subsides to oil companies, although it is not certain whether such a proposal will make it to the Presidents’ desk.

Unfortunately, there is some evidence to suggest that there is not much the government can do, at least in the short run, to significantly reduce oil prices. Despite the massive size of the major oil companies, there is no direct evidence suggesting that they are driving oil prices upward. OPEC, which is responsible for approximately 40 percent of worldwide production, has a much greater effect on oil markets.

As for the speculators like hedge funds and other traders, they may very well be responding to real geopolitical pressures that would lead to higher future oil prices. The unrest in the Middle East has done much to rattle oil markets. In the past six months, there has been a revolution in Egypt, civil unrest in Qatar and Syria, and a civil war in Libya. Many investors fear that this unrest could eventually spread to Saudi Arabia, the world’s number one producer of oil.

China is also having a considerable impact on global oil prices. China is still in the middle of an economic expansion, with much of its growth depending upon capital construction and manufacturing. As a part of this process, they are consuming massive amounts of energy including oil, to further this growth. The result of the Chinese feeling the effects of this economic growth will result in their demand for oil which will only continue to increase.

Given the importance of oil to a modern industrial society, it is not surprising that demand for oil is not very responsive to price increases. Indeed, many economists have estimated that a ten percent increase in oil prices only reduces demand by two or three percent, because of this, some have argued that the United States needs to open up to more oil production. It is true that America is the third largest oil producer in the world and has approximately 20 billion barrels of known reserves, but it is still a small producer in the global market and would likely not have much effect of global prices. The switch to alternative energy solutions may also be a long-term solution, but it will do nothing to affect prices in the near future.

In the end, continued geopolitical instability and rising demand from emerging markets will continue to push gasoline prices higher. In all likelihood, speculators are responding to these pressures rather than spearheading it.