Speculators are driving prices up.
This is just unavoidable. As Live Oil Prices reported earlier today, the CEO of Exxon-Mobil (NYSE:XOM) recently said:
“Based purely on supply and demand, [oil] should be in the $60 to $70 a barrel range.”That doesn't look too good for speculators. It's unavoidable that speculators are a huge part of the problem. But why are speculators driving the price up? Is it just something they randomly decide to do?
People who understand that artificially cheap credit and inflationary monetary policy will always create bubbles know the answer to this. And people who understand that politicians talking about blowing up oil-producing countries is bad for oil know the answer to this as well.
Speculators are driving up prices for the following reasons:
a) Excess Liquidity: That's code for, "The government printed lots of money with nowhere to go." In an attempt to "jump start" the economy, the government — specifically through the Fed — created trillions in new dollars and low interest loans. When the government does that, the money finds its way to a specific asset — just look at housing in the mid-2000s.
b) War Fears: Politicians in Iran, Israel and the U.S. are all constantly talking about war. Talking about a war in an oil-producing country is a good way to make speculators fear that price disruptions will exist in the future. That makes them buy and hold — pushing prices up.
c) Regulations: There are hundreds of billions of dollars worth of oil that is illegal to drill up in the U.S. Much of it is on federal land, and the government refuses to make it available for drilling. This might be good or it might be bad, but it's unavoidable that it has a huge impact over time. The same goes for the regulations used during the actual drilling.
Bonus Fact: The government makes more than Exxon.
One of the reasons most people care about oil prices is because oil prices make up a large part of gas prices. The sad thing?
Exxon makes about 2 cents per gallon of gas it sells.
Local, state and federal taxes make about 48 cents.
In other words, the government makes over 2,000% more than Exxon does for every gallon of gas that Exxon sells. This doesn't even count taxes on oil company and gas station profits.
Either way, speculators are responding to government policies. Blaming speculators right now is essentially blaming the victim. If you're upset over gas and/or oil prices, let the blame fall where it's deserved.