Oil Futures

At the behest of Congress, President Bush has offered a few solutions to the current gas crisis, including an investigation into whether the oil companies have engaged in price gouging. This last lays at the heart of the current debate. Bill O'Reilly certainly chalks it up to a sort-of-conspiracy and is particularly suspicious of the oil futures market, which he believes is probably the biggest factor in determining the price at the pump. Here's how the oil futures market works.

Gasoline retailers determine the prices they charge, but they often take their cue from the price of crude and gasoline that's reached at the New York Mercantile Exchange. Oil and gasoline producers sell their products at the exchange so they can lock in a price months before they're ready to deliver it. Speculators take the risk that prices will drop between the time the oil or gas is sold and when it is actually delivered, but reap the reward if prices rise. Through these active futures markets, benchmark prices are determined for crude, gasoline, heating oil, natural gas and other commodities.

O'Reilly explains:

Gasoline supplies are at an eight-year high according to OPEC. There is plenty of gas selling on the open market, more than enough to meet the worldwide demand.

So rising gas prices are not a supply-and-demand issue.

What the American oil companies are doing is exploiting the uncertainty in the world. Every time the nutty Iranian government threatens to kill the Jews or the Americans or whoever, speculators bid up the paper price of a barrel of oil.

These speculators operate in the so-called commodities markets. They gamble on where the price of oil and other tangible assets will be months from now. These Vegas-type people sit in front of their computers and bid on "futures" contracts.

Every time the oil company executives, guys like Lee Raymond, see these people bidding up oil "futures," they order their retail gas station owners to jack up prices to you. Supply and demand? -- my carburetor, this has nothing to do with the free market.

Mac Johnson counters O'Reilly and traces the real rise in price as being a rise in the price of crude oil due to normal supply-and-demand economics. The free-marketer in me is inclined to side with Owens.

But I do often marvel at how quickly gas stations raises prices on the news of an increase in price on the futures market and how slow they are to lower it when the price on the futures market decreases. When the price goes up, they explain, it's because, well, the price is going up and they need their prices to reflect that. But when the price goes down, well, you see, they have to sell the inventory at a price so they can still make a small profit.

That being said, in addition to the long term benefit of developing alternative energy sources, the real short-term solution is to expand the area in which we can drill domestically (ANWR and other federal lands), thus making us less dependent on foreign--and more unstable--sources of oil.