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Domestic Drilling Doesn't Decrease Gasoline Prices 736

Posted by samzenpus
from the let-the-flaming-begin dept.
eldavojohn writes "As the political rhetoric heats up, there's something puzzling about drilling inside the United States. Essentially, it doesn't reduce what we pay at the pump. From the article, 'A statistical analysis of 36 years of monthly, inflation-adjusted gasoline prices and U.S. domestic oil production by The Associated Press shows no statistical correlation between how much oil comes out of U.S. wells and the price at the pump.' If the promises that politicians made when they opened U.S. drilling were true, then we should be paying about $2 a gallon now. Instead it's $4 a gallon. Minnesota Public Radio pulls some choice quotes from both parties and wonders why this decades-old empirical observation goes seemingly completely unnoticed."
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Domestic Drilling Doesn't Decrease Gasoline Prices

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  • by eldavojohn (898314) * <eldavojohnNO@SPAMgmail.com> on Friday March 23, 2012 @08:06AM (#39449435) Journal

    Minnesota Public Radio pulls some choice quotes ...

    Submitter here, my mistake on that above source. When I read this in my news feed yesterday, I didn't see the AP markings all around this story. All of it appears to be completely and solely Associated Press sourced [google.com]. I apologize if that confused anyone.

    Noticed that when I was looking to see if anyone had come up with a sufficient rebuttal to this empirical link but aside from a few [kansascity.com] insane pundits [rushlimbaugh.com], I didn't find much. The remaining arguments for "drill here, drill now" probably rests on "job creation" (waiting on that fact check) and, according to Thomas McClanahan from the Kansas City Star, it "means fewer dollars going to nasty, unstable regimes and more revenue for the Treasury, especially if the drilling is on public lands." He might be right about lowering the trade deficit but I think there are other things we could stop doing to prevent unstable regimes [wikipedia.org].

    • by fotoguzzi (230256) on Friday March 23, 2012 @08:21AM (#39449573)
      Drilling domestically might not lower the price of gasoline, but perhaps it creates a buffer in case worldwide oil flows are disrupted. That is, if all oil is imported and there is a boycott against the U. S., we are back to 1973, waiting in gas lines. If a local industry had to begin from scratch, prices would presumably be high for quite a while.

      Having at least the ability to drill locally should prevent huge price swings every time there is a panic. The price might rise for a while, but presumably the large oil producing companies would return to the market with slightly lower prices.
      • by eldavojohn (898314) * <eldavojohnNO@SPAMgmail.com> on Friday March 23, 2012 @08:32AM (#39449683) Journal

        Drilling domestically might not lower the price of gasoline, but perhaps it creates a buffer in case worldwide oil flows are disrupted. That is, if all oil is imported and there is a boycott against the U. S., we are back to 1973, waiting in gas lines. If a local industry had to begin from scratch, prices would presumably be high for quite a while.

        You're right but I would like to point out two things. One is that you seemingly forgot to mention the Strategic Petroleum Reserves [wikipedia.org] that were created after that boycott. Despite what pure capitalists say about its influence on the market, this reserve still exists and has come in handy for taking "loans" out of during catastrophes. This would help us transition from foreign dependence to massive drilling at home.

        The other thing is that we actually do a lot of our own oil refining (especially in Texas) [wikipedia.org]. So, it's not like we're missing that huge part of the infrastructure, we import the crude and refine it on our soil. So really what we're missing is just the crude pipeline. The "local industry" you speak of is actually mostly already here to support us, all that's missing is the source and transportation of the crude (since it would probably flip from cargo ships to trucks initially?). What it comes down to is how long would it take a company to drill and lay pipeline? Probably not very long ... they have crazy revenues.

        • by landofcleve (1959610) on Friday March 23, 2012 @08:45AM (#39449791)
          There's a third thing to consider, that being that last year the U.S.'s largest export was....gasoline! [yahoo.com] It comes down to the fact that the U.S. is using less gas, and instead of lowering prices to encourage more consumption to increase profit margins, the gas companies sell it off outside the U.S., largely to South America, keeping prices high.
          • by theguyfromsaturn (802938) on Friday March 23, 2012 @09:13AM (#39450055)

            It's a global commodity. There is no way that domestic production can change the global price if global production is declining. Globalisation ensures that your suppliers can sell to the highest bidder, and as capitalists, they'd be crazy not to.

            Second, it IS expensive to drill in deep water. Not only in immediate costs, but in potential costs of litigation. You have to prepare you nest egg with that in mind. BP certainly convinced everyone in the industry of that fact. You cannot calculate only the immediate profit, but must consider that in the long term the risk of an evironmental catastrophe will hit you, and you can't reduced your profit margin, even if you were so inclined.

            The bottom line is, consumers have to get off the drug. The days of free fossil fuel are over anyways (whatever those idealistic economists who obviously still believe in the tooth fairy will tell you). Suck it up, plan in consequence. Give up the macmansion in the suburb and think of a more reasonable lifelstyle. Don't blame others for what YOU can change? Fuel is expensive? Don't buy it.

            (I know, we are all affected by indirect cots of other products we can't do without, but we can certainly reduce that impact by changing our behaviour anyways).

            • by berashith (222128) on Friday March 23, 2012 @10:22AM (#39450881)

              there have been documented cases where the global demand has gone down and the global supply has gone up, and yet the prices have increased. There is something else at work beyond simple supply and demand.

              • by afidel (530433) on Friday March 23, 2012 @10:42AM (#39451153)
                Risk, there is a very large risk premium built into the pricing of crude. It's kind of the inverse of how the value of a fiat currency fluctuates.
              • by repapetilto (1219852) on Friday March 23, 2012 @10:43AM (#39451173)

                Yes, it is called speculating on the future supply and demand. One is widely expected to go down and the other is widely expected to go up. The spot supply and demand estimates are only part of the equation.

              • by thesandtiger (819476) on Friday March 23, 2012 @12:15PM (#39452483)

                Speculators. During the crash in 2008 speculators got out of oil in a big way and lo, prices plummeted. As they got back in prices have gone steadily back up.

                And sorry to go off on a rant here, but to the larger point...

                As far as triggering behavioral changes, I would recommend increasing taxes on gas (we're still much less expensive than Europe) and VASTLY increasing tolls for daily commuters. If you live in the city/suburbs and are commuting to the suburbs/city you are a big part of the problem. If employers want to reap the benefits of cheap real estate in the burbs, let them subsidize workers transit or - MUCH BETTER - make them pay so much that telecommuting is very strongly incentivized.

                Spend the increased taxes on improving mass transit and information infrastructure, see consumption drop, and maybe the best part would be more people working from home and being able to spend more time with family instead of wasting hours of their days stuck in traffic to go to a job they could easily do from anywhere with a decent net connection (for the most part).

                Fuel costs would stabalize or go down for long-haul uses and things like food production while purely recreational use would be treated like an expensive luxury (as it should be).

                What we need is not just changing from one fuel source to another, but a radical shift in how our economy works to recognize that physical transport of individual humans from point a to point b is pointless, that productivity has increased so much that a 40 hour work week is just dumb for the most part (and would be better split up between 2 people working 20 hours/week each), and that technology will let us make quite a few office jobs things people do routinely from home rather than being the exception.

            • by khallow (566160)

              The days of free fossil fuel are over anyways (whatever those idealistic economists who obviously still believe in the tooth fairy will tell you).

              Those days and those economists never existed. I gather you probably meant "cheap oil". But the transition to "expensive oil" automatically fixes the problem of weaning consumers off the "drug". As those "idealistic economists" would tell you, if you were listening.

              Suck it up, plan in consequence. Give up the macmansion in the suburb and think of a more reasonable lifelstyle. Don't blame others for what YOU can change? Fuel is expensive? Don't buy it.

              Or continue to live in the suburbs and pay a little extra for gas or whatever your car happens to use. There's not going to be a lot of drama in the long term unless some politicians try to go Pol Pot on the suburbs and force people to move elsew

            • by Anonymous Coward on Friday March 23, 2012 @10:59AM (#39451357)

              Who cares if it's a global commodity, the politicians said that home drilling would reduce the price of oil.

              It doesn't.

              Story: End Of.

              We KNOW they were lying, we KNEW at the time they were.

              But still it was demanded to be passed because it would reduce prices and help the poor out.

              Now that it has been shown to be a load of bollocks, why will you now excuse them for lying about it?

          • by DigiShaman (671371) on Friday March 23, 2012 @09:14AM (#39450063) Homepage

            Oil is fungible [cjr.org]

            "Oil is a fungible commodity, sold on the global market to the highest bidder, as McAuliff points out."

            It has nothing to do with some grand conspiracy. It's a simple matter of supply and demand. America is competing on the world market for cheap energy. The locality of drilling only determines who gets first sale profits and the quality of the crude. Other than that, the highest bidder gets the oil. Simple as that.

            Now personally, I think we should maintain our strategic reserve for times of natural disasters and regional conflict (war). The idea of tapping into it to spook the speculators is flat out wrong. It's also not working anymore. The hedge fund managers are starting to become immune to this political tactic.

            • Oil is fungible [cjr.org]

              "Oil is a fungible commodity, sold on the global market to the highest bidder, as McAuliff points out."

              It has nothing to do with some grand conspiracy. It's a simple matter of supply and demand. America is competing on the world market for cheap energy. The locality of drilling only determines who gets first sale profits and the quality of the crude. Other than that, the highest bidder gets the oil. Simple as that.

              Now personally, I think we should maintain our strategic reserve for times of natural disasters and regional conflict (war). The idea of tapping into it to spook the speculators is flat out wrong. It's also not working anymore. The hedge fund managers are starting to become immune to this political tactic.

              Agreed. And I think there is another point that is missed on the consumer. If you owned an oil company or you have stocks in said petro company where is your incentive to lower prices? There isn't any. You are making cash hand over fist. I mean, no one is bitching about he cost of their IPad when Apple is sitting on a 100 billion worth of cash. But then again, some folks think Apple is "green."

          • by afidel (530433)
            The reason we are a net exporter of gasoline is the cheap natural gas that has come online in the last few years. Mexico is shipping crude to the US to be cracked and then transporting the gasoline back home because it is cheaper than using part of each barrel to create the heat to do the cracking themselves.
          • by mcgrew (92797) *

            Also, last year was the first time since 1949 that we exported more oil than we imported. [hollandsentinel.com]

            • by michael_cain (66650) on Friday March 23, 2012 @10:46AM (#39451203) Journal
              Use more precise terms for clarity, please: we exported more finished petroleum products (diesel, gasoline, etc) than we imported. OTOH, of the finished products we consumed in the US, some 45% were still refined from imported crude oil. And some part of the finished products exported from our refineries were derived from imported crude. The US continues to be the largest crude oil importer in the world, and is heavily dependent on imported crude to provide for domestic consumption.
          • by Kagato (116051) on Friday March 23, 2012 @10:37AM (#39451085)

            Very true. Which is why Keystone is going to the golf coast. So that the crude can be refined and then loaded onto ships and sold overseas. In fact there's a $2bn anual tax incentive to take canadian crude and ship it overseas. Long term the US tax payer is the one that pays for the Pipeline via tax incentives.

            If you wanted to lower gas prices in the US you would pass the Pickens Plan (the bi-partisan Natural Gas Act that was recently filibustered in the senate by those beholden to big oil) to convert comercial semi's to Natural Gas (by the way the original conversion from gas to diesel took 5 years). And then you tax the crap out of petroleum exports. You put those tax dollars into renewables and building a hydrogen infrastructure.

            By the way one of the biggest by-products of natural gas production is hydrogen. So if we're going to push natural gas we might as well collect and distribute hydrogen the same time. Supply and demand at work.

          • by oDDmON oUT (231200) on Friday March 23, 2012 @11:00AM (#39451371)

            Another thing to consider: The world added 80.1M cars to the gasoline leech line last year alone, every one of which was outside the US (PDF documentation [oica.net]).

            Face it, we've exported our bad habits to the world, and now we're going to have to compete for resources we've taken for granted for decades.

        • by Archimagus (978734) on Friday March 23, 2012 @08:47AM (#39449803)
          I think the big thing we need to do is figure out WHY the prices don't come down from domestic drilling. I would bet it doesn't have nearly as much to do with the cost of drilling, and way more to do with the fact that people on Wall Street decide what a barrel of oil is worth, it doesn't matter where it comes from.
          • by gtall (79522) on Friday March 23, 2012 @08:59AM (#39449929)

            It's a world oil market, Wall Street is only one input. Also, OPEC, while weakened, does control a good part of the supply. Other producers more or less keep in line with OPEC because to dump a lot of oil on the market would decrease the price. There is a long term push for an oil supply crunch due to China, India, and the rest of SE Asia become more industrialized. Add to that the instability of the mideast pushing up insurance rates, that the price remains high is not too difficult to comprehend.

            As someone above mentioned, the U.S. is also a net exporter of refined oil products, i.e., gas. There isn't any mystery here either. American consumption is down because of the recession and increased use of more fuel efficient cars. Gas is also an international market. So refiners sell into that market, not strictly the domestic market.

            • by michael_cain (66650) on Friday March 23, 2012 @10:58AM (#39451343) Journal
              Yes, and as the US is still heavily dependent on crude oil imports, the supply variable to look at is not global production, but global net exports -- because we can't import oil if no one is exporting. There is a long-term trend of the producing countries consuming more of their own production and exporting less. Global net exports peaked in 2005, and are down by more than 3 million barrels per day since then. The US, Europe, Japan, China and India are all oil importers, and are all bidding for a shrinking supply of the available exports.
          • by Phrogman (80473) on Friday March 23, 2012 @09:45AM (#39450419) Homepage

            Is nothing to do with the price of oil per barrel essentially.
            I will give you an example from up here in Canada where I live, specifically Victoria BC. The price here varies between roughly $1.12/litre and $1.39/litre (i.e. $4.24 to $5.26 US dollars. The exchange rate is $1 Cdn = $0.9997 US so no effective difference at the moment). The price per litre varies on a daily basis, with no real apparent pattern.
            Now, our gas comes from Alberta as oil, is shipped to the US to be converted into gas, then gets shipped back north to BC (why we don't make it ourselves is beyond me).
            The price goes up based on anything remotely bad in the news apparently. Revolution in Libya, price goes up. Bad weather, price goes up. Election coming, price goes up. Long weekend coming, price goes up. It drops periodically when things are normal. I have only seen it go over $1.39/litre once or twice and then only for a few hours. When it goes up at one station, it follows at the rest, same thing when it drops.
            It seems to me that this price war has nothing to do with the price of oil internationally. I haven't noticed a pattern for the most part.
            However, one change that does happen is if the price of a barrel jumps dramatically up, the price of gas jumps immediately - no matter that the gas we bought actually cost less. However, if the price per barrel drops dramatically, the price at the pump drops slowly if at all.
            Its nothing more than an industry colluding to ensure they get the highest prices possible, combined with a government that is not interested in regulating it at all because they collect massive taxes on the sale of fuel.
            So it doesn't surprise me that drilling in the US doesn't affect price at the pump - because the industry that sets the prices has zero interest in lowering the price of gas, they are milking it for all they think they can get away with, and with zero repercussions. Our NA society is built on burning fossil fuels, and nothing is going to change that any time soon.

            • by Doctor_Jest (688315) on Friday March 23, 2012 @10:04AM (#39450697)

              You've hit the nail on the head (so to speak) with respect to vertical monopolies. While there isn't a giant Standard Oil anymore, the fact that the oil companies control the entire lifecycle (in one way or another) from crude to finished product at the pump shows that we can have the weird market fluctuations you described. (Going quickly up, but taking its sweet time to go down in price.) The fact that gasoline isn't something that has very elastic demand because of the way it is used in every aspect of our economy lends us to the conclusion that vertical monopolies can leverage their monopoly status to keep prices artificially high in the face of real change in the marketplace.

              It is funny that our refining capacity never meets the aggregate amount of oil we are pulling out of the ground. (It's more profitable to close the refineries rather than let price go down.)

              We've seen the oil companies push prices up to a point, hear the outcry, then lower prices back down slowly so the average person with a busy life doesn't notice that gasoline spiked at $4/gallon up from $2.50. But they never seem to get back to $2.50... the price just stays up where it was, slightly below the heartburn level that caused the reduction in the first place. :)

              When you have an item that most people depend upon (and businesses too), you can play fast and loose with the market and not fear losing customers. (I wish the electric car would put a damper on this practice, but I'm not holding my breath.)

        • Re: (Score:3, Interesting)

          by fotoguzzi (230256)
          My comments were based on the idea of: if it doesn't lower prices, why should the U. S. be in the oil business?

          The petroleum reserve was designed for major catastrophes. Apparently in its history, total draw-downs have only amounted to around ten percent of the total capacity.

          So that is one piggy bank that really hasn't been raided unduly. Thanks for bringing it up! It would be interesting to know if the market considers that large withdrawals could be made or if a major withdrawal would actually cause
      • by AlecC (512609) <aleccawley@gmail.com> on Friday March 23, 2012 @08:43AM (#39449763)

        Not really, as long as oil is freely traded. If oil spikes from, say, $120 a barrel to $150 a barrel, do you seriously expect US-based producers to turn their back on $30 a barrel extra profit in order to please domestic consumers? They will either export their production or (more likely) expect domestic consumers to pay the market price. It is called the Free Market and the US is supposed to be keen on it. Oil is one of the most transportable, commoditized things around, and the market is world wide.

        • by spxero (782496)

          Yes, if the oil was obtained on U.S. soil.

          That is a selfish viewpoint, but I don't expect Iran to look out for us over themselves.

          We are all running out of time and these guys are making obscene profits as is. I live in West Texas and see this on a daily basis. Other than safety, there is little account for responsible spending. Example: workers that used to check and maintain the pumpjacks are promoted to "manager" and told to call a consulting/maintenance firm to do any repairs, costing a ton more than ju

      • by Jawnn (445279) on Friday March 23, 2012 @09:38AM (#39450335)
        No.
        The term "buffer" implies an excess, something that would provide for the required flow during intermittent disruptions upstream. Given the numbers involved, the impact of any realistic amount of additional domestic production would not be a "buffer".
        Now, what actually would have an affect on the price of gasoline is reducing the amount that is exported. Yeah, that's right. We are the refinery for the world. We (the people who live here) get the mess AND the high prices. Such a deal we're getting in this magical "global economy".
    • by arth1 (260657) on Friday March 23, 2012 @08:26AM (#39449623) Homepage Journal

      I think you're missing the point, which isn't to drive down oil prices, but to make the country less reliant on foreign oil imports and to improve trade deficits.
      That's a laudable goal, but unfortunately it doesn't help the consumer, it just helps the Rockefellers and Gettys.
      Why? Because it's a piss in the ocean. If you have a street full of limonade sellers who sell it at 99 cents per cup, and you have a limited amount that you can sell at 50 cents, you won't do so. There's not enough of your product to have an effect on the market price. So your price will converge towards the common price.

      How to make it benefit the public, then, in the short term? Regulation and taxation. The oil industries are given special privileges that they don't need. The US of A is no longer in a boom period where incentives were given to sustain the overall high growth. Start taxing them at a reasonable level for using up non-renewable resources that belongs to the country.

      • by ArcherB (796902)

        Your post is spot on up until the last sentence. While I'm not railing on you, this is more for the people who think that oil in the US is the US's oil. This is not the case.

        Start taxing them at a reasonable level for using up non-renewable resources that belongs to the country.

        State or government are other words that could be used in place of "country". It wouldn't change the meaning in the slightest, but I feel it takes a more ominous, but accurate, tone.

        The resource belongs to whoever holds the mineral rights. If the government can claim the oil under my land, why can't they claim the food that is grown

    • by sycodon (149926) on Friday March 23, 2012 @09:59AM (#39450611)

      You may blithely dismiss Limbaugh's point but you can't argue against it.

      The AP study looks at actual oil coming out of the ground, which is but a small part of the price of oil.

      Since oil is a commodity market and markets are subject to the law of supply and demand, producing more oil will impact the market. Last I heard, U.S. production is part of the world wide market.

      Also, since speculation is a primary component of the cost of oil, actions that tend to calm the speculative market will undoubtedly reduce the price of oil at least to the extent that the price is driven by speculation.

      For you to argue against this is to argue against all the Democrats who were screaming for Bush to tell the Saudis to increase production. And you also would have to ignore the fact that after Bush opened the outer continental shelf to mere exploration, prices came down as speculators considered the fact that there could be more oil on the market. Lest you forget, when Bush left office, the price of a gallon of gas was less than $2 after being in the high $3 range prior to his executive order.

      As for job creation, for you to even suspect that additional drilling wouldn't mean tens of thousands of new jobs is like someone suspecting that water isn't wet.

      • by NeutronCowboy (896098) on Friday March 23, 2012 @11:27AM (#39451725)

        The point is that the US can't meaningfully impact the price of gas. Maybe a few cents here and there, but that's it. The reason the Saudis can do it is because they have an oil extraction infrastructure that is very broad and flexible, as well as oil that is easily accessible. And even they have a hard time to significantly do it on their own. The US has neither, and yet people seem to think that tapping the piddly extra reserves the US has is going to bring us back to $2 a gallon gas. Fucking ridiculous.

        The price of gas also came down during an election year, when some team won the Baseball World Championship, and when there were exactly 27 sun spots on the sun. Which one had the most impact? Show your work.

      • by cwgmpls (853876) on Friday March 23, 2012 @12:01PM (#39452259) Journal

        Lest you forget, when Bush left office, the price of a gallon of gas was less than $2

        Lest you forget, when Bush left office, the global economy, lead by the U.S., was heading toward a bottomeless crash of unknown proportions and everybody slowed their purchase of oil products significantly. That is why a gallon of gas was in the $2 range when Obama came in. I don't know how we can expect healthy economic growth *and* low energy prices, nomatter what the source of the energy, at the same time. Simple economics would seem inform us that we can't have both.

  • One word (Score:4, Interesting)

    by TraumaFox (1667643) on Friday March 23, 2012 @08:08AM (#39449457)
    Speculation. That's what it boils down to, folks. If you really want to see $2.00 gas prices again, outlaw speculation and it will happen overnight. It is absolutely mind-boggling that this practice is allowed with no checks or balances to keep it from driving our gas prices sky high. People will bring up anything else, like gas taxes or domestic drilling, just to draw attention from the real problem. It's almost like no one on either side wants to have that conversation, though.
    • Re:One word (Score:4, Insightful)

      by repapetilto (1219852) on Friday March 23, 2012 @08:12AM (#39449477)

      Outlaw speculation... how will the price be determined?

      • Re: (Score:3, Insightful)

        by TraumaFox (1667643)
        Hopefully by actual supply and demand, rather than what speculators predict future supply and demand will be.
        • Re:One word (Score:4, Informative)

          by repapetilto (1219852) on Friday March 23, 2012 @08:43AM (#39449761)

          So, under your system, if I need to buy oil for some purpose, am I allowed to predict that it will be cheaper in a month and wait until then? This really makes no sense to me so I must be misunderstanding.

          • Re:One word (Score:5, Interesting)

            by Kokuyo (549451) on Friday March 23, 2012 @09:27AM (#39450197) Journal

            Please, do correct me if I'm wrong about this, but when I read 'speculation' I don't think 'Waiting for the price to come down to buy the goods'. I think 'buying paper or digital numbers that represent goods'.

            Isn't this the same thing with just about any traded object on Wall street? None of those buyers are interested in owning a part of a company, a few bars of gold or a ton of concentrated frozen orange juice. They just want to act as if they did and then sell this facsimile to some other schmuck who wants to act like that... hopefully at a better price than they payed previously.

            I mean, this is like children play-acting supermarket, only that the adults afterwards have to actually pay the prices for milk their children have come up with. And THAT is the problem, because so much capital is sunk that way. This capital doesn't really find its way into the market, after all, unless we, the customers, start paying higher prices for our products. The Wall Street does not generate anything of worth. All their gains must be paid and we are the ones to do that.

            And therein lies the problem: As long as people are allowed to speculate this way, prices will not go down. After all, prices going down is not good for Wall Street people... unless they're going up much more right after they bought in. There is only one way for prices to go, if you ask Wall Street.

            The whole concept just boggles the mind, frankly...

            • Re:One word (Score:5, Informative)

              by JazzHarper (745403) on Friday March 23, 2012 @10:59AM (#39451361) Journal

              Please, do correct me if I'm wrong about this, but when I read 'speculation' I don't think 'Waiting for the price to come down to buy the goods'. I think 'buying paper or digital numbers that represent goods'.

              First, speculation can take many forms, and not all of them involve options contracts. Hoarding is also speculation. At the moment, it is quite profitable to hire Suezmax tankers (day rates are quite low), fill them with crude oil and have them travel very, very slowly to their destinations.

              Second, there is no objective way to distinguish between hedging and speculation. Selling and buying futures is an essential mechanism for both producers and consumers to manage risk. Wildly fluctuating prices, which is what you would have in the absence of futures contracts, are bad for everyone. Producers would be less inclined to invest (and less able to secure capital) in growing crops or extracting raw materials because they would not know if they could do it profitably. Consumers would not be able to plan their businesses properly, because they would have no control over their input costs. In other words, prices would be much higher across the board in the absence of futures contracts, because of the greater risk aversion of both producers and consumers.

              Third, futures contracts do not tie up nearly as much capital as putting a commodity into inventory (hoarding), which is what would happen in the absence of futures contracts.

              Fourth, in anything other than the short term, futures contracts have neutral effect on commodity price. Futures contracts are written in brackets above and below the expected market price. All the futures do is smooth out the fluctuations. Sometimes that works to the benefit of the producers, and sometimes it works to the benefit of the consumers, but neither can hold prices artificially high or low through futures contracts for very long, because the contracts do expire. When new futures contracts are written, the premium at which they are sold reflects the reality of the new supply and demand conditions.

              Fifth, this has absolutely nothing to do with "The Wall Street". Energy commodities are traded at the NYMEX, which is on the opposite side of Manhattan from Wall Street, and agricultural commodities futures are traded in Chicago.

              In the case of gasoline, part of the problem is that the individual consumer does _not_ have any way of hedging the fluctuations in price through options at the retail level. Individuals have no negotiating power and and must _always_ pay the spot retail price at the pump. It would be very interesting to see what would happen if fixed-price gasoline contracts were offered to individuals (or if individual consumers themselves formed a co-operative to negotiate gasoline contracts with distributors).

      • Re:One word (Score:4, Insightful)

        by jythie (914043) on Friday March 23, 2012 @08:24AM (#39449607)
        Via the market? Companies selling their product to other companies that use it, rather then speculators inserting themselves between buyer and seller.

        Speculation pulls money out of a market and raises prices without adding value simply because people with enough resources are able to force getting their 'share' of whatever is going on. Markets do just fine without speculation, in fact they generally do better with lower prices and greater stability... but fewer useless people getting very wealthy for no other reason then already being wealthy.
        • Re:One word (Score:4, Informative)

          by nedlohs (1335013) on Friday March 23, 2012 @08:59AM (#39449927)

          Speculation also lowers prices when speculators think the future price will be lower.

          Speculation also puts money into a market when the speculators get it wrong. If speculators really are pushing up the price of oil above what it "should" be then the oil producers (part of the market) are taking money from the speculators by taking them up on their promise to buy.

      • Re:One word (Score:5, Informative)

        by LF11 (18760) on Friday March 23, 2012 @08:25AM (#39449619) Homepage

        I congratulate you and wish you well in your asbestos underwear!

        Speculation is not the problem. The safety net provided by government bailing out the biggest speculators (the big banks) is the problem. Let those folks go out of business like they ought to, and we wouldn't have a speculation problem.

        cej102937

        • by Kupfernigk (1190345) on Friday March 23, 2012 @08:45AM (#39449789)
          I don't have the exact figures, but at one time most oil futures were all about the actual users of the oil - refineries and so on - and were perfectly legitimate. Futures are what is needed to get farmers to raise hogs and grow corn, after all. Things went wrong when the futures were taken out by people who were not in the supply chain at all. This could be made illegal, but hedge funds have enormous political power.

          Speculation of this kind has a long history. G K Chesterton, nearly a hundred years ago, referring in passing to the scandal of the time, wheat futures buyers who were not millers or grocers trying to buy up the entire wheat crop in order to raise prices to whatever they thought would not actually collapse civilisation while making them rich. Currently, I believe, over 70% of oil production is accounted for by hedge fund futures. It is a classical cornering of the market - but it could only be addressed by sending gunboats to banana republics like the Bahamas, the Channel Islands, the State of Delaware and the City of London.

      • Re:One word (Score:5, Insightful)

        by TheRaven64 (641858) on Friday March 23, 2012 @08:29AM (#39449655) Journal
        The same way it was before the USA deregulated commodities speculation about 15 years ago. A limited number of speculators were allowed, but mostly the price was determined by supply and demand, i.e. most of the people buying commodities were people who actually needed them, not people who were hoping that they could sell them for a higher price.
      • by dj245 (732906)
        Outlaw speculation... how will the price be determined?

        It is actually simpler than you probably think. The price will be determined by the people who buy oil.

        Right now, if you have enough money, you can buy a bunch of oil. But, there are various methods by which you can own the oil but never have to actually take delivery of it. Usually by placing futures orders which allow them to take delivery of the oil at a specific date in the future, which can be weeks or months from now. All we have to do to
    • Re:One word (Score:5, Informative)

      by cfulmer (3166) on Friday March 23, 2012 @08:21AM (#39449583) Homepage Journal

      Please spell it out: what are the mechanics of speculation driving up gas prices?

      Speculators buy and sell futures contracts. Every time they buy a contract, they are betting that the price of oil will go up. But, whenever they buy, somebody else is selling, betting exactly the opposite - that prices will go down. And, recall that speculators eventually have to sell those future contracts (or have 100 tanker trucks pull up to their homes.) When they do, the price will be determined by the actual facts on the group -- how much demand is there, and how much oil is being produced at the time.

      • Re:One word (Score:5, Informative)

        by TraumaFox (1667643) on Friday March 23, 2012 @08:42AM (#39449757)

        Speculation and futures bend the rules of supply and demand. Gas prices are not determined by actual supply and demand, they are determined by speculators hedging on low supply in the future. Would you care to explain why despite supply being at an all time high just a few years ago, prices never came down to match? You can't say that it has anything to do with our oil coming from unstable nations; it's been that way for a long time, decades before we ever saw gas prices climb above the $2 mark.

        I take it what you're asking is how futures contracts actually impact the market price of anything since they are essentially an artificial market not bound by the laws of supply and demand. When speculators buy enough contracts at above the current market price, oil producers see this and start artificially limiting their supply in hopes that they'll be able to sell it all down the road at that higher price, and that causes the price of oil to go up now. We had an agency called the CFTC put in place specifically to prevent this sort of thing from happening, but what happened? Enron happened.

        You remember Enron, don't you? They were instrumental in exploiting a loophole in the CFTC's regulatory powers to allow oil speculators to trade outside of those regulations. As the CFTC lost power, the futures market exploded, and as it has continued to increase dramatically over the past decade, so too have oil prices. You have to be out of your mind to argue that oil prices coincidentallyskyrocketed with the futures market.

        • Re:One word (Score:4, Insightful)

          by repapetilto (1219852) on Friday March 23, 2012 @09:46AM (#39450425)

          Maybe oil prices should be skyrocketing and the regulations on speculators is preventing this?

          There are two reasons we should expect prices to be higher 10 years from now:

          1) Inflation of the USD
          2) We are running out of oil

          What reason do you have to think the price should drop?

        • by Alioth (221270)

          Prices didn't fall because demand was ALSO at an all-time high - it's called supply *and* demand. When demand collapsed, so did the price.

    • Re:One word (Score:4, Insightful)

      by XxtraLarGe (551297) on Friday March 23, 2012 @08:34AM (#39449701) Journal

      Speculation. That's what it boils down to, folks.

      No. Speculators play a valuable role in the market, by taking on risk. They don't control the price of any commodity any more than than consumers do.

      Gas prices are going to stay at $4 a gallon as long as people are willing to pay it. It's supply and demand. If demand dropped by half overnight, you'd see a precipitous drop in prices as well.

    • Another word (Score:3, Insightful)

      by Goonie (8651)
      Rubbish.

      Storing large quantities of oil is very expensive, unlike, say, gold or diamonds. You can't hoard the stuff. Ultimately, the stuff has to be sold to consumers, and if high prices drive demand down (and demand for fuel is elastic, despite a lot of nonsense to the contrary) speculators will lose their shirt.

      The reason why oil are prices are at historicallly high levels, and have been for the past few years, is that global demand has not kept up with global supply, mostly because China and to a l

    • Two reasons:

      1. When barrels of crude oil get cheaper, that just boosts the profits of the oil companies. Since all you fools buy the gasoline anyway at $3.50 or $4.00, why would they lower the prices?? You don't have any other choice anyway.

      2. As long as US oil consumption is larger than the domestic production, the US cannot expect lower prices for crude oil.

      The world oil market has shortages, and increasing production costs. That means foreign oil is expensive.

      The US may have some domestic production, but

  • Obvious (Score:4, Insightful)

    by tbannist (230135) on Friday March 23, 2012 @08:16AM (#39449521)

    Personally, I would have thought this was obvious. Any additional oil generated by the U.S. is pretty much a rounding error compared to the major producers, with international markets, American oil well are going to want to earn just as much as international sellers, if they had to choose between selling for less domestically or getting more on the international market they're going to go for more. They're essentially required to do so by their shareholders. In the absence of an amazing discovery of vast reserves of cheap, easy to extract, untapped oil reserves, the only way to actually get lower prices would require price controls and subsidies to force the price of gas lower and, frankly, I think that would be much worse than high gas prices.

  • Absurd... (Score:5, Insightful)

    by cfulmer (3166) on Friday March 23, 2012 @08:16AM (#39449525) Homepage Journal
    This is the problem when journalists with political agendas pretend to be statisticians. Oil is sold on a global market and goes to many different uses. You cannot look at one part of the supply and say "well, increasing this particular part of the supply didn't affect prices in this other particular market." There are too many other factors to consider: How much oil did other countries use? How much oil was diverted to purposes other than producing gasoline, such as plastics or heating oil? What happened to production in other areas? NONE of this is accounted for in this silly "analysis." Most telling? The analysis excluded the oil shocks of the early 1970's. Why? That was the clearest time that domestic gas prices (and supply) are driven largely by the global oil market. Yet, this analysis is being put into papers all across the US. For what purpose? Could it be to deflect criticism from the Presidents' drilling policies? When an analysis concludes "therefore, the basic laws of economics don't apply," then just like one that says "therefore, the law of gravity doesn't apply," our first instinct should be to question the analysis, not the basic laws.
  • by HangingChad (677530) on Friday March 23, 2012 @08:36AM (#39449715) Homepage

    Why on earth would oil companies sell gasoline here for $2.50 a gallon when they can sell it in France for $10 a gallon? Gas prices are higher because we're selling gasoline overseas [usatoday.com]. Welcome to the global economy.

    There's at least one domestic downside to America's growing role as a fuel exporter. Experts say the trend helps explain why U.S. motorists are paying more for gasoline. The more fuel that's sent overseas, the less of a supply cushion there is at home.

    I still remember crowds of complete fucking idiots chanting, "Drill, baby, drill!!" Pathetic.

    • by necro81 (917438)
      The price an importer pays to buy a gallon of refined gasoline in France isn't all that much higher than in the U.S. Sure, it's more expensive in France, because you have to pay shipping and there aren't that many refineries in France, but the difference isn't even close to 2.5 : 10. The price to consumers in France is so much higher in large part due to different tax structures.
  • by Shavano (2541114) on Friday March 23, 2012 @08:59AM (#39449931)

    US oil production will only ever be a small fraction of world oil production. In a free market, all oil costs about the same. So the USA can't influence world oil prices much by increasing domestic supplies. By it could if it could reduce demand because it forms such a large part of the market.

    I expected US oil production to be anticorrelated to price because US is out of its cheap-to-get oil. But when world prices get high enough many marginal Wells become profitable.

  • What the politicians don't want you to know is that the production of crude oil doesn't affect the price at the pumps as much as the production capacity of the oil refineries. In fact, the US has been enjoying an oil boom in 2011 with exports of petroleum at it highest in the past 11 years or more (reference [usatoday.com]).

    The republicans are using the seasonal nature of gas pricing (summer months mean higher prices) to pressure Obama into allowing the Keystone XL pipeline to be constructed through environmentally sensitive areas by threatening his reelection over an issue they feel the populace could rally behind. Welcome to election year rhetoric folks.

  • Blathering liberals think we can solve this problem through reducing demand alone. Archaic conservatives think we can solve through only increasing supply.

    They are both wrong and both missing the whole point of supply and demand - 'and'. You have to increase supply /AND/ you have to decrease demand. We can't conserve our way out of European levels of gas prices any more than we can drill our way out of them. We have to work with both and get the radicals on both sides of the equation to start compromising!

  • by Dixie_Flatline (5077) <vincent@jan@goh.gmail@com> on Friday March 23, 2012 @09:52AM (#39450515) Homepage

    Here's the REAL question that rarely gets asked: why should fuel prices be lower? Fuel prices in other countries are much higher than in the US (with some exceptions in the Middle East where the fuel is subsidized to extraordinary degrees), mainly due to taxes. The taxes are there to limit consumption, while bringing in tax revenue to fund other services.

    Is there a good reason why fuel prices should be low at all? We know there are costs associated with high use that aren't baked into the price of petrol. Arguably, we've never paid the true price for the fuel we use.

    I understand that high fuel prices disproportionately affect the poor; rich people have more than enough money to pay for petrol. But that indicates other things wrong with the infrastructure of cities and how people move around.

    Virtually no matter how you look at it, prices for petrol should be higher. On the extreme capitalist side, they should be higher because the product is in demand, the supply is dwindling and public opinion is getting harder to buy (oil spills, climate change). On the more socialist side, prices should be higher through taxes, to move money into providing better infrastructure for all drivers, encouraging better city layouts, and funding already badly strapped local governments. 'Because I hate paying more for something that used to be cheap' isn't really a reason.

  • by SuperKendall (25149) on Friday March 23, 2012 @10:01AM (#39450649)

    There are a myriad of excellent reasons to drill for oil locally which have nothing to do with gas prices.

    * Ethically Sourced is better
    Why should we be giving ANY money to cultures that treat women (or other groups based on sexuality or gender) unequally?

    That money is far better off going to either the U.S. or Canada.

    * Environmentally friendly
    It may seem counter-intuitive that more local drilling is better for the environment, but the simple fact is that we cannot trust other cultures to care as ugh about the environment around drilling as we can. Drilling or pipelines here can be monitored more closely and we can do more to clean up problems when they occur. There are hosts of environmental issues with wells around the world but you'll never know about them because they are swept under the run by tightly controlled government press.

    There is also a very logical component to the issue though. The longer you have to ship something, the more likely there will be accidents. Currently we have a vast quantity of oil coming in by ships, and one of which can and do leak. Moving to more local production means eliminating the shipping of a lot of oil from large distances across the ocean.

    * Local Jobs

    Producing oil locally means more local jobs, end of story. It takes people to build out wells/pipelines, and people to maintain them. Even if the number of jobs once built is not very high, it is non-zero and it requires skilled labor.

    That's a few, there are more (such as strategic or price leveling reasons). The fact is we have the oil and gas we need, we should start making use of it ASAP until alternative energy industries can come up to speed.

  • by ClintJCL (264898) <clintjcl+slashdot@gma i l .com> on Friday March 23, 2012 @10:22AM (#39450887) Homepage Journal
    This to me is not a reason to not drill, but rather a reason to deal with antitrust and price gouging issues.

    Or remove their subsidy if they can't price fairly. Or just do that anyway. Fuck the subsidy.

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