Forget everything you learned in Economics Class about the Demand Curve and its brother the Supply Curve. Every time you pull into a gasoline station, you are participating in a market that ranges from inefficient to manipulated.
The first fact to consider is that speculation in the oil markets causes the price to fluctuate widely, reportedly at least up to 40%. Let’s call it a speculators tax. You are paying up to 40% extra when you fill up your tank because of the way the markets are structured: speculators are allowed to basically cause fake demand. Or fake supply.
When analysis is made of the costs of gasoline at the pump, only about 45% of the cost of gasoline at the pump is to pay for the base product, crude oil. About 18% of the cost is for refining and profit. The rest is taxes and marketing. So something in the range of 60% is related to the cost of getting the oil from the ground to you. The rest is overhead.
Given the speculators tax can drive the crude portion up 40% higher than it should or needs to be, then we can easily see that the cost to you, the consumer, has little to do with how much you want to drive this week. Your demand for product is irrelevant.
Consider the cost to supply you with gasoline. Do you think the cost to drill, transport, refine the gasoline changes week by week when your price at the pump fluctuates? Of course not. If one week you pay ten cents less a gallon and the next week you pay forty cents more a gallon, this change does not reflect any change in the cost of producing the product for you. These changes are just to satisfy the speculators effect on the market.
What’s in the Future?
The price for gasoline is mostly set by the state of the futures market. Buyers, sellers, middlemen, and speculators meet to trade quantities on many commodities, and crude oil and gasoline are two of those commodities. These trades are called contracts, and usually are for a limited time. Since these contracts expire in the upcoming weeks and months, they are called futures. Historically, contracts were for actual delivery of the commodity when the contract fulfilled, but that is no longer the case. You can buy futures without the fear someone will deliver ten carloads of oranges to your front lawn.
Nowadays, you can buy futures contracts on all sorts of commodities, not only gasoline. In fact, by law, the only product that is prohibited to have futures market is onions. The history of the Onion Futures Act, which prohibits onion futures trading, is a fascinating story to read about. The prohibition on onion futures grew out of the results of what speculators can do when they get to control the market. In 1955, two speculators cornered the market on onions and made millions, the producers (farmers) were devastated. In one area (Chicago) oversupply caused onion prices to collapse; at one time the burlap bags holding the onions were worth more than the onions themselves. In other parts of the country there were onion shortages. In short, consumers were grossly manipulated.
As it turns out, since onion futures were banned, onion prices fluctuate without a futures market. Things like weather, transportation, crop yields, etc., all cause onion prices to fluctuate like anything else. If anything, it proves that a futures market is not really necessary.
However, futures contracts exist on most other commodities. Regardless of history, nowadays we are being manipulated by the entrenched state of futures markets. Since there is no delivery of the commodity, speculators have as free a reign to affect prices as much as they can afford.
Time to revise those Economics textbooks.
Thinking about supply and demand might be useful. But thinking that there is a law of supply and demand that governs prices is too simplistic and naive.
Remaining with the gasoline example. When you pull up to the pump in many states, you can see a sign or placard listing out the cost of the product, the amount of taxes per gallon, etc. I submit that it should include the speculators tax. Daily or weekly financial news programs can report the rise and fall of the speculators tax on consumers just like the changes in the overall price of gasoline is constant news.
At least then we’d be honest about what we are paying for.