Bad news: gas prices are projected to reach $5 this summer. A recent article by the New York Times has confirmed everyones worst fears.
People will likely lose their minds in panic as they suddenly realize that driving has become reserved for the rich and famous. Others will get into their Toyota Prius, Honda Insight or other snooty hybrid and continue life as they normally would. But the rest of us will be stuck at home cursing the oil companies.
You might as well just save your breath this summer because this gas problem is complicated.
You may be thinking, “The Middle East doesn’t like us so gas is up a thousand dollars.” No, it turns out that the predicted summer increase is likely going to be very similar to the gas price increase of 2008. Some of you might be too young to remember (get it together, freshmen) so I’ll give you a brief history.
From January through March 2008, two men and a trading company bought, in total, 6.3 million barrels of oil (84 percent of oil available for delivery in April 2011) to create an impression of a shortage on the New York Mercantile Exchange, and thus, to increase the price of oil. Then when prices were sky high, the company, Parnon Energy, a U.S. oil trader and its affiliates, Arcadia Energy (Suisse) and Arcadia Petroleum (UK), sold their contracts making more than $50 million.
This market manipulation was revealed last summer in an investigation by the Commodity Futures Trading Commission. The CFTC also found that 81 percent of all oil contracts are owned by financial institutions and 19 percent by companies that actually take control of the oil, compared to 1990 when financial companies made up 30 percent and when gas was 99 cents a gallon. So it seems that the two rouges, James T. Dyer and Nicolas J. Wildgoose, had found a loophole that many financial firms were aware of and took advantage of it, making record profits.
Fast forward to 2010 when President Barack Obama implemented the Dodd-Frank, an act to help our economy recover from the recession, which basically ended oil speculation by financial institutions and left the CFTC in charge of regulating future oil speculation contracts. The CFTC then determined that companies should still be able to buy oil but just at a smaller scale — 5 percent of the total available supply. This allowed companies to still make profits and stabilize the market but anyone who understands basic math would figure that if 81 different companies each own 5 percent of all the oil, there would be a problem.
But that isn’t the biggest problem — the 5 percent wasn’t definite. When the bill was passed it seems that most people didn’t read it because it stated that the 5 percent wasn’t set in stone. A lot of big companies like Goldman Sachs figured this out and lobbied to get the CFTC to change the law and increase the ownership percentage. The new proposal from the CFTC was 25 percent.
Commissioner of the CFTC, Bart Chilton, said last October, “There’s nothing wrong with speculators. It’s when it begins to get excessive. We’ve seen where you can have 30, 35, 40 percent plus in some markets with just one trader holding onto that concentration. That can impact markets.”
So 30 is too much but 25 is just right? This reminds me of the film “The Producers.” Gene Wilider and Zoe Mostel sell the rights to a play to different investors who all think they own the play. They oversell the play 250 times over and then try to escape with the profits. Well that is what seems like is going on. The U.S. government is selling the rights to our oil to a bunch of greedy financial firms who then make us watch their crappy play as they and the government exit stage right with our money.
Speeding costs 5 percent more gas for every ten more miles of velocity. It may not seem like it but that adds up and costs you in the end. The same can be said for Wall Street. It costs us when people make greedy financial decisions. In the end we all have to pay. Make the firms who getting rich off the backs of Americans pay — not the other way around.