Refresh my memory: What pushed gas to $4/gal for Bush?

[Frustratedlady]

We haven't even come close with Obama. What's the diff? We still have two wars, losing oil by the barrel in the Gulf...what's different?

Also, since the gas hasn't risen during Obama's term, why haven't the prices gone down in the grocery? They said they had to raise the prices because of the gas prices. Always up, never down.

[dkf]

1. Recession pushed down oil prices.

Oil inventories are very healthy now.

[EstimatedProphet]

2. Bush's presence in office, mostly.

[Xenotime]

13. Exactly.

[Beetwasher]

3. Bush Did, It Was A Smash And Grab Operation Because They Knew A Dem Was Going To Be Elected

And they were getting what they could while they still could.

[Submariner]

10. +1000

Oil baron thieves.

[Hoopla Phil]

4. Most of it was the futures market bidding the price up. I say we prohibit

secondary futures markets worldwide for any fossil fuel.

[Frustratedlady]

7. I thought there was a lot of blame put on the futures market, but...

did they do that as they normally would react, or because they knew Bush wouldn't call them on it?

If they were trying to control the prices, why haven't they tried it with Obama? I can't imagine the quantity available is that much different than at times with Bush. We still have a Recession/kinda-Depression going on...

I agree that fossil fuel should not be in the futures market.

[NoNothing]

11. Fuel definitely should be in the futures market

The whole point of a futures market is to allow people to insulate themselves from price shocks in volatile commodities like oil.

Let's say I'm a smallish business, like a contractor, that is heavily dependent on fuel, and that needs to be able to plan costs and prices a year or two into the future. Without oil futures, it's almost impossible to do that. The deal I make today that looks profitable could turn out to bankrupt me tomorrow. The only way to protect myself is to set prices at "worst case scenario" levels, cutting out a large chunk of my customers who don't want to pay that much.

Futures allow me to fix the price in stone, so I can know I'll get x gallons of fuel at y price one year from now. If the spot prices on that future day turn out to be lower, then the seller makes a profit. If the spot prices turn out to be higher, I get an extra profit. In *either* case, though, I get the benefit of knowing in advance what my costs will be.

Think of it as price insurance. Yes, you want to prevent speculative bubbles (though all bubbles must necessarily burst), but futures serve an important role in economically planning for the future.

[Hoopla Phil]

15. Primary futures market but not in the secondary market. That is where the

gambling goes on.

[Statistical]

19. There is no difference between "primary" and "secondary" market.

There simply is the futures market.

Southwest for example buys oil futures. They are just oil futures; the same exact ones you (or anyone) could buy with a futures account. Now SW buys a LOT of oil futures but they still as the same insturment.

They protect SW pricing when oil exceeds their projections. Given their tickets are based on a projected price of oil (and they need to sell tickets in advance despite not knowing what oil will be) those oil contracts provide them a hedge against higher prices. As oil prices rise the value of their futures contracts rise. If oil prices rise enough they may actually lose money on the tickets however the profits from oil futures hedges that loss. Likewise if oil prices fall they will make more money on tickets (ticket sold in anticipation of $85 oil will be more profitable if oil is $70 at the time of the flight) however they lose money on the hedge.

The hedge simply reduces profits and reduces losses. Hedging is the flip side of speculating. You can't have hedging without speculating. It is impossible.

Hedging is simply unloading the risk on someone else.
Speculating is simply taking the risk from someone else.

They are ying and yang.

[Frustratedlady]

20. I have learned a great deal by asking the original question.

During the Bush administration, I got the impression the speculators were having a field day because they knew they could...Bush wouldn't put any pressure on them to behave.

Now, I understand how that helps businesses in the long run, even though it hurts us at the time. But, that raises another question...if you didn't have speculators, wouldn't the price of oil stay fairly stable?

There are SO many actions that have an effect on different areas that it's hard for the common folk to keep track of and understand what is happening.

Thanks to all for your explanations. It will sink in eventually.

[Statistical]

21. "if you didn't have speculators, wouldn't the price of oil stay fairly stable?"

No. Oil is going up and up and up and up.

Without excessive speculation there may be less volatility (up & down) but the trend for oil is very clear.

You have a finite and soon to be shrinking supply of oil.

You have a large demand for oil and very little spare capacity (current demand - current capacity).
Demand is expected to rise rapidly as emerging nations massively increase consumption of fossil fuels (think US during 1930-1960s).
The increase in demand from emerging world nations will be PARTIALLY offset by efficiency and declining demand in the developed world nations but not by enough.

That is with only roughly 40% of the world's population living an industrial lifestyle. Think any of the other 60% wouldn't gladly stop living in the past and join the modern society with all it's conveniences? If we have problems meeting demand with only 40% of world living a modern lifestyle what do you think will happen when 100% do? China is rapidly industrializing the interior; it is adding roughly 200 million people (adult population of United States) to industrialized society every decade.

What would make you think the price of the incredibly valuable and scarce commodity would remain the same under those conditions?

We saw a temporary reduction in demand due to the recession (consumption in 2009 was well off peak consumption 2008). That bought us a couple years of breathing space.

We will see $4 gas before the end of the decade (likely much sooner).
We will see $6 gas by end of the next decade.
If you are less than 40 years old you likely will be alive long enough to see $10 gas.

Those blaming it only on speculators are fooling themselves. Speculators can't change end use demand. They can make prices rise (or fall like they did in 2008) faster and steeper but the price was heading there on it's own.

[Frustratedlady]

25. Well, I guess you could say my views were narrow. Thanks for the lesson

in today's oil supply. I hadn't looked that far into the future, but should have known better.

[Statistical]

28. Here are some graphs which illustrate the issue.

OECD is essentially the "developed world".

As you can demand growth has slowed and will continue to slow. It is still growing because of population growth but eventually it will begin to grow even slower than pop growth (meaning a reduction in per capita consumption).

However even the modest reductions brought by efficiency gains in developed world will be swallowed hole by the exploding demand in developing world.

Now here is the thing most Americans can't grasp. Many people in China will be happy to have motor vehicles even if oil is $150 per barrel (and gasoline >$5). Why? because it is a MASSIVE productivity booster.

Think of someone who needs to bike into town can now use a truck/bus. The time gained is worth the cost. You have to realize that vast majority of the world spends countless millions of hours wasted in mundane tasks like walking, getting water, gathering firewood, transporting products to market by hand. Lack of electrical lighting means the number of productive hours in the day are limited by sunlight.

Thus for these people gasoline (and other fossil fuels) is a life saver. A radical productivity enhancer which will lead to more time and more revenue per hour of labor.

Now they won't be "wasting" gasoline like some Americans. Single person driving a hummer to go to the Starbucks drive through just down the road but even productivity use of oil combined with the sheer number of people means demand is (and will continue) to explode.

Now if there was lots of oil that wouldn't be a problem. Production is still growing but is reaching a peak. We know this because production follows exploration and exploration has already peaked.



Exploding demand combined with limited growth and eventually terminal decline (Decline where production never again rises) will push oil & gasoline prices to levels that many people will find "shocking". Some of won't be shocked though we will say we have been expecting it.

[NoNothing]

24. I would guess no it would not

Personally I think the whole issue of oil futures and gas prices is a red herring. The *spot* prices for oil - that is, no futures at all, what you would pay right now for a barrel of oil right now - is highly volatile. Futures actually help smooth out the price of gasoline compared to oil. This is because oil *spot* prices can be hugely affected by whether a certain shipment is available today or tomorrow, or an unexpected day off at a distribution facility. Futures allow buyers and sellers to insure against this volatility, so the refinery can change the price of gasoline only a little even when the change in oil spot prices are gigantic.

[TheWraith]

27. Both of the above.

Yes, they were able to push the limits more because they knew that they had protection against re-regulation under the Bush admin. But the price of oil is still artificially inflated by commodities exchanges even now.

[Statistical]

18. How exactly does the US prohibit worldwide markets? n/t

[Hoopla Phil]

22. It would be by treaty and agreement. The U.S. has no authority to force

any such policy. You did know that right?

[Statistical]

23. Exactly that would be the point.

If US banned future markets in the US they would simply continue overseas. Even now roughly only half of futures contracts are traded on American markets the rest are traded overseas (mostly in London however Hong Kong is growing in volume and there is interest in creating a middle eastern futures exchange).

Futures serve a purpose and other countries aren't going to ban it. Simply will be something else that is exported. Americans would simply trade the exact same contracts on foreign markets.

The point it is a global market and US is merely one player in that market.

[NoNothing]

5. Economic activity = energy consumption = demand for oil

Economic activity has slumped worldwide. Demand for oil is lower than was expected, thus lower prices.

[Skink]

6. Remember the food bubble.

Wall street speculation is what causes bubbles and while they profit most of us don't.

[sinkingfeeling]

8. Speculation in the oil futures market was the largest driver of high prices.

[DailyGrind51]

9. Commodities speculation

[slampoet]

14. +1000

[Spider Jerusalem]

12. High levels of demand for a finite commodity

oil production and consumption prior to the economic crisis that began in the last half of 2007 were roughly equal, largely driven by growth in demand from China and India. Global supply was roughly equal to 82-84 million barrels a day. Demand was at the same levels. Pay no attention to the people saying 'commodity speculation.' They do not understand basic economics. Speculation probably had some part in driving up prices at the margins, but such speculation could not and would not have happened had demand not nearly outstripped supply with no overhead for surplus production. Given a limited resource with no reserve pool to draw from and significant market competition, the price will inevitably go up.

[Statistical]

16. Demand.

Annual global consumption is still well below what it was in 2008.

[DCBob]

17. Speculators.. betting on China and India to drive (literally) demand..

The recession stopped that but its building again and it will happen eventually again.

[LLStarks]

26. Katrina didn't help the situation.