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Why Is the Cost of Gasoline Increasing?

Name: Nelson Goodell
City & State: Burgaw, N.C.

Question: With U.S. oil stocks high and refiners at a low production rate, why is the cost of gasoline increasing at such a high rate? It makes you think that there is more to it than supply and demand. Do you think it is Wall Street speculators?

Paul Solman: I've long believed, and written here, that short-term speculation drives prices in the oil market, as it does in just about EVERY market. This raises the uncomfortable question, however: Exactly how long does the short term last?

I couldn't rightly say. All I know is what you know: U.S. oil supply is high; demand is down. By any conventional analysis of supply and demand that would imply LOWER prices. And yet oil has soared in recent months. I can only attribute it to expectations about the future: that demand will RISE while supply FALLS.

One correction, though. It's not just -- or even primarily -- WALL St. speculators driving the price. It's the big oil producers and users themselves, buying and selling oil for future delivery, often trying to protect themselves against price rises or falls. As near I can tell, THEIR collective judgment (or sentiment) has a huge influence on price.

As I've written before, though, there's plenty of controversy over this issue. But I agree with you.

-- Posted June 15, 2009 | Comments (0) | Permalink