Why You’re Paying Too Much At The Pump

June 21st, 2008 · No Comments

In May of 2008, with gasoline prices climbing to unprecedented highs and oil prices rocketing past anything that’s ever been seen in the past, the United States Congress finally called oil execs on the carpet to explain why. One by one, executives from each of the 5 largest oil companies, Exxon Mobil, Conoco Phillips, Shell Oil, Chevron and BP, shook their heads, wrung their hands and explained that the law of supply and demand is what’s responsible for those high prices at the pumps.

Crying “the market sets the price” may have seemed like an easy out for these oil execs, but it takes only a tiny bit of research to see that supply and demand have little to do with the reason you’re paying higher and higher prices for every fill-up.

In years past, when U.S consumers were shocked by prices at the pumps, that sticker shock was always caused by a disruption in supply. In 1973, for example, an Arab oil embargo caused gas shortages that resulted in high prices and long lines at the pumps.

The late 70’s saw another spike in prices with yet another shortage, and once again the law of supply and demand prevailed.

The next price hike in the U.S. that was caused by a real shortage came in 2005 when Hurricane Katrina hit the Gulf Coast oil refineries and devastated production.

After that is when a new trend in pricing began to emerge, one that had little to do with real world supplies and real U.S. demand. It had more to do with Wall Street commodities traders pumping money into futures contracts, a move that pushed prices ever higher.

By late in 2005, oil had reached a then-staggering$70 a barrel. This caused conservative publication The National Review to warn investors that the manipulated “oil bubble” was surely about to crash and create a downturn in the economy that would make the dot com bust of the 90’s “look like a picnic.”

Of course, we all know now that prices did not crash. They did, in fact, continue to rise and rise and rise. Oil prices have now passed $130 a barrel. And this despite the fact that there has been no disruption in supplies, no rising surge in demand.

In fact, the oil industry’s own statistics indicate that world oil production is up, demand in the U.S, is on the downturn and U.S. gasoline reserves are at their highest levels in 15 years.

That’s because the American motorist, faced with sky-high prices at the pumps, has actively embraced conservation. But the resulting downturn in U.S demand hasn’t delivered any relief at the pumps. In fact, prices are going higher every day.

Yet prices continue to spike.

So if supply and demand is not driving those prices we pay at the pump, what is? Just as The National Review warned in 2005, oil and gas prices are being manipulated by investors who’ve pulled their money out of the busted real estate market and poured it into commodities like corn, gold and oil. As the prices for those commodities climb, investors who bought low are selling high and it’s the American consumer who’s paying the price.

Pass the Goods: