5-29-08 by dugan
It’ll take a few days to see what’s really going on in oil markets, but still… a $4-a-barrel price drop in crude oil markets today followed news that federal regulators were investigating oil trades, and increasing oversight just a little. It’s about time, though I have my doubts about this administration running a tough investigation. There were multiple explanations of the drop to near $126 a barrel, including a slightly stronger dollar. The timing was still interesting.
A government report on unexpectedly reduced oil supplies this morning shot prices upward, then they dropped fast after the Commodity Futures Trading Commission announced its investigation of market speculation and some new cooperation with unregulated European markets. Like OilWatchdog, some analysts tied the price drop to the federal investigation. From the AP story:
Disclosure of the investigation may have contributed to oil’s declines, analysts said.
"That’s
regulation that could change the landscape of what people have gotten
used to," said James Cordier, president of Tampa, Fla.-based trading
firms Liberty Trading Group and OptionSellers.com. …"This was the first time we’ve had a bearish reaction,"
to [oil supply] news that in the past would surely have driven prices higher,
Cordier said.
Congressional hearings since 2006 have speculated that 30% or more of the bloated price of oil is due to speculation–not to the dollar, Chinese consumption or nasty world politics.
If the market gamblers are about to get their comeuppance, I’ll be cheering. But also keeping a squinty eye on gasoline prices, which are still rising fast despite the leveling off of oil. That’s largely because refineries are restricting their production of gasoline to push up the price at the pump.
Although the oil industry always points to the spot price or futures price of oil when defending the price of gasoline (today the national average for regular jumped to $3.952, and diesel averaged $4.787), their actual oil price is much lower. About one-third of U.S. oil supplies are drilled in the U.S., from the Arctic to California, Texas, Louisiana and the Gulf of Mexico. Much of it costs under $20 a barrel to produce. Heavy oil from Canada sells at a steep discount, up to 35%, according to OPEC figures and an acquaintance who buys Canadian oil. Mexican oil also sells at a discount. Oil companies also get a percentage of the oil from fields they operate around the world, sometimes for governments.
So when the oil industry tells you that 70-some percent of the price of a gallon of gasoline is due to the price of oil, block your ears. The only way they can get to that figure is by selling their own cheap oil to their own refineries at top price–then complaining that their refineries aren’t making a big enough profit. For a company like Exxon, $40.6 billion a year (more than $11 million a day) just isn’t enough.