What Drives the Cost of Oil?

October 22, 2008 at 3:43 am Leave a comment

When petroleum prices soared last summer to over $140 a barrel, Americans began changing their daily routine, their car buying habits, and their political preferences. Now, only a few months later, the price has crashed.

Watching prices posted at Portland gas stations has been instructive. Prices were well over $4/gallon last summer. This weekend I passed a station on Highway 26 that was selling gasoline for just under $3/gallon.

It is tempting to approach this as a resource issue. How much petroleum is still in the ground? How much is being pumped out? Who wants it and what are they willing to pay for it? But before we travel down the road of supply-and-demand with the oil companies and their political friends (drill, baby, drill!), we should realize that it is highly unlikely that either supply or demand has varied all that much in the last 10 weeks. Something else might be driving the price shifts.

Living on Earth‘s Bruce Gellerman reports that “hedge fund manager, Michael Masters, told a Senate subcommittee that supply and demand can only explain a part of the volatility. Masters says the real reason is market manipulation, not necessarily by a small group of Dr. No evildoers, but by institutional investors, who funneled hundreds of billions of dollars into what are called commodity index funds.” You can read the entire interview at Living on Earth (Sept 19, 2008) or download the podcast (mp3).

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Entry filed under: In the News.

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