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You Pay Wall Street Oil Speculators This Much Per Fill-Up
bullshiit! filling up a SUV is like 50 bucks
What this poster is indicating is how much money is going to Wall Street speculators. So if you go to BP or Amoco or whoever and fill up your SUV, you may pay $50 as you say. The money flow is very complicated after that. But essentially an $11 cut of that $50 goes to Wall Street speculators. Some people argue (and I agree with them) that Wall Street trading activity artificially inflates the price of gas.
This part is really technical, but if anyone is curious:
The price of oil is settled by commodity trading. For example this is the most actively traded oil contract in the US. Industry players who want to lock in their price for energy and decrease their risk exposure will come to the market and enter into futures contracts. For example, a few years ago, one of the airlines (I forget which one) had all of their jet fuel prices locked in for five years or so. A couple years into their contracts the price of jet fuel skyrocketed. All these other airlines lost a ton of money, but this one didn’t give a fuck because they had futures contracts. This side of the process is called hedging. Sometimes it can go horribly wrong.
The hedgers need someone to take the other side of the contract and that’s where the speculators come in. But in return for taking the other side of the contract, they extract a risk premium. In my example above, when the price of jet fuel skyrocketed and the airline had futures contracts, whatever speculators were on the other side of those contracts lost a lot of money. The speculators absorbed the losses. If, on the other hand, the price of jet fuel dropped, that airline would have still been paying the higher prices, and the speculators would rake in a lot of money. So one side gains, and one side loses. They’re in the game for different reasons, and that’s what creates all the gyrations. Speculators basically think that they can outsmart the market. And for the most part that generally works.
Here’s one of the problems though. A lot of institutions have noticed that there are a lot of opportunities to make money on the energy markets. Investment Banks (eg. Goldman Sachs, Morgan Stanley, Lazard), Hedge Fund/Private Equity Fund operators (eg. KKR, Apollo Management, The Carlyle Group), and assorted Commodity Pool Operators pile into these markets with billions of dollars. Where do they get the money to invest? Some of it is proprietary, but most of it is foreign governments (eg. Abu Dhabi, Saudi Arabia, China, Canada are huge investors), pension funds (both public and corporate—eg. California, Texas, Canada, the Netherlands, Norway are all big), university endowments, charitable foundations, and wealthy individuals. They’re not just investing in oil, but that is one of the big markets they play in. The point is there are mind-bogglingly vast amounts of money in play.
Because there is so much money in the markets looking for a high return, the speculators end up overpowering the hedgers. Speculators compete with each other for a limited number of contracts. That bids up the price over and above what the theoretical price should be. (There are very well known methods for calculating what the price of a contract is supposed to be.) Because the price of gas is set based on the oil contract, the speculators effectively raise the price. And they are able to collect that when they close out their positions.
This is one of my specialties so I could probably bore everyone by talking about it all day. I don’t agree with the practice. But I’m glad that I’ve had experience in it so that I understand how it works. Anyway, I hope all that makes sense! :)
