Gas prices soar (Page 2)

Just like all the utilities got the same idea at the same time to install gas turbines to take advantage of the artificial power shortage Enron created in California. There was not enough gas supply, prices went through the roof, and brand new plants sat idle all over the country.... oh, and there wasn't an actual shortage of power.

I don't mean to be facetious here, but... huh???

If you'd just thrown in a reference to black helicopters, it would have been Hall of Fame material!

Not what I was saying – I was responding to your description of speculators.   My experience is that people complain about “speculators”  and assign to them awesome powers of omnipotence without any real knowledge of (a) what a speculator is  (b) what they do  (c) how this has an impact on prices  or (d) why we should be concerned about it.    Basically, “speculators” are on par with the boogeyman.     

But guess what – do you trade stocks?   I guess you’re a speculator too.  Do you ever fill up the tank on Wednesday because you’re worried about the price going up on Friday?  Now you’re an oil speculator!  

Describing speculators as a ‘single entity’ is a stretch, to say the least.  There are thousands of professional energy traders out there, just like there are thousands of stock traders, bond traders, currency traders, and pork belly traders.  And probably millions of people or companies that are making bets on the future price of oil.   If you can describe how you think some of them are manipulating the market – please do. 

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Now… on to your broader point.  It depends what you mean by a free market.

One definition is that a free market allows companies and individuals to participate free from government intervention.  E.g. anyone can enter, exit, produce, buy, sell, enter into contracts, etc. at whatever price they wish, without needing government approval.   On this dimension, I’d say the US is pretty free, other than environmental restrictions, state / federal ownership of land, biofuels mandates, and other assorted regulations.   But at a high level, you and I could agree to start up an oil & gas company tomorrow, without a problem.   Global markets – much less so, as many countries have a single national oil company that controls most if not all oil & gas activity.  But most of them are small enough relative to the global market that they can't set price (or can only do so within their borders).

Another definition (which probably steers closer to what you’re suggesting) is that a free market is competitive e.g. no single entity exercises control of the market.    Here, I would say that the global oil & gas industry is highly free, with a few notable exceptions:

• a) OPEC – an organization that is quite explicitly coordinating the actions of its members to control supply availability, and therefore price. 
• b) Pipelines – in many cases, there is only one pipeline going from point A to point B, giving the pipeline operator huge market power.  However, for this reason, pipelines are very heavily regulated.
• c)  Lightly traded markets (e.g. very specific geographies, very specific grades of fuel, etc.), where companies can indeed capitalize on the lack of information – much in the same way that thinly traded stocks on NASDAQ are way more vulnerable to market manipulation than the Dow Jones Industrial Average.  

Otherwise -- the oil & gas market has billions of consumers, hundreds if not thousands of producers, dozens of refining companies, thousands of traders, tens of thousands of service companies, etc.   I believe the global oil & gas industry is far less concentrated than (say) the global automobile industry, the global airline industry or the global banking industry.  And prices move up and down every day in response to the behaviors of each of these entities.  

So in sum -- yes, I think it's pretty free.  No, I don't think it's completely free.  But I think your characterization of rampant price manipulation is way off.  But I'd love to hear the counter-argument.

I don't think I did a very good job of describing my point earlier.  I have no problem with speculators and I agree with you that they're not the cause of the problem.  They speculate prices based on perceived value in the future.  I almost exclusively invest in options personally, so I'm very familiar with speculation.

What I was trying to say was that because of oil being a commodity all of the oil companies essentially have the same price which is similar to a monopoly.  I know that's how most commodities are traded, but this system can and does get abused because contrary to what you described earlier the barrier to entry in the oil industry is really high and very slow.  So, essentially oil companies control their refineries and mysteriously every year before a holiday weekend there's some "power outage" or "insert reason here" that they reduce capacity and the speculators drive the price up just in time for the weekend.  In economics collusion and price fixing is generally bad in low barrier of entry type industries, but the net result in the oil industry is high short term profits for the whole industry because the demand doesn't react very quickly and there will be zero competition to take up the slack at a reduced price.

BTW, if you google "collusion and price fixing in oil" you'll find hundreds of articles in just the past few weeks.  This very accusation is blowing up in Europe and there's Senatorial calls to expand the probe into the US.

Senator wants U.S. in oil price-fixing probe

Either way, I'm not an expert in this area so I may not be describing it very well.  I used to be all on board with oil being a "free market" thing, but I have ultimately concluded that it's not.

You're making a few intermingled (and interesting) points here, so I'll try to address them in turn...

Actually -- what you're describing (many producers selling an identical product)  is the textbook definition of perfect competition.  Of course they have the same price -- it's the exact same product (down to the molecule level!)    Are there high barriers to entry?  Of course -- but it doesn't matter much if you already have a boatload of competitors in the market.

I've lost track of the number of times this has been investigated.  It's a really popular drum for populist politicians to bang, just like attacking banks or pharmaceutical companies or health insurance companies.    Just because an industry is politically unpopular doesn't mean that the accusations have merit.   Think about it -- if you own a refinery, and you intentionally reduce capacity -- sure prices will go up, but your volume goes down too.  Very seldom does the former outweigh the latter (only really in situations where there is a single refinery serving the market).  Who benefits instead?  Your competitors, who kept volume the same while prices went up.  (Now, if you acted in concert with your competitors, you're all better off -- but that is highly illegal --and hey, I basically just described OPEC!)

And anyway (recognizing that I won't make any friends with this point) I can't quite understand the visceral opposition to higher gas prices during times of peak demand.  Airfares are higher during the holiday season;  movie theaters charge more on the weekend;  sports teams charge more for playoff games;  retailers charge more for toys on Dec 24 than they do on Dec 26;  the price of long-stem roses triples on Valentine's Day.   I'm hard-pressed to think of an industry that doesn't raise prices during peak demand (or conversely, offer discounts during slow season).  Yet somehow this is evidence of a conspiracy in the gasoline market? 

As a general rule -- you can google "collusion and price fixing in oil" and find hundreds of articles anytime.  You can also find lots of articles if you google "autism and vaccines" or "wifi and brain tumors" but I'm not sure that's the standard I'd apply for whether an accusation is credible.   

As for the ongoing probe -- here I have no problem saying you're on much stronger ground.   What a troubling thing to see (if it pans out).  Though to be clear the companies involved are not accused of throttling supply or creating artificial shortages or setting prices -- they're accused of misreporting pricing information to the price-index folks (Platts).    Still bad as it creates a lack of transparency in the market, and needs to be dealt with, but not in the same league as what you described in your original post.