In April, the CME Group, the largest commodity exchange group in the country, comprising the Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBOT), the New York Mercantile Exchange (NYMerc), and the Commodity Exchange Inc. (Comex) blasted the president's plan to put regulators in charge of margin requirements for oil futures and warned the move risked raising prices.
The CME went on to pontificate, "The Administration's proposal to use margin requirements to control cash prices is misplaced. Taking away from the exchanges the ability to manage margins would make the markets less efficient, less tied to fundamental, and would create the potential to push the hedges out of the market which would make oil more expensive for all consumers."
Really!?
There is a large body of discourse pointing to the untrammeled, barely regulated trading on the exchanges that has distorted the price of crude oil and in turn oil products such as gasoline to levels ever higher, losing all vestiges of any connection to supply and demand. The commodity exchanges have become casinos welcoming all players whose only interest is the spin of the roulette wheel, never either consuming, producing nor taking title to the oil they are placing bets on. As far as the exchanges go, their key concern is to keep the players coming in the door.
All well and good, but the croupier begins to play a far more sinister role when he not only provides the gaming table, but also manipulates the price of the gaming chips. Over the past weeks we have seen a significant break in oil prices. Here for once in months if not years we have an oil market evolving in a way that could significantly reduce oil and gasoline prices and in turn damper the hectic tempo of oil trading on the exchanges -- it seems lower prices result in lower exchange turnover. So to give some underpinning to sliding oil prices it would appear the CME Group, knowing where their bread is buttered, did what they could in order to bring in more traders and trades in what could be seen as an attempt to support the eroding price of oil/gasoline -- they lowered the margin requirements for each crude oil contract of 1,000 barrels from $6,885 per contract to $6,210, making it that much less expensive to buy your chips, so more can play in the casino to help halt the slippage of crude/gasoline prices.
Maybe we should all send our next gas station tab to the good folks at CME headquarters in Chicago. Certainly it appears, given the CME's recent actions, their discomfiture in President Obama's suggestion to put regulators in charge of margin requirements 'doth cause them to protest too much.'
Follow Raymond J. Learsy on Twitter: www.twitter.com/raymondLearsy
chart: http://trendlines.ca/free/peakoil/BarrelMeter/BarrelMeter.htm
For $90 per barrel oil, that amounts to $90,000 worth of oil for $6210 -- the investor putting up 6.9% of the cost and the exchange floating a loan for the other 93.1%. This allows a lot of speculators into the market, using low interest rates and low margin costs to buy up contracts for oil, making oil "more in demand" and lifting the price. It doesn't take much change in the price of oil for a speculator to make hefty profits.
Higher margins would mean that speculators would have to tie up more of their own money. Consider: a speculator with cash access of $100,000 could tie up 16000 barrels of oil in contracts with the current margins. On the other hand, if margins were 40% -- reasonable if you are talking about consumption of a commodity -- could only tie up 2500 barrels. Remember the speculator is not interested in the product itself. The speculator buys the contract to inflate the sense of demand and push up the price. A larger margin would reduce the demand for oil, allowing the cost to drop.
Hedge funds do not lower costs. They raise costs significantly. Remember that no investment firm is interested in lowering costs for others. The more they can raise the costs, the more they make and the more you pay. Hedge funds are in it for the money.
I have argued that Billionaires are more than capable of moving the price of oil. Now lets open that up to World Billionaires, and Hedge Funds, price dropping, get enough of your friends to buy, push the price back up and then you can sell again.
The same is true of Health Care of course..
The moment you nationalize an industry it becomes unprofitable (so taxpayers must bail it out like Fannie/Freddie), no longer innovates and costs actually go up.
Non-profits have no motive to be efficient, so they charge far more for services than "for profit" industries.
1. Seasonal. Different blends of gasoline are used, summer grade is more expensive.
2. Size of existing reserves.
3. Refining capacity at any given time.
4. Weather (hurricanes can disrupt supply chains).
5. Future forecasts.
Based on your loose figures I'd say 1 and 3 are most responsible (assuming $2.89 was a quote for winter gas).
There is as Learsy stated, a disconnect between what we pay at the pump and what goes on in the markets.
If we had a mass transit system so that anyone in a city of 50,000 or more didn't need to buy a car - no one would care about the price of oil.
If it weren't, you could go out there and undercut everyone and be a billionaire within months.
They also forced Henry Ford to make his cars to run on gas rather than ethanol as he had originally planned while also mounting a campaign against hemp which threatened their hammerlock on quality oil and fibers markets.
The President’s own jobs council underscored the need for not only more oil, natural gas, and coal but also energy infrastructure projects.
Simple math.
condescending sarcasm off.