“That’s good, you answered my question with a fact, very nice. Very nice.”

Perhaps you would have a better understanding of what is happening to the the price of gasoline and why if you compare the price of gasoline to the price of gold. Why gold? Because gold is real money and it is the one commodity most people look to as a hedge against dollar devaluation (aka, inflation). A year ago (5/2/10) gasoline was $2.93 per gallon (average US price) and today (5/2/11) it is $3.93. A year ago, gold was $1170 per ounce and today it is $1540 per ounce. If you do the math you will see that the price of gasoline in terms of dollars is up by 34 percent, but in terms of gold gasoline is only up about 2 percent, or virtually unchanged. So you see, it could be said that gasoline really hasn’t increased in price, rather those US dollars of yours are rapidly losing their purchasing power.

Jeremiah, are you not a speculator yourself? I know I am. Suppose you go by your neighborhood gas station in the AM and notice the price: $3.50. During the day you learn that oil on the NY Merc has increased by a whopping $10.00 a barrel. On the way home you see the price of gasoline at your local gas station is unchanged. My guess is that if you have some room in the tank of your car and money or a credit card in your pocket, you will pull in and fill up your tank before the price increases, which, based on your experience, you know it will. That is usually called being prudent but it is really speculating!

Speculators in oil may be affecting the price of oil because they anticipate that the Fed will keep on devaluing the dollar, so it is simply prudent to buy and hold oil or gasoline off the market in anticipation of the Fed’s reckless behavior. As long as government is in control of the money supply, and there are idiot savants like Krugman with the ear of the government, there will be inflation. Anyone who is forced to do business in dollars finds it prudent to hedge against inflation as best one can. The prudent ones will be decried as speculators by those who do not understand economics, but they will not be impoverished by inflation as their wining detractors will be.

If the prices were driven by “supply-demand”, then why in the hell are gas prices CONTINUING TO RISE!?

Some retailers use the gas as a loss leader and make their money on beer and ciggybutts. They set the bottom price in an area.

Fuel prices rise 30% and sales drop 3%. Prices are to low. Anyone who says it is because of an inelastic demand is not thinking clearly. Most people don’t buy a car for transportation but to create a public image.

What if that is the case? There are no substitutes. No combination of nuclear, used french fry oil, wind, shale gas, tar sands or anything else packs the punch oil does. After all, it the reason the US has meddled in the Middle East for so long (badly). We have a limited buffer of greater efficiency, but we are essentially in uncharted waters.

If you asked my opinion for the faltering recovery I think it is high gas prices. According to Liebigs Law of the Minimum, this is now the limiting factor on the economy. We will see alternate periods of recession and recovery closely fallowing the rising and falling oil price.

I don’t suppose anyone here will be surprised to learn today (Good Friday) that Obama has appointed a task force headed by the attorney general to look into how speculation is contributing to the run up in gasoline prices! (I don’t suppose an investigator from DOJ will bother to question Bernanke about his role in the “fraudulent” run up in the price at the pump.) The timing of Cuomo’s report and Obama’s announcement of forming a task force is interesting. Do you suppose Obama got his cue from Chris Cuomo, or vice versa?

http://www.bloomberg.com/news/2011-04-21/obama-says-u-s-team-to-study-whether-speculators-driving-up-pump-prices.html

The present correlated commodity bubble has little to do with speculators in search of transaction profit, although they have entered the oil market following recent geopolitical events thereby causing a ‘spike’.

In every organised commodity market where financial buyers may participate – generally via the new breeds of exchange traded funds and structured finance products – we have seen the entry of ‘inflation hedger’ investors who are off-loading the risk of holding dollars in favour of holding commodities.

The motivation of these investors who are buying anything but dollars is fear, not greed, and their presence in the market since 1995 (when Goldman set up the GSCI fund) has gradually led to the markets becoming financialised and parting company from the real world of physical supply and demand.

In the oil markets, the advent of new techniques enabling financial oil leasing – where funds lend dollars to producers and producers lend oil in return to the funds – has meant that oil producers have essentially been able to support the oil price at the upper bound where demand destruction sets in.

Ask yourself Cui Bono from high oil prices?

If the history of commodity markets – eg the tin crisis of 1985; the Hamanaka copper manipulation; cocoa, coffee and diamond cartels and monopolies – tells us anything it is that if producers CAN support prices then they WILL. By using dollars borrowed interest-free from risk averse inflation hedgers the producers have been making out like bandits.

But as I forecast in the conclusion of my article in Asia Times last year,

http://www.atimes.com/atimes/Middle_East/LA16Ak02.html

the market is now, I believe, suffering a de-stabilising shock and ‘spike’, and a dramatic collapse of the market price to the lower bound is IMHO inevitable sooner rather than later.

When the price goes down and we don’t like it, the speculators are the ones selling and short selling hoping to stop losses or make money in a down market.

The “speculator” are always the ones we think are making money off our backs.

In reality, there is two sides to a transaction and speculation affects speculation, not the consumers.

Speculators have contract term limits and must sell before the contract ends or face the consequences of having to take delivery.

It’s like Keynesians who frown upon saving money. Well, savings are delayed consumption, delayed spending and delayed investments. What people don’t spend now, they will spend later.

Instead of complaining about saving, take advantage of the actual saving to invest for future spending and consumption.

Take the price of gas as a product of supply and demand, supply from the manufacturer and demand from the end user. Let’s say we have a price graph in front of us showing the natural supply & demand price evolution.

Well, speculators seeing an upside might buy and hold and drive the price up, but at some point they will have to sell to take profits and sell to take their losses and drive the price down.

Speculators bring volatility, but it’s in the forms of higher highs and lower lows. It all averages around the natural commodities market and in the long run, end users who buy at regular intervals don’t see the effect of speculation.

Speculators affect speculators, not consumers.

Because of speculators, you will now pay a higher price than normal for gasoline, but later down the road you will pay a lower price for gasoline. It all evens up.