Oil Company Monopolies

Everyone knows that the oil companies are price gouging, it’s just that they aren’t breaking any laws.





So, why are prices so high? Oil Futures Markets.



Close the Oil Futures Markets and gas prices will return to a true ‘cost based’ level.



Why do futures markets exist? They exist to provide price protection for buyers and sellers of commodities. For farm products, sellers may go out of business if they can’t get a minimum level price. It’s insurance to sell some of the expected crop at today’s prices as a hedge against a price drop. Commodity buyers can make the same hedge to stabilize prices that can otherwise fluctuate drastically.



Why are Oil Market Futures a problem? Because the majority of the companies producing gas, produce their own oil. The Futures markets have no impact on their cost but it does create an excuse to charge the higher price because “that’s what oil costs”.



But won’t someone be hurt by closing Oil Futures Markets? There are 3 participants in futures markets. Buyers, Sellers and Speculators. The buyers and sellers are the same, the oil companies. They need no protection. Speculators have no shortage of futures markets to participate in.



Is this really a monopoly? No, not based on the current law. It is from a practical point of view though. Oil companies have reached the point that they can charge 3X what they could sell gas for with no fear of competition. Profits are ‘unprecedented’. There is no reason that gas prices should be so high but the Oil Futures Markets provide an artificial benchmark to base gas prices on. The oil companies will say that the cost of the oil is ‘X’ percent of the cost of gas. What they don’t tell you is that they paid themselves for the oil they pumped out of the ground.



So what will happen if the Oil Futures Markets are closed? There will be no artificial benchmark for oil prices. Through the majority of the ‘oil crisis’ the world oil market has been over supplied. True current supply and demand will set foreign oil prices and domestic oil has no external cost component (oil companies don’t need to pay X dollars per barrel to some other company). The result will be that oil companies will have to price gas based on their cost to produce and competition in the market place.



Won’t companies that rely heavily on foreign oil be disadvantaged? If the cost of foreign oil is too high, there will be an impact at the pump for those companies that provide the gas produced from foreign oil. That may mean that the US consumes less foreign oil due to the higher cost. That is not a bad thing.



Won’t oil companies just use foreign Oil Futures Exchange markets? Maybe. Legislation may be required that oil companies that sell oil in the US not participate in Futures Markets anywhere on earth. While a drastic measure, it may be the only way to be rid of the artificial oil price bench mark.