Gas Prices
As most of you have noticed the price of gas has fallen. Five months ago I would have sworn we would never see sub $2 gas again. I have heard it has dropped below $2 in some places but I haven’t seen it yet. At the price I bought gas yesterday I know it is only a matter of time.
What happened? Weren’t prices suppose to go up when the BP pipeline in Alaska went down for maintenance?
Several things, but the biggest thing was the fuels future market. The future price of fuels was greater than the current price of fuels so the investors started purchasing large quantities of fuels to sell them at a contracted future rates a good bit higher than they were buying them for. The price of fuels was going up so it made sense to a lot of the people that purchased fuel for large fleets to lock in a rate at a known value.
This was going great for the investors and the buyers because the investors were making money and the buyers knew how much to budget for fuels well in advance. However, the buyers were also doing something else along with the rest of us out here. We all started a conservation program. Finally something happened that hadn’t happened in a long time. Our fuel storage capacity filled up. The investors found themselves in a bit of a pickle. There was nowhere to put the fuels they were purchasing so the refineries began cutting back on production. There was a true glut. Prices began to fall.
Falling current prices also translated into falling future prices. Some of the investors are getting burned. While that’s bad for them it’s good for the rest of us because it means that investors will think twice before running up fuel futures again.
Economics | Larry D. Burton | 27 September 2006 |
