Exactly how does speculation drive-up prices of oil in easy-to-understand language?

Question

I've heard many sweeping statements to the effect "speculation drives-up oil prices". Could someone kindly explain just exactly how this happens? Step 1: Futures are bought to make a profit. End Result: Prices go up. But what happens in between?

Thanks in advance.

Answer 1

Oil/gasoline is bought in the future on a large scale. You cannot just ask for a million barrels of oil and get it tomorrow.  So, it is sold in large lots to be delivered in the future.  Based on supply and demand, sellers and buyers finish the transactions based on what oil should cost at the date of delivery.

So, when oil is purchased today, you are paying what it should be worth when it is delivered.  That means, if gasoline costs 3.50 a gallon today, but will not arrive for 4 weeks, and it will probably cost 4 a gallon, its going to sell for a speculative cost closer to 4 dollars.

Speculation is just taking an educated guess on what something will cost when it is delivered or used.

Same thing happened in the housing market.  People bought houses for bloated prices.  Because, they assumed it was a good bet, because property will only gain in value.  And, it was such a "SAFE" bet.