How does the value of oil futures on the stock exchange affect the price of gas at the pump?

Question

hey, i heard a piece on NPR today about how the speculative bubble which is driving up the price of oil could burst eventually and bring down the cost of gas. call me naive but i figured the cost of gas was going up because of increased demand and reduced supply. i didn't realize there was manipulation occurring based on speculation and futures (maybe i haven't been paying attention). anyways, does anyone understand how speculation on futures translates into today's gas prices? i know nothing about this stuff! the person they interviewed was talking about loop holes in the regulations that govern futures and made reference to ENRON.

Answer 1

Oil trades on commodities markets, not the stock market.  

Commodities markets have two main types of participants: hedgers and speculators.  Hedgers are trying to control their budget by fixing the price of a product that they must buy or sell in the future.  Think oil companies and airlines for oil, or Frito Lay and corn farmers for corn.  Speculators are trying to profit by guessing (or speculating) about what direction the price of a commodity will take in the future.  Speculators get a bad reputation by the media, but are absolutely essential for the markets to function smoothly.  (There aren't enough true hedgers for the markets to trade efficiently by themselves).

Since oil is the primary input for gasoline, as oil prices rise, gasoline prices will generally follow.  However, this relationship is not absolute.  Oil prices have recently risen much more than gasoline prices have.  If gasoline were keeping up with oil, it would be about $6.50 per gallon right now.