08
Jan
15

What You Need To Know About Oil Prices and The Stock Market

Update 2/9/2015: The price of gasoline has just jumped 20 cents per gallon this week. The reason: the price of “Futures”, in other words, the speculative price, has gone up to $52 per gallon. Speculative price has nothing to do with true supply and demand, but is just another vehicle for Wall Street to bet and make money. On the graph below: the real price based on real supply and demand, the price per gallon of oil should be $42 per barrel. That means Wall Street is making the consumer pay $10 more per barrel than the real price (which is better than the $72 more per barrel than last year). As part of the American public, I shoul let you know that we do not have to allow speculators on Wall Street to raise the price of gasoline. Congress passed that law in 2000, and we could demand that Congress repeal that law. If we cared. What I find so funny, is that when you ask people off the street, if they are will to pay more for gasoline by adding a tax that will repair roads and bridges and stuff, most people say no. But if you make the people pay more for gasoline just so Wall Street can profit from your gullibility (without any benefit to anybody), then people are okay with it.

What You Need To Know About Oil Prices and the Stock Market

With the price of oil going down from a high of $115 per barrel in June 2014 to the present $48 per barrel this week, it makes you wonder what controls the price of gasoline. The simple answer is speculation. Speculation is when one purchases or sells stocks in the hopes that the price will go either up or down. With oil prices, we have been carefully taught that the price will go up when there is a lack of resources and will go down when there is too much product. This is total BS and that has been for more than 10 years. When the price of oil started going down this summer, there was no explanation for this which is rightly so because nobody really knew why the prices were going down. But, now that the prices have continued to dip, the oil companies have taken to the media and have tried to push the idea that somehow we are producing way too much energy and that all of a sudden the whole world is not using as much energy as six months ago.

This, of course, is not the case. There is no evidence that there is a global economic slowdown. China, the largest country in the world, continues to grow exponentially with an incredible increase in GDP at 8%, and China continues to build highways and freeways all throughout the countryside and is selling thousands of new cars every day.The United States is also in a boom phase with an increase of GDP of 5% with an average of quarter of a million new jobs being created every month. Obviously there is no economic slowdown.

What about there being an actual oil glut? If that were true then all of our reserve tanks would be full, but they are not nearly even close to maximum. If we were truly in oil glut situation, why would we need to prove more energy projects such as the Keystone XL pipeline? In truth, there is no oil glut either.

Below is a chart on the price of oil since 1987. The CFTC was established by Congress in 1974 specifically to prevent speculation from artificially inflating the price of commodities. Note that in 2000, CFTC  had its rules relaxed thanks to lobbying from Enron (remember them?), and since then the price of oil has skyrocketed.

oil prices

So why perpetrate this myth of supply and demand regarding oil prices? The answer: the stock market needs to preserve the image, that not just oil but all stocks are based on supply and demand. Wall Street is afraid that if the public knew the truth about the stock market that there would be a loss of faith in that institution which may compromise its status of stability. If you look at the chart – it is speculation that has driven up the price of gas since 2001 (right after they relaxed the rules on speculation on oil). The real cost of gas probably is $43 per barrel.

For more information about the CFTC and speculation see the below reference (a very short and readable article):

How Does Oil Speculation Raise Gas Prices by howstuffworks

The Stock Market

When people think of Wall Street, most people think of a TV screen with a ticker tape running across the bottom the screen and thick-necked guys wearing color-coded jackets standing in the pits hollering at each other. That scene went away back in 2007. Today, there were a few human beings working on the floor of the New York Stock Exchange and in the various Chicago exchanges, but they no longer preside over any financial market or have a privileged view inside the markets. The US stock market now  compromise giant black boxes and heavily guarded buildings in New Jersey and Chicago.

What happens inside those black boxes are fuzzy and unreliable-even an expert cannot say exactly what happens inside them or when it happens or why. When the Dow Jones makes a major shift upwards or downwards, nobody can say why. There is always some lame conjecture to explain the reason even if that makes no sense at all. The reason why nobody knows why the stock market goes up and down is that trades all are done electronically. There are no longer any middle men to make transactions. Plus, there are complex computer codes which will automatically sell or buy if a stock hits a certain level. (If you have ever noticed if a financial report comes out that a company didn’t make their arbitrary target which is set by some “Financial Expert”, their stock immediately drops, however, it might come back up the next day after the overselling that ensues.)

Another factor into not knowing why prices rise and fall is the rise of high-frequency traders. These traders make their money by exploiting faster data connections via fiberoptic or microwave transmissions of known information from one part of the country to the other. Simply using this faster data exchange, a single Wall Street bank could make profits of $20 billion per year. (Figure from the book “Flash Boys: A Wall Street Revolt” by Michael Lewis, 2014). It is amazing that billions can be made that have absolutely no social value whatsoever.

Conclusion

Price of oil and the price of stocks usually have nothing to do with traditional supply and demand. It is based on speculation by high-frequency traders as well as Wall Street banks that have maximized their ability to see trends and make trades before anybody else by using the fastest technology available. The morale of this story is don’t watch the ticker tape and try to be a day trader – you will lose your shirt – you will always be milliseconds too slow. Also, don’t believe the reasons that try to explain the ups and downs of stocks. The Stock Market is shaped by millionaires and billionaires moving around millions of stocks around the board for no forseeable reason, except they always make a good profit. The Dow Jones today closed at 17,584 (and had recently topped 18,000). It is over-valued – in reality it should be no higher than 16,250, eventually it will correct but it may take awhile. The Stock Market, like Bitcoins are based solely on the faith of the system – so, just because it is not based on supply and demand – doesn’t mean you should have no faith in the system. But, be realistic, the Stock Market is a highly complex system that even the experts don’t grasp how it all works, and don’t believe their simple explanations about the systems ups and downs.

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