Could The Skyrocketing Gas Prices of 2008 Happen Again?

Oil, like cotton or coffee, is traded on the commodities future market, usually having minimal effect on the average American. This type of trading on the New York Mercantile Exchange was started more than a century ago as a way for farmers to determine the future worth of unharvested crops. But the erratic price of oil has caused some to wonder what role this type of speculation had on the average American through a good part of 2008.



More specifically, Dan Gilligan of the Petroleum Marketers Association became suspicious when the price of oil more than doubled. According to CBS 60 Minutes, Gilligan and others started to notice the disconnect between oil prices and its usual link between supply and demand. Despite ample supply, the price for a barrel of oil kept going up in 2008.



The volatility in the oil market was being driven by the fact that hedge funds and other investment engines were speculating on the future price of oil. "Approximately 60 to 70 percent of the oil contracts in the futures markets are now held by speculative entities. Not by companies that need oil, not by the airlines, not by the oil companies. But by investors that are looking to make money from their speculative positions," Gilligan explained to Steve Kroft of 60 Minutes.



Last July, when the national average for a gallon of gas was $4, all that Wall Street speculation was being felt in bank accounts across America. As with the housing market, complicated investments were causing problems for many Americans who had never even heard of the commodities future market. But like the housing bubble, the expanded oil market speculation eventually popped and prices for oil came back down, rather quickly at that.



Could this happen again? Currently the national average for a gallon of gas is below $2, with Austin gas prices between $1.49 and $1.69 per gallon this week. Recent volatility in the Mideast has caused a slight bump in the price of crude, but nothing drastic. According to 60 Minutes, Congress deregulated the futures market in 2000 making speculation on oil derivatives quite profitable. When large investment banks like Morgan Stanley began to run into trouble in the fall of 2008, the oil speculation market dried up.



The deregulation that helped feed the investment in the commodities market is on the long list of problems to be addressed by the incoming Obama administration. As with most economic issues, the predictions on oil prices for 2009 vary. The World Bank predicts oil prices to fall gradually through 2009. According to a Bloomberg News article, there are many other variables to factor into that forecast, such as oil consumption in China and OPEC production levels.



Working in favor of gas prices staying lower is the decrease in demand caused by the high prices over the summer. That coupled with heightened awareness of the environmental impact of driving are causing Austinites, like many other Americans, to incorporate less gas consumption into their daily lives. That may be the greatest indicator of future oil prices: Americans having some control in the prices by how much they drive.

About the Author

Ki graduated from college in Austin, and couldn't leave. He created a website to provide information on the Austin real estate market to future buyers. Anyone can search the Austin MLS on his site as well as use a free mortgage calculator.

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