The following letter to the editor appeared in the Providence Journal this morning.
Jim Cummings: Cut electricity, gas prices next?
01:00 AM EDT on Wednesday, August 13, 2008
With the rapid decline in the price of a barrel of oil, can we expect to see National Grid and the Rhode Island Public Utilities Commission soon collaborating to announce a retraction in the dramatic price increase for electricity and natural gas they recently implemented?
The problem with oil and natural gas is that they’re both traded on ‘futures’ markets. What we’re paying now for gasoline and oil was set a long time ago. That’s why futures were developed, it started with agriculture and they didn’t like the wild fluctuations of pricing.
To me futures trading violates the law of supply and demand. When demand is higher than supply prices go up. When it’s the opposite, prices go down. But in setting a price for your product or service you want to reach what is called equilibrium.
The current futures market looks more like a boom-bust cycle. And how curious is it that way back in 2000 an insertion was made to an appropriations bill that removed most oversight of most markets. It was called the Enron Loophole. We all remember Enron don’t we? Ran the grid in California into the ground, their CEO was a friend and donor to George W. Bush.
That loophole allows big oil to trade without federal regulation. It also allowed a system of shadow banks to prop up to assume some of the debt for the trades.
And there was a recent move to close the Enron loophole but it failed. I hope they’ll try again but I think that big oil is getting the picture. Look at the declining price of a barrel of oil.
But it’s still wildly inflated. I recall reading a piece where an economist said that fully 60% of the price of a barrel of oil was based solely on speculation (Ie. Futures Contracts).
So when oil was $150 a barrel, it should really be $60 a barrel.
Chew on that one for a while.