Why do crude oil prices fluctuate so much?

Question

Crude oil prices are the major determining factor in the price of a gallon of gasoline. I think the government is investigating the wrong question. Not manipulation of gasoline prices by oil companies, but rather manipulation of crude oil prices by the market. Large investment companies are manipulating crude oil prices.

Answer 1

There is no need to manipulate crude prices. The structure of the oil industry is such that highly unstable prices are a virtual certainty.

On the one hand, oil is a storable commodity, so it is theoretically possible to make money by stockpiling oil during periods of high prices and selling the stockpiles off during perions of high prices. Moreover, there are at least two very large actors in this play who actually (and actively) stockpile oil in periods of RISING prices, further contributing to price hikes. They are the U.S. government and the Japanese government.

On the other hand, investments in oil production tend to be large and irreversible, so oil companies wait until the last minute to commit to production expansion efforts, just to make sure that higher prices are not a temporary phenomenon. Needless to say, once every oil company starts expanding production, glut ensues and prices drop...

A formal model of the above and its application to the aluminum market can be found in this article:

Fridrik M. Baldursson
Modelling the price of industrial commodities
Economic Modelling
Volume 16, Issue 3, 3 August 1999, Pages 331-353

Baldursson concludes that his model predicts the behavior of prices and inventories very similar to what is observed in reality: volatile prices, asymmetric adjustment of production to price changes and long inventory cycles...

Answer 2

The supply and demand of the crude oil is constantly changing. The prices will never be stable.

Answer 3

both are substitutes, on condition that both are used to provide warmth, electricity and plastics. call for for warmth and electricity is seasonal, which creates similar seasonal fluctuations in both one in each of them. further, even as cost of one is going up, it pushes up call for for the different, which will strengthen the different cost to boot. On provide section, oil & gasoline have a tendency to come back from similar areas, so political or protection stress issues impression provide of both one in each of them. ultimately, both gasoline and oil expenditures are determined in commodity exchanges, which frequently have similar companies (if no longer similar human beings) trading both oil and gasoline. Herd habit means that when investors get pessimistic about international boom possibilities, expenditures of both oil & gasoline bypass down and vice versa.