Oil markets have been exceptionally volatile lately, prompting some analysts to predict a repeat of the great oil crash of 2008 when oil tanked from almost $150 a barrel to the high $30's in intra-day trading in a matter of months. In the last few weeks, oil prices have belly-flopped again, nosediving from almost $100 a barrel to as low as $74 a barrel last Thursday. Then, today, they recovered again, surging to a almost $90 a barrel before the markets closed.
We predicted prices swings like this back in 2006 when I said that the energy markets were devolving into a "malarial economy." By a malarial economy, I meant that like malaria, gas and oil prices would be soon be subjected to price fever, followed by price chills, and then followed again by an ever-worsening price fever. Unfortunately, the prediction came true, and it has nothing to do with supply and demand.
We saw the worst of it - so far - in 2008, when oil prices peaked at $147, in June and then collapsed below $50 a barrel by December, 2008. According to the law of supply and demand, the drop in oil prices should have indicated that roughly 2/3 fewer barrels of oil were being used. But that wasn't the case. In 2008, many of the barrels that were sold on the futures market in New York were sold, and then resold as many as 100 times on the way up to the peak price of $147 a barrel. Then, when the market began to collapse, the barrels were resold again to other futures traders.
Companies like Goldman Sachs and Morgan Stanley make money on volatility. They are like bookies. It doesn't matter if the price of oil goes up or down, they make money on the bets placed by their clients. And in the process, they helped devastate the U.S. economy, and played a huge role in the market collapse and high unemployment of the Great Recession (in 2008, Goldman Sachs was predicting $200 a barrel oil, and they keep predicting it whenever it is convenient and profitable for them to do so).
In recent weeks, the cost of oil has dropped by 40¢ per gallon of gasoline on the futures market. If our local gas prices followed the price of oil, they would have cost $3.40 a gallon for a few minutes on Thursday and $3.62 at noon today. The current average price for gas in San Diego is $3.73 a gallon.
In the short term, we expect local gas prices to drop by a few cents over the next four days. But don't get complacent. The only thing that is predictable in the current, unregulated oil futures market is price volatility ... especially when companies like Goldman Sachs are involved.