Falling gasoline/oil prices: Can someone please explain?

As many of you may have noticed, gasoline prices are the cheapest they have been in years. Most wise people fill up hit the highway happy that the damage wasn’t so bad, or if they’re more vindictive have a little moment of joy at the pain being inflicted on, well, whoever the hell makes all that money when the prices are high. And then there’s us, the people that actually want to understand what happened. Sometimes the quest for wisdom isn’t the best idea, the answer to the question posed above is pretty murky and you might start cutting yourself before you get to the bottom of it. The pat answer as to why gasoline prices went down is that OPEC did it. Kind of funny that; it’s like an ethnic stereotype that no one seems to mind. OPEC gets blamed for all sorts of things, and true enough they deserve most of it, they are like the rich kid in college with the Porsche parked on the sidewalk because daddy will pay the ticket. The odd part in this instance is that OPEC literally didn’t do anything, and market forces took over. It’s pretty widely understood in these parts that free markets are pretty efficient in the long run at achieving progress (that’s free markets, not a capitalism debate, two different things). But in the short term, stock and commodities markets are like vermin magnets, and every rat-like being that is devoid of a conscience or ethics is drawn to the scent of easy money. And that fundamentally is what caused the price of oil to drop so far so fast, with gasoline in its wake. Not sure that’s true? Well, consider this…oil is converted pretty much directly into gasoline, plus or minus a bit of other stuff. It is also converted into diesel pretty much the same way, though diesel is even easier since it is less refined and sophisticated. Yet a recent check in a nearby city had diesel prices almost 50 percent higher than gasoline prices. That’s not a typo. 50 percent, and two months ago diesel cost more per unit. Free market-wise, that shouldn’t possible. So what happened? Well, there are 2 stages to what happened, each marked by swarms of trading vermin “following the trends” and driving prices to extremes, which is surefire way to make a good buck if you’re sitting at the right trading desk. First off, when OPEC did nothing, which was the catalyst for an estimated $1 trillion wealth transfer from oil producers to consumers (I don’t get paid nearly that well for doing nothing), commodity market traders seized on a slight overproduction of oil, helped create thousands of sensational headlines about “gluts of oil”, which generated hysterical cries of “stunning drops in oil prices”, which the traders oddly enough had bet in favor of, and lo and behold it happened. If you yell fire in a crowded theatre you can get the human equivalent, with no need to actually start the fire. Second, commodities traders turned their T-rex mouths (and arms) to gasoline and diesel markets. These markets have been studied to death to determine if they’re manipulated, with both market defenders and consumer advocates sure they aren’t/are respectively. The problem is that markets are complex, they are woven together globally (gasoline refined in Asia can sell in California, for example, if the market conditions are right), but at the same time big players can manipulate things with ease. A crystal clear example from the power markets: about 12 years ago, some electricity companies figured out what happens to power prices in the event of a generating station being shut down during high demand times. Prices spike. So what happens if you own 3 plants in a region and shut one down? Well, the other two make a hell of a lot of money, and governments/consumers get really mad. So the companies stopped doing it, after paying the usual big fines. A few very aggressive players that control a lot of infrastructure dominate the whole energy trading business. It is remarkably easy to play games, and very hard to prove otherwise. The opportunities to bend rules or quietly manipulate supply/demand are endless, which is I think a factor in illogical price discrepancies and wild price swings. And remember at the end of the day what happened on Wall Street in 2008. As the cover was slowly lifted on that den of rats, who scattered to the four winds leaving whole economies in tatters, it’s taken years to unravel what happened and who was responsible. No one has gone to jail, tens of billions in fines have been paid, no one has admitted any wrongdoing, and the US government is in debt up to its eyeballs from trying to keep the economy alive due to this fiasco. And as far as Wall Street goes, here’s the most telling and startling statistic: as of August 2013, over a year ago, the biggest Wall Street banks had forked out over $100 billion in legal fees to deal with the financial crisis they’d helped create. Let that number soak in for awhile… A lot of these big players are involved in the daily commodities trade, for electricity, oil, gas, diesel, you name it. You may draw what conclusions you like. You’ll never prove them, and the question will remain unanswered: what causes large swings in oil or gasoline prices? I’ve told you my best guess…