Thursday, August 25, 2005

Oil Prices: Collusion?

Somebody who is more familiar with the Futures market and the oil industry explain to me how it all works. What exactly does it mean when the price per barrel is $68?

I know that the Petroleum industry is divided into two parts: Upstream and Downstream. Upstream operations are the ones surveying for new oil, drilling, and extracting oil from the ground. Downstream operations take the crude oil and refine it into various products (gasoline, toluene, plastic resin, etc).

So, we know that supply is limited. So, what prevents an oil company from using collusional tactics on the trading floor to artificially inflate prices? I'm talking about stacking up the people who are yelling out prices all day long, so instead of 1 person bidding for you, you have 10 people (though they would appear to be different companies), and each person is bidding up the price established by the person before them. In the end, the price per barrel is higher, yet the crude that was purchased ends up at the same place for refining. The Upstream operation makes a huge profit, while the Downstream operation passes the difference on to the consumer.

Are there safeguards to prevent this type of behavior? Or am I just totally clueless about how the Futures market in correlation to crude oil delivery works?