They could store and pay their contracts in oil, but it's more likely they just pay the contracts in cash, depending on how the security operates.

If the Straits of Hormuz are threatened, future contracts say that oil must still be provided. So all over the world, oil tanks are topped off just in case. This causes price spikes that cause conspiracy buffs to invent evil. Welcome to a market where the actual price changes are not absorbed by the middlemen. Where price changes are near zero. Welcome to how all commodity prices really change.

Watch prices for electricity on the grid. Current prices are extremely stable. Currently at $19.6 per megawatt hour to $23.8 at the same minute. Prices can vary from $15 to $70 throughout the day. In the summer, those prices have risen to over $200. At one point, $400 per megawatt hour even when the grid was not overloaded. Why? In markets where price variations are actually seen by the consumer, these oil price variations are near zero.

But again, gas at $2.50 per gallon, $3.65 per gallon, and $6 per gallon is cheap. After all, what saw the largest increase in sales during the previous gas price jump? Largest SUVs. The lowest performance vehicles with the worst gas mileage were top sellers during that last price jump some years ago. Because gasoline prices are really so low. And price changes are trivial.

One can deal logically with the facts. Or let spin doctors and the local gossip News get then all childlike and emotional. When gasoline prices changed in the 1970s, those prices doubled. Did the $3 per gallon gas suddenly become $6? Only then were price variations worthy of historical note. Even electricity on the grid varies from $17 to $40 most every day.

Meanwhile, unstable news in the Persian Gulf (for political spin we now call it something different) means substantial oil is being stored all over the world. Causing a normal and tiny price spike.

Only the most excitable and emotional would entertain such local gossip news stories. Oil price changes are so tiny as to not even be relevant. But if you are a politician who gets elected by inciting the least educated and most childlike voters, then hype evil oil prices. Those are the people whose votes are manipulated by bogeymen. Gasoline at $6 per gallon is still cheap.

Addendum: ten minutes later, prices on the grid jumped to between $40.3 and $45.4. Where are the politicians hyping fears about our obsolete grid causing price spikes? It does not create fear and votes. Hyping near zero gas price changes does create a bogeyman.

Some do -- but others just pay the difference between the price of the security and the price of oil when the security matures.

Sometimes there is physical oil involved which is stockpiled. But even that oil may never be delivered, because the contract that is due is exchanged for another contract for the future.

In any case the futures markets reflect monetization of risk. Iran realizes this, and this may be why they are threatening: the price of oil then rises, which causes certain nations to ignore sanctions and trade with Iran anyway.




[1] If you saw "Trading Places" you realize that when Frozen Concentrate Orange Juice futures are bought and sold, there may be no actual juice present, just a report of how the orange crop is doing.

Damn you and your facts, UT.

It's the Pork Futures Warehouse in Discworld that is really creepy.

There's so much that Dan Akroyd can teach us, if only we'll listen.

Yup. When things go wrong, blame the juice.

:D

And there is an 800 pound gorilla somewhere in the room.

My preference is to trade for the Swedish meatballs. I dream of futures trading.

Obama owns the rise in Gas prices, he can't dodge it. It happened on his watch and it is important that the fact that gas prices have damaged the economy while he was president is really an important fact to hammer during the upcoming election.

Quite the opposite, gas prices reflect demand which is driven by (worldwide) economic recovery.

Obama should lower gas prices by bombing Iran. Problem. Solved. :angel:

I agree with UT. As long as China and India, primarily, are wiling to pay more for it, the price will increase for us here. Its that Free Market capitalism thing I hear so much about from the right. Sucks when it works against you, eh?

And as long as the Middle East remains unstable (or potentially unstable).

To those who think the president controls the price of gas: gas prices have come down. Time to thank your president, Mr. Obama.

Good luck with that. They only BLAME the President for imagined things. Giving him CREDIT for ANYTHING, real or imagined, ain't gonna happen.