Oil is what powers our cars, lubricates machines all over the world and is a key ingredient in many of the items we use every day. But oil is also an investment. Everybody from the largest multi-billion dollar investment firms all the way down to the individual stock trader can invest in oil through ETFs, futures contracts and individual stocks. (Find out how this commodity's fluctuating price affects more than just how much you pay at the pump. Check out How Does Crude Oil Affect Gas Prices?)
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Most investors don't take delivery of oil. Instead, they invest using sometimes complicated contracts that cause artificial rises and falls in the price of oil. In fact, it is estimated that up to 70% of all oil futures contracts, a contract used to lock in the price of oil for delivery at a later date, are held not by people who are physically delivering the oil but by speculators who are buying and selling the contracts to make short term gains. In 2009, for every 27 barrels of oil traded by speculators, only one of those was actually being consumed.
As buying and selling of investment products has become efficient, this new breed of speculators has emerged to cause a great upset in the global price of oil. In the oil crisis of the 1970s, prices became higher because of another fact about oil that is buried deep. Oil is a political tool. So what can we learn from the previous oil crisis?
Oil Is Political
In 1973, OPEC, an alliance of Arab nations, issued an oil embargo against western nations as a way to punish them for their support of Israel during the Yom Kippur War. Because of this, and the amount of money being spent on the Vietnam conflict, the United States ultimately ended up with gas prices rising from 25 cents per gallon to one dollar in just a few months.
This embargo taught the world a valuable lesson: the Arab nations realized that their oil was an effective political bargaining chip. With other nations consuming oil without regard to its cost or where it comes from, they became dependent on oil. They had to have it to keep their countries running regardless of the cost.
Oil Isn't Unlimited
The United States and other western nations knew that the days of cheap, unlimited oil were over and a nation's economic and national security could not remain in the hands of other nations. If we had no oil, our military couldn't fly the aircraft, drive the tanks or power the bases that protect us. This had to change.
After the oil embargo, the United States set out to lessen its dependence on foreign oil. The modern day speed limit was instituted as an attempt to use less gasoline. Americans bought smaller cars and gas stations willingly closed on Sunday and would only sell a maximum of 10 gallons of gasoline to a customer. As a result, we decreased our oil consumption by 20% for a brief period and set out to find an alternative source of power - coal.
We Are Still Dependent on Oil
Although lowering our dependence on foreign oil may seem like a new idea, it's actually more than 35 years old. It has been argued by some that America has learned very little from our dysfunctional relationship with oil. In 2009, 63% of the crude oil processed in United States refinery came from foreign sources. In 1970, only a few years before we were faced with a national security as well as economic crisis due to our dependence on foreign oil, we only imported 24% of our oil. Today, $475 billion is spent on foreign oil. That's money that is being sent to other countries instead of being spent in our own country according to famous oil man, T. Boone Pickens. He and others argue that we've learned very little from the oil scares of the past and, if oil is once again used as leverage for political or military gain, the United States is more vulnerable than ever in its history.
Add to that the new presence of speculators and other investors who artificially inflate the price of oil, and the situation looks even bleaker. This is why T. Boone Pickens believes that it is vitally important to find an alternative energy source. His plan is to harness the power of wind turbines, natural gas and solar energy.
Alternative Energy Isn't Viable Yet
Even in Washington, there is very little disagreement about our energy problems. However, the problem is partially based on the lack of infrastructure. There are very few companies who are involved in the transmission of natural gas and the amount of pipelines and other transportation infrastructure would cost a staggering amount of money. Although the technology exists to run automobiles on natural gas, a large scale migration to natural gas fueled vehicles isn't practical for many Americans until the infrastructure exists.
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The Bottom Line
With Americans once again paying $4 at the pumps, our alleged overuse of foreign oil has taken center stage once more. If history is any guide, when the price of oil again drops, our energy consumption worries will fade away until the next crisis. Sometime, maybe not far in to the future according to T. Boone Pickens, a global event may take place that forces us to finally learn from the mistakes of the past. (When the price of oil goes up, don't worry about how much gas is going to cost; get even by making a play on the Canadian dollar. See Canada's Commodity Currency: Oil And The Loonie.)
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