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Who Sets The Price Of Oil? Wall Street Speculators?

STEVE INSKEEP, HOST:

Next we have a mystery. Who sets the price of oil? We know the price of any product goes up and down. What's hard to grasp is why oil prices move so much. This mystery occurred to our Planet Money team when they bought some oil as part of their reporting. Jason Bruns, the Kansas pastor who sold the oil, said he also didn't know who sets the price of his own product. So Reporter Jacob Goldstein tried to find out.

JACOB GOLDSTEIN, BYLINE: When oil gets expensive, people love to complain about speculators.

(SOUNDBITE OF 2008 CONGRESSIONAL HEARING)

UNIDENTIFIED MAN #1: Ending rampant speculation in the oil's future market has the capability of doing something for us.

UNIDENTIFIED MAN #2: We need to consider a full range of options to counter this rapacious speculation.

UNIDENTIFIED MAN #3: We must end the excessive speculation in the energy markets.

GOLDSTEIN: This is a congressional hearing from 2008. The price of oil at that time was over $100 a barrel.

MARK YUSKO: Ridiculous. Ridiculous. Just the idea that excess speculation - there's no such thing.

GOLDSTEIN: This is Mark Yusko, oil speculator. He is the CEO of Morgan Creek Capital Management, which among other things, makes bets on which way the price of oil is going to go. He says it's possible for speculators to drive the price up, but it's just as easy for speculators to drive the price down. So why is it that we only hear about speculators when the price is rising? Why don't we ever hear people shouting about how speculators are driving down the price of oil?

YUSKO: Well, that doesn't make good media coverage, and it doesn't certainly make good politics.

GOLDSTEIN: Now, of course Mark is going to say this. He's a speculator. So I found an economist named Dan Murphy. About 10 years ago, when the price of oil was going through the roof, Murphy asked himself, what's going on? Why is the price going bananas?

DAN MURPHY: I did not know, to be honest. I was curious what could be causing this. Why then - why was it going up so fast?

GOLDSTEIN: Murphy looked at what speculators were doing. He looked at how much oil was coming out of the ground and how much people were buying. He crunched a lot of numbers, and he came up with an answer. How much did speculators affect the price?

MURPHY: They played a negligible role.

GOLDSTEIN: Nothing?

MURPHY: So yeah, I would say it's pretty much negligible.

GOLDSTEIN: So if it wasn't speculators, what was driving up the price?

MURPHY: Our basic finding is there was global demand that was driving the real price of oil.

GOLDSTEIN: Demand - also important, supply. If you're a speculator, like Mark Yusko, you can close your eyes and see a map of the world with little price tags scattered all around, showing how much it costs to get oil out of the ground in different places.

YUSKO: You know, you start with the cheap stuff in the Middle East that costs, you know, eight or $10 to get out of the ground. And then you go to shallow-water offshore in the Gulf of Mexico. Then you go to deep-water offshore off the coast of Brazil. And now you're up to 40 or $50 dollars...

GOLDSTEIN: And so on, all the way up to oil that costs more than $100 a barrel to get out of the ground. So here is what sets the price of oil. You take all the oil people are buying today. Start at the end of the spectrum, where oil is cheapest to produce, and work your way up until you've satisfied all that demand.

That last barrel you need, the most expensive one someone is willing to buy, that's the one that sets the global price for oil. If you're looking for someone who is setting the price, you look for someone who is just about to turn an oil well off or on.

YUSKO: It's probably the drillers in the United States.

GOLDSTEIN: In other words, Jason Bruns, the Kansas pastor who sold us our oil, wasn't sure who sets the price - in some way, he's the one setting the price. When we went to visit him, he told us about this one well he has.

JASON BRUNS: We shut it down a few months ago with a low oil price. And we're waiting on the price to go up.

GOLDSTEIN: And he's been trying to decide, does it make economic sense to turn it back on?

BRUNS: I'm kind of in limbo. Do we plug it? Do we get rid of it? Do we start it back up?

GOLDSTEIN: The next time you see the price of gasoline at the station in those giant numbers, you can think of Jason Bruns standing next to a well in Kansas, trying to decide whether to turn it back on. Jacob Goldstein, NPR News. Transcript provided by NPR, Copyright NPR.