What's fueling gas prices?
Posted
Jun 08 2009, 01:54 PM
by
Catherine Holahan
Rating:
This story has been updated. Read the new one here.
Drivers are shelling out far more to fill their tanks this summer than last winter, despite the severe economic downturn. And there's likely more pain to come at the pump.
Gasoline prices have risen sharply in the past month. This week, the average price for a gallon rose to $2.67, according to automotive group AAA. That's up more than 35% since December 2008.
To be sure, gas prices are still far less than consumers paid last summer. Oil prices hit a record high of $147 per barrel on July 11, 2008, pushing the average price of regular gasoline to $4.11. But the price of crude has soared in recent weeks. Prices jumped past $72 a barrel late last week, though they fell slightly on Monday as the dollar strengthened. (A stronger dollar reduces the desire to buy commodities as a hedge against inflation.)
Speculation shares some of the blame for price hikes
The recent gasoline price increases are perhaps more difficult for consumers to bear than even last summer's soaring prices. Unlike last July's spike -- which was fueled by increasing demand due to global economic growth, as well as speculation that the good economic times would continue - this year's increase is largely due to anticipation that the worst of the recession is over and that the economy will pick up. Unfortunately for many Americans and businesses, their personal fortunes have not improved along with investors' economic outlook, leaving them ill-prepared to pay higher prices.
Talk back: Will high gas prices kill the recovery?
"Investors are feeling confident that we are going to come out of this recession and do so soon... and we are seeing a lot of cash flow back into the commodities markets," said Troy Green, AAA national spokesman. "So that is the primary reason that you are seeing the price of oil climb as significantly as it has over the past four weeks. It's not as if you are seeing increased demand [for oil and gasoline] domestically."
Demand for gas is still depressed
Demand for gasoline is still depressed due to the economy. Gross Domestic Product decreased 5.7% in the first quarter of 2009 and is expected to decline again this quarter. Unemployment is still climbing, despite the rate of layoffs slowing in recent weeks. About 9.4% of Americans - about 14.5 million people -- are unemployed, according to the most recent Labor Department statistics, released June 5. That rate rises to 16.4% if all the recently laid-off workers who have taken temporary part-time jobs are included. Those people are no longer commuting to work and are unlikely to be taking long road-trip vacations.
Airlines, a major consumer of fuel, are also not behind skyrocketing prices. The global airline industry is expected to lose $9 billion this year due to a 17% drop in air cargo and an 8% drop in passengers, according to a June 8 report by the International Air Transport Association.
Those hoping for lower gasoline prices may see a silver lining in all the negative economic news. Surely, all that's indicative of a speculation-fueled bubble poised to pop?
China is also a culprit in pump price hikes
Maybe. But there are some real factors fueling the price of gasoline, as well. Among them: increasing demand in China, production cuts by refineries and oil producing nations, and fear of inflation.
Despite the recession's impact on China's growth, demand for oil is still growing at a fast clip, say analysts. Sanford C. Bernstein analysts Neil McMahon and Alexander Inkster believe that Chinese imports spiked in March and April. In a May 22 note to investors, the analysts cited the rise in imports and a steady increase in the amount of oil China is adding to its reserves as a key justification for the recent oil price surge.
"Satellite images confirm a significant increase in storage construction in the last few years," the analysts wrote. "This suggests that China is stock-piling crude oil." (The analysts told the Wall Street Journal that they were tracking how much China had increased its capacity using Google Earth satellite images.)
Oil refineries and OPEC have significantly cut production in hopes of stopping last year's price free-fall. As a result, when the economy improves there may not be enough capacity to meet demand in the short-run, creating upward pressure on prices. Oil refineries are running at about 82% of capacity. Refineries typically operate at upwards of 90% capacity in the peak summer months, says Green. OPEC, meanwhile, has pledged to cut production by about 4.2 million barrels a day. On Sunday, Venezuela's oil minister said that OPEC members had met about 86% of the cuts.
Inflation fears are also fueling oil prices. Investors are putting their cash into assets tied to the dollar, due to concerns that the U.S .government's massive stimulus spending will weaken the currency. Commodities, such as oil, typically rise in price along with the dollar. Thus, oil provides investors with a hedge against inflation.
Prices to hit $3-per-gallon?
So how high will oil and gasoline rise? Sanford C. Bernstein's McMahon believes crude could reach $80 per barrel by next year. Last time oil hit that target, the price at the pump was about $3. Notoriously bullish energy analysts at Goldman Sachs (remember the $200-a-barrel prediction?) believe oil could hit about $85 per barrel, fueling the price per gallon of gasoline above the $3 mark.
Related Reading:
The hidden costs behind gas prices
How investors can profit from pricey gas
12 ways to find cheap gas
A drop in drilling
Watch: Gas price woes
Updated June 15, 2009
