Making Sense of Rising Gas Prices, Or Not

Car at the Pumps />

As we approach the one-year anniversary of $4 gas, once again prices at the pumps are on the rise. In the past week, the national average price for regular gasoline surged more than 16 cents to $2.24 per gallon. That’s mild compared to last year’s push up and over $4—where it remained for a six-week period before taking a tumble.

So, what do experts make of the current run at the pumps, and the jump in price of a barrel of oil to $60?

The San Francisco Chronicle’s David R. Baker reports that surplus oil supplies will not allow the price of oil to climb much more. “While [experts] say oil could rise to as high as $70 per barrel in the near future, others argue that the world has too much oil right now for such high prices to stick.”

Mark Williams, Associated Press’s Energy writer, agrees. Williams writes, “Many think prices have only about another nickel to go before topping out.” The difference this time, according to Williams, is high levels of crude and gasoline in storage. “The country has not seen storage levels this high since Saddam Hussein invaded Kuwait in 1990.”

Michael Oneal of the Chicago Tribune adds that the bad economy will keep prices down. He reports that “additional increases will likely be moderated by the nation’s continued economic doldrums.”

Hybrid as Insurance Policy

On the other hand, Spencer Swartz, blogging for the Wall Street Journal, points to experts who believe there’s more room for prices to go. “Oil bulls see signs of demand recovery everywhere: Lower-than-expected inventory builds in the U.S.; less-awful-than-expected jobless numbers; record Chinese car sales in April. Top that off with OPEC’s continued efforts to fully cut oil production, even as non-OPEC countries watch their production too, and oil bulls think $70 oil is a real possibility.”

Steve McDonald at ContrarianProfits.com, sees a potential double-whammy when you add OPEC cuts to a recovering economy. “It is conceivable that if any really significant positive information about the health of our economy, or any other key world player’s economy, were to be released we could see a run well beyond our near term price of $75.”

While it’s a fool’s game to try to predict oil prices (especially beyond 2009), car owners who don’t want to be subject to the ups and downs of the market are well advised to drive a car that goes as far as possible on a gallon of gas.


  • Tony

    Here’s the thing. There are two reasons gas was $4 last summer.

    First, basic supply and demand. More oil was wanted than was being produced, ergo the price went up. This effect has been temporarily reduced due to the recession. Assuming the economy gets back to normal, prices will go up.

    Second, speculation. Ever decreasing supply and increasing demand made an investment in oil futures seem attractive. This effect was eliminated when the government started making concrete moves in the direction of increasing domestic production, EG opening the OCS. The Obama administration’s reversal of this move is going to reinstate the speculation effect.

    Thus, all things being equal, once the economy gets back to normal and speculation gets back into full swing, oil should go back to at least where it was last summer.

    Of course, all things are NOT going to be equal, as the government is considering a couple of different mechanisms for imposing a tax on the release of carbon. Whether it’s cap-and-trade or a simple carbon tax (there is partisan wrangling between the two options, but it is going to be one or the other), it amounts to a direct increase of the cost to the consumer of petroleum based fuels.

    High inventory may have the effect of delaying or temporarily moderating the effect of increasing demand and shrinking supply, but it seems fairly obvious that under the near-term conditions, supply WILL exceed demand and inventories will therefore begin to decline. Eventually the cushion will be gone and oil will get back to it’s natural prices plus whatever extra the government tacks on.

    Bottom line is that the only good news is that you don’t have to waste your time agonizing over whether a more efficient car is a good investment or not.

  • Samie

    Tony good breakdown of how the oil markets work.

    I suspect that speculative motives had a lot to do with last springs price troubles. Supply and Demand was tightened no doubt but looking at GDP and world energy needs the quick growth in prices doesn’t add up. Some growth in gasoline prices usually has to do with switching grades of crude and if refineries are actually trying to produce at near capacity. Also oil cartels and natural/political disasters play a factor. I always suspect some speculation in the summer months as more people travel and the upcoming holiday adds to these investments. This year will be different as more can’t afford the long trips to see family or the vacation to Disneyland.

    The point about domestic oil production has a short term plus but a long-term negative. As all know, when global oil prices are high it becomes more attractive to extract oil in the U.S. but prices need to stay up form the time of extraction to refining in order for this to work. Also no brainier it does not matter how much more of an increase in domestic production we have it does little in the long-run for the overall U.S. supply. The more domestic oil we use up in the short-run the less leverage we have from cartel countries in the future.

    That’s where “Hybrid (/EV’s) as Insurance Policy” should come in by promoting these vehicles, we could start slowing the growth in domestic demand and reduce some speculative motives also reduce some of the influence that some oil companies have on idiot, sorry for sell Senators from states like Louisiana ouch too harsh…. But lots of things need to change which I’m hoping EV’s in the next 10-15 years will be an attractive alternative to the silly games that has.. and will continue to happen with gasoline prices that is to fill up our lovely ICE vehicles.

  • william

    Those interested in the subject of the oil prices might very well want to watch the 60 Minutes episode where they documented the high prices had NOTHING to do with supply and demand.

  • RKRB

    Regarding the issue of speculation, it’s unfair to generalize about a situation by taking the outliers as “typical.”

    The oil price jump caused by speculation seems to be a case where the system didn’t work, but it’s unfair to label all futures trading as dysfunctional, and it’s unrealistic to expect any complex situation to work perfectly (even if the government regulates it). Commodity “speculators” (futures traders) help hedge against risk brought on by uncertainty. This is why the futures markets exist, and why it generally helps consumers and producers. The futures market is one reason farmers can pay their creditors (and why we can eat their crops) even though no one has any idea what the future price of their crops will really be. With perhaps a few exceptions, no honest person can really say they know the future supply/demand ratio for a commodity like oil, but if you are planning a business, having a set price for an undelivered commodity is a necessity. Sure we all like to gripe when the futures market doesn’t work, and we all like to think we know the answers to all the reasons why it didn’t, but c’mon, let’s get realistic. I’ll bet plenty of knowledgeable people in the industry are trying to figure out what went wrong and how to fix it, even as others are trying to make unfair profits from the imperfections in the system (and politicians are trying to figure out how they can gain more power by once again distorting the situation, too).
    Hedging against the future cost of oil is also one big reason many people will buy hybrid cars (and avoid gas guzzlers) even if the current price of gas is about half what it was a year ago. You could easily make a case that the gas price spike last year greatly helped hybrids and fuel-efficient vehicles.

    Besides, if you factor in the hidden environmental costs, the billions of dollars spent to defend foreign oil supply lines, the support that terrorists have gained from oil-associated social disruption, etc. etc. we should realize we have been paying far more than $4/gallon for quite some time.

  • mark is rad

    i dont know about all that but have you ever considered that people get greedy when they see a possible fat payday down the line.

  • Fred Smilek

    I truly believe that the high gas prices has nothing to do witl the supply and demand. I personally drive a hybrid car and it was totally worthed. You can save money

  • Dave K.

    Most of you really don’t get it, supply and demand for oil are both very inelastic, therefore when something changes(say, 3 billion people in Asia want cars) the price moves ALOT! (like 2008). The system works the other way too(Like when the economy tanks, partly due to high energy prices) the price moves ALOT! The speculators were just responding to market signals, if there were no signals they would have done nothing.
    The underlying problem is simply geology, most of the easy oil has been tapped and the remaing oil will become increasingly difficult to extract, prices will be volitile but will continue to rise on the average ($2.25/gal sounded high 5 years ago, now it’s low) and if we don’t reduce our dependance on it our economy(along with other things) is DOOMED.

  • Samie

    Dave K.
    You really need to rethink what you said. In theory what you say is true but not reality. “speculators were just responding to market signals” Remember that speculation is the prediction/projection of future returns on financial assets given interest rates if you want to throw that it. The signal you are referring to was the unattainable growth in world GDP and energy needs that would have been expected. You really need to look back at the movement of energy prices last year. You will see this is not ALL responding to a large increase in demand that is if you follow the day-to-day prices and again as investments grow in value it often attracts more investors and all of a sudden you have conventional funds like 401Ks chasing this which creates even stronger movements in prices . Then as prices reseeded in the summer the explanation was somehow the world conserved energy through conservation to drive down prices? I don’t think so if you look at total energy needs after last spring… Also here is a problem, if gasoline prices continue to increase this creates more incentives to start drilling in harder to extract places and things like nasty shell oil come online. This makes it more financially feasible to extract harder to find oil….

    As for farming markets I have to laugh sorry RKRB
    This is dysfunctional if you ever known a farmer, they have to sell to a middle man especially cattle/livestock. So here is where that market is dysfunctional, If Oprah scares everyone about say Mad Cow Disease people reduce consumption of beef, guess what the price for cattle gets reduced at auction so the farmer gets little or nothing for his/her livestock but here is where nobody gets it the package of hot dogs does not drop or say prices for steak and the meat producers like Tyson can actually gain/profit along with certain investors from any consumer fear or middle man trying to find ways to devalue farmers cattle value so to drive down costs to producers and some cases increase large profits to some investors.

    As for food crops, the corn market is NOT a real market in the first place! Subsidies dominate the differences in say corn values… I will leave that one alone….

  • Max Reid

    Unless we start moving to Ethanol, we will continue to pay more and more for gas. Lets hope government is approving E15 (15% Ethanol) as a fuel.

  • DJB

    We know where gasoline prices are going in the long run if we keep relying almost exclusively on gasoline for transportation: UP.

    The number of drivers worldwide goes up every year and the total supply of oil goes down every year. Eventually, as we run out of oil, the price will rise dramatically UNLESS we get off of gasoline.

    Not only do we need to be thinking about alternative fuels and fuel efficiency, we need to be thinking about how to make walking, biking, and transit more attractive options for more people.

    We need urban planning for “complete streets” that leave room for all types of transportation, and we need the land use density (number of people per unit of land area) and land use mixture (e.g. putting housing close to shops and offices) that can support convenient transit and other alternatives to solo driving.

  • Anonymous

    There is no way OPEC can keep cutting oil production due to their economies being based on oil revenues. We as consumers pretty much can grab back control of our markets by buying small energy efficient cars. The oil speculators keep making up excuses that it’s the economy, it’s opec cutting production, it’s job cuts. If we really look at it oil demand has been falling since mid last year before all the big job cuts, before we started to feel the economies pinch, and before opec cuts. Demand is just not there and they are playing a psychological game with us. The real reason is that consumers have made the switch to more fuel efficient cars. As I look down my street which was once filled with trucks and suv’s you know see small cars and smaller suvs. So we as consumers shouldn’t believe the hype of the speculators. OPEC will be crying in a few years if consumers continue to make the switch at the current rate.