by Ron Scherer
18-03-05
As the price of oil nears $ 58 a barrel, the price of regular gasoline at the
pump may soon exceed $ 2.40 a gallon. And if oil crests above $ 60 a barrel,
Americans could be paying as much as $ 2.75 a gallon by the time the summer
driving season gets under way. Indeed, the price of crude oil hit a record price of more than $ 57 a barrel
(not adjusted for inflation). The price of gasoline also hit a record at $ 2.05
a gallon nationally, according to AAA. Despite the high prices, energy demand continues to be strong. Some of this
is weather-related: Cooler than normal temperatures have kept demand for home
heating oil strong in the Northeast. Globally, demand remains strong as well. The main forecasters continue to
predict that China will represent a third of growth in demand. Some of the
Chinese appetite comes from work on filling a strategic petroleum reserve of up
to 750 mm barrels of oil. OPEC said it would try to meet some of this higher
demand by increasing production by 500,000 bpd of oil. Most of this will come
from Saudi Arabia, which has spare capacity. "Unfortunately, it's the
heavier grade, not the sweet stuff [which is better for making gasoline],"
says Mark Baxter, director of the Maguire Energy Institute at Southern Methodist
University in Dallas. If crude prices remain at this level, Mr Baxter predicts
the price of gasoline could soon hit $ 2.40 a gallon. However, if the price
rises to $ 60 a barrel, he says the price at the pump could move as high as $
2.75 a gallon.
The price spike comes at a time when Congress is focused on energy. The
Senate, in a budget bill, moved to open up drilling in the Arctic. The
legislation must now pass the House. And President Bush said he was concerned
about the price of energy. In fact, now that the price of gasoline is above $ 2 a gallon and rising,
Baxter thinks Americans will start to change their driving habits.
Source: Christian Science MonitorCan anyone stop the rise in oil prices?
This sudden spurt -- frustrating everyone from OPEC oil ministers to anyone
filling up their tank -- seems to be an intense combination of big demand,
limited spare capacity, and speculation.
"The market is pretty tight right now," says John Felmy, chief
economist at the American Petroleum Institute (API).
"Who knows where it will go?" says Mike Fitzpatrick, a trader at FIMAT
USA, a commodities trading firm. "Speculation is running rampant." Mr
Fitzpatrick says part of the increase comes from new investors and speculators
entering the oil markets.
"Now, we're seeing pension funds, equity funds, people who feel they need a
commodity component in their portfolios," he says. "They are
unencumbered by numbers, by history."
"It's been a long, cold end of winter," says Mr Felmy. At the same
time, Americans are driving more. API statistics showed a 1 % gain in gasoline
demand in February. Some of this increased demand is the result of a healthy
economy, says Felmy.
"I'm concerned about what it means to the average American family when they
see the price of gasoline going up," he said. Indeed, the price of gasoline
is now 33 cents a gallon higher than it was last year at this time. On an annual
basis, this means that consumers spent an additional $ 40 bn at the pump.
"It's a lot of income spent on gas that could have gone to other
goods," says Felmy.
"They will become more efficient, make fewer trips," he says.
"How high will it have to go before consumers start to trade in their SUVs
for more efficient or hybrid types of vehicles?" Some of those moves may be
happening already. General Motors and Ford, which make many of the large SUVs,
report significant increases in inventories.
"The most recent numbers indicate some pretty dramatic declines in the
sales of SUVs, particularly the larger ones," says Felmy.