Why Are Gas Prices Rising?
Gas prices are once again headed higher, and most people are probably wondering why. The Charleston Gazette (1) provides a typical reaction:
Lee Franc, a client manager from St. Petersburg, spent about $40 to put 16 gallons in her Toyota Highlander. She works at home and can go a week or two without filling up.
“Katrina, I can understand,” Franc said. “I didn’t see a very good explanation this time. You hear so many excuses it gets to where you don’t believe anything anymore.”
The thing is, they are not excuses. There are valid reasons that gas prices are rising, and people should take time to educate themselves on this very important issue that affects all of our lives. As I have said again and again, look to the product inventories – which are published on a weekly basis by the Energy Information Administration (EIA) – to guide you on what prices will do in the short term. USA Today (2) writes:
Nationwide, the reasons behind the increase in gasoline prices are ripped from an Econ 101 textbook:
*Supply. Gasoline inventories fell for the fourth-consecutive week last week and were 4% lower than a year ago, partly because of lower imports and refinery maintenance, according to the Energy Department. The amount of gasoline was enough to meet demand for 23.7 days, the lowest since the week ended Jan. 12.
*Demand. Drivers have been pumping more gasoline, despite the higher prices. Average gasoline demand in the four weeks through March 2 was 1.2% higher than the same period a year ago, according to the Energy Department.
There are multiple factors right now affecting supply. Refinery turnaround season – when refineries shut down or scale back to do maintenance – peaks in the early spring and early fall. This is because those time periods provide a combination of moderate weather and off-peak gasoline demand. In the spring, however, there is also the transition to summer-gasoline. I have previously explained what this transition is all about. The result is that it lowers the available supply of gasoline just as driving season is picking up. Lower supply + higher demand = higher prices. This is why gas prices tend to spike at this time every year, although this year’s spike is early than normal.
Gasoline demand was unusually high throughout the winter. This could pose problems in the coming weeks, as it has resulted in gasoline inventories being pulled down. The U.S. relies on gasoline imports to satisfy part of the demand, but when the price falls it becomes less profitable for those exporting the gasoline. When the price comes back up, imports increase and the exporter can make higher profits.
Because the price was lower over the winter – and because demand is typically lower than what was seen this year – imports were low in the winter. Because prices have come up, expect to see gasoline imports rise and take some of the pressure off of the supply constraints. On the other hand, demand will pick up over the next few months, so it is going to be a tight race to see if imports can keep up.
My personal belief is that even though there may be lulls in price, higher gasoline prices will be the norm rather than the exception in upcoming years. Refinery capacity is just too tight, and some argue that Saudi Arabian oil production has peaked (although I disagree). If (when) the latter is true, this would (will) put incredible pressure on prices because growing demand is going to run head on into falling supply. That is what Peak Oil, or oil depletion discussions, are all about.
My advice to all would be to plan for a future in which energy prices are much higher, and start making efficiency improvements in the car you drive, the electricity you use, and the fuel you use to heat your home. I believe this will pay big dividends for you going forward, and your budget won’t be quite so exposed to volatile energy prices. As a bonus, making these changes will lower your greenhouse gas emissions.
1. Californians Pay $3 Again for Gas, The Charleston Gazette, March 8, 2007
2. Gasoline Prices Getting Pumped Up Again, USA TODAY, March 9, 2007