Frustration at the pump: U.S. gasoline prices rise even as demand drops
Driving in the U.S. will probably become even more costly in the months ahead, since gasoline prices are likely to rise, even as overall U.S. gasoline demand drops. The culprit is the price of oil, which accounts for about 60-65 percent of the cost of a gallon of gasoline, according to the U.S. Energy Information Administration. Oil, which rose $2.62 to $81.74 per barrel on Wednesday at mid-day, has soared 125 percent since plunging to about $35 per barrel last winter. Further, in the last six weeks alone, oil has jumped about 20 percent.
Meanwhile, U.S. gas prices, currently about $2.61 per gallon for regular unleaded, have erased a minor, early-autumn decline and are now approaching the 2009 high of $2.67 per gallon, according data compiled by gasbuddy.com. Since hitting a low of about $1.61 per gallon last winter, gas prices have surged about 60 percent.
What's driving oil higher? The likely U.S. and global economic recoveries and the weak dollar. The former means oil demand in key emerging market economies, particularly in China and India, is likely to increase in the quarters ahead, and since the developing world accounts for a disproportionate share of global oil demand increases, any signs of a quickening economic pulse in these countries puts upward pressure on oil prices.
As far as the dollar goes, institutional investors, many of whom have purchased oil as an inflation hedge, tend to pile into oil contracts as the dollar falls, pushing up its price. Other institutional investors are buying oil contracts as a long-term asset, calculating that its longer-term return will be high, and this, too, puts an upward pressure on oil.
However, although oil's price and the weak dollar account for the bulk of gasoline's latest vector toward $3 per gallon, they're not the only factors. A third factor is a lower gasoline supply in the United States. Refiners, who saw margins squeezed this year, have closed refineries as demand in the U.S dropped, due to the recession, The Wall Street Journal reports. What's more, gasoline consumption in the United States is likely to fall to about 17 million barrels per day (bpd) by 2020 from about 19 million bpd today.
The result is an unusual market phenomenon in which Americans are using substantially less gasoline, but are still paying more for it -- a trend that's likely to continue until oil prices moderate. In normal times, a pronounced recession in the U.S. and the loss of five to seven million U.S. drivers due to job lay-offs would result in a sustained drop in gasoline's price; but that hasn't been the case during the initial stage of the globalization era.
Analysis: A rising gasoline price is exactly what the U.S. economy does not need now, since it reduces Americans' disposable income. Disposable income has historically supported consumption, but consumption levels will clearly take another hit if gasoline prices continue to trek higher as budget-squeezed Americans cut-back discretionary purchases further in order to fill the gas tank. Add higher heating oil prices and the U.S. economy will encounter two headwinds that will weigh on GDP growth.
In the long-term, the American economy would benefit from increased vehicle efficiency and a move away from gasoline and diesel as primary fuels. Short-term, Congress could help with a one-time, sliding-scale, $200-300 federal income tax credit for gasoline purchases to help poor and working families cope with increased commuting costs. However, at this juncture, there's little support for it in Congress.
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Reader Comments (Page 1 of 14)
10-21-2009 @ 3:26PM
Carney said...
It's bizarre that this story does not mention OPEC, whose whole reason for being is to artificially increase prices by restricting production levels below market demand. No matter how low consumption gets, whether from energy efficiency or a shrinking economy, OPEC can simply reduce production to match, spike the per-unit price, and make as much money as before on reduced sales volume.
That's why all the talk of conservation, saving energy, energy efficiency, hybrids, etc. completely and utterly misses the point. The point is our suicidally stupid passivity in allowing millions of cars to be produced and sold each year that are unnecessarily locked in to being compatible only with petroleum fuel.
If we switched to alternative fuels that no hostile cartel can ever corner, such as alcohol fuel, we wouldn't be in this fix. And that switch is relatively easy: Congress just has to mandate that all new cars sold in America (SOLD, not made, so as to include the imports) be fully flex-fueled, equally able to run an any alcohol fuel as on gasoline. The technology to do this is reliable, refined, and has been ready for over a decade. And it costs automakers only $130 per car.
With alcohol compatibility a standard feature like seatbelts, the oil cartel won't be able to spike prices above the $50 a barrel point at which alcohol fuel is competitive in the free market. Wise tax, trade, and regulatory policies can put further downward pressure on oil by favoring alcohol, further breaking the cartel's grip on fuel prices and the economy.
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10-21-2009 @ 3:27PM
Carney said...
For more on this issue, see former NASA rocket scientist Dr. Robert Zubrin's book "Energy Victory" or see his site at http://energyvictory.net
10-22-2009 @ 8:59PM
bud68man said...
Carney said:
The point is our suicidally stupid passivity in allowing millions of cars to be produced and sold each year that are unnecessarily locked in to being compatible only with petroleum fuel.
I SAY:
iT'S CALLED FREEDOM! THE PROBLEM IS THAT THE
"ENVIRONMENTAL" FASCISTS WON'T ALLOW US TO DEVELOP OUR OWN OIL SOURCES, WHICH WE HAVE IN ABUNDANCE! THAT WOULD REDUCE OUR DEPENDENCE ON FOREIGN SOURCES!
10-22-2009 @ 11:57AM
8thstrVA said...
First off, drill here drill now.#2 Alcohol=no power,you mite get about 3mpg,it is costic,evap's to quickly&moves us growing food to growing fuel.If you remove all the useless
epa mandated additives (that do not burn by the way) &
out of hand tax's,guess what! price goes down,power per
gallon goes up,mpg up by 50%+ & what comes out of the
tail pipe is cleaner because all is burnt. there is no sub. for
gasoline,
10-22-2009 @ 11:20AM
William said...
You have hit the nail on thr head. Great insight.
10-22-2009 @ 5:30PM
Kenneth said...
it not opec it's wall street that prices are up
10-22-2009 @ 1:31PM
JWR said...
Let's not forget all the taxes on top of the price of oil from the federal and state levels. It is our elected officials pitting us against each other claiming party lines when in fact it is their own greed and "take care of our own" mentality that is sinking us into personal debt. Wish you could have their health care, retirement, perks? Yea, me too.
10-22-2009 @ 1:35PM
dan said...
Carney I have read the book and came up with the temporary solution to our oil usage.
Think if we made all cars sold in the USA be flex fuel including hybrids, how much we could reduce our oil usage. It only costs around a $100 per vehicle for the manufacturers to install it. In Minnesota they have blend pumps that you can mix the amount of alcohol with gas, and in Calif. they have started to install ethanol pumps, but have slowed down due to the price of oil dropping.
This could be done but the oil cartel in this country still controls our congressman buy their donations to their campaigns, which is the real underlying problem in our countries political system. If Republicans were true Teddy Roosevelt Republicans, they would break up the monopolies, like the big 5 oil and health insurance companies, but they aren't, they are the party of the fortune 500 and are destroying free enterprise and the middle class in this country.
So now it's up the Democrats to fix it and the Republicans will resist every change, keeping the corporations in control of any change that would be beneficial to the country.
10-21-2009 @ 4:08PM
Rick said...
Just another way for big business and the government to reach further into our pockets and leave us destitute! If we all spoke with one HUGE voice and said ENOUGH!, by voting out every incumbent in the senate and house of representatives, maybe then these idiots will get the message and start doing th right things, rather than the things that feed their greed.
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10-21-2009 @ 4:38PM
Mike said...
I vaguely remember my dad filling up our VW bug back around 1971 for about $0.39/gallon. According to my favorite online inflation calculator, that's the equivalent of $2.11/gallon today. So, I'm paying about $0.40 more per gallon than my dad did 38 years ago. In 1971 dollars, that difference is only $0.08. As much as it pains me to pay over $2.00 to fill my lawn mower, I'm not convinced that I'm paying significantly more for gas than my dad did. Plus, I get better fuel economy in my car than most 1971 cars did (possibly even better than the Beetle, but I don't remember that Dad even kept track of mpg then). So, I think it's inaccurate to say that the recent rise in gas prices will have a significant impact on economic recovery. A tax credit for gas would be nice, but do we really want to keep spending on these kinds of programs and tax cuts?
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10-22-2009 @ 1:30PM
mstycl1219 said...
Mike, where are u getting gas for $2.40 a gallon. I just paid $2.95 this morning and I am getting ready for the climb any day now!
10-22-2009 @ 5:33PM
skeezix said...
Nice pitch. Sounds like it is scripted by an vested interest in the pertoleum industry.
The next thing these goobers will be telling us $5.00 a gallon gas is only pennies a month. Sound like a car sales pitch?
It is.
Speculators are already out on the circuit raising prices now.
These bogus reasons and rationale are just more of the bull that almost sent our economy off the cliff last year.
Come on obamanator, slap a windfall profit tax on these bastards before it is too late.
10-21-2009 @ 4:44PM
bub said...
Just keep printing money with nothing to back it up , president OBAMA !
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10-21-2009 @ 4:12PM
Artie said...
This is typical BS. Demand goes down but the price goes up? There is an apparent glut of oil on the market right now however price keeps rising. These financial gurus always find ways to explain away everything even though it is contrary to common sense. It's the futures traders, its OPEC, its the weak dollar, it's "Bababooey." One thing that remains constant, however, is that all these guys manage to talk out of both sides of their collective asses.
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10-22-2009 @ 3:51PM
JayJ said...
You read my mind Artie. Everytime gasoline prices fluctuate, they state a new reason that contradicts the last price change..ie Gas prices are going up because demand is down this time, then gas prices are going up because demand is up next time.
10-22-2009 @ 5:14PM
300M said...
Well said Artie, Off with their heads
10-21-2009 @ 4:13PM
Dennim said...
Finally someone is getting smart. Raise price of fuel, handle only half as much fuel and make the same profit.
Reply
10-21-2009 @ 4:53PM
bill said...
now how are we going to blame the Bush administration for this rise in gasoline prices. seems he has be out of office for quite some time and gas prices dropped but now they are on the rise. the great one, obama, had better talk to his arab and muslim friends and see what he can do to stop this rise in oil prices. oh maybe he can just rais his magic wand and it will all go away since he thinks he is a god.
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10-22-2009 @ 4:40AM
wargun said...
Sure, and the closed refineries aren't to be blamed on Obama - only the Middle East.
10-21-2009 @ 4:15PM
MOBS said...
Oil prices caused the recession that is occurring now.
Somehow, our wonderful government doesnt get it. Our wonderful government sat on their fat asses for 30 plus years and did nothing,, I said,, NOTHING,,after the oil crisis in the 70's..
So, just get ready for round 3 and more economic disaster.. no wait......... we have 'the Obaminator' now,,
hummmmmmmmm,, I forgot.
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