Gasoline prices, you may have noticed, are rising again. Can you have a recovering economy and lower gas prices? Perhaps it depends on how much war talk is going on.
Many of the experts say the price of a gallon could soon hit $4, and they’re probably right. The question is how much higher than that they’ll go.
Forbes suggests today that gasoline could hit $7 or $8 a gallon if strike in Saudi Arabia spreads:
“This is another one of those possible flash points in the region,” says Georgetown political scientist Paul Sullivan, “that could become a much bigger fire if it is not contained early on.”
Sullivan is referring to an internal rebellion in Saudi Arabia.
According to Bloomberg, fighting is getting worse in the east of the country, with police and armed Shia protesters. The protesters killed 11 police in October. Since then, police have killed seven Shia, according to human rights observers.
Here’s what makes the situation so volatile: The east is where the Saudi oil is. It also has a majority population of Shia Muslims — in a nation ruled by Sunni Muslims for the last 80 years. We have been talking about it a lot, but the fact is you don’t need an Israeli or U.S. attack on Iran to drive gas prices up dramatically.
Generally, the price of gasoline is pegged to the demand for it, so naturally a warming economy pushes energy prices higher. But Bloomberg says the price has been going up while demand has continued to drop. What gives?
Strangely, the current run-up in prices comes despite sinking demand in the U.S. “Petrol demand is as low as it’s been since April 1997,” says Tom Kloza, chief oil analyst for the Oil Price Information Service. “People are properly puzzled by the fact that we’re using less gas than we have in years, yet we’re paying more.”
Kloza believes much of the increase is due to speculative money that’s flowed into gasoline futures contracts since the beginning of the year, mostly from hedge funds and large money managers. “We’ve seen about $11 billion of speculative money come in on the long side of gas futures,” he says. “Each of the last three weeks we’ve seen a record net long position being taken.”
Refineries have also been getting squeezed by higher crude prices over the past several months, forcing some of them to shut down rather than operate at a loss, says Stevens. “The price that refineries have been paying for crude was roughly flat, while the price they were getting for gasoline was lower than what they needed to make their crack spread,” he says. A crack spread refers to oil refineries’ profit margins and is roughly the difference between what they pay for crude oil, and what they make by “cracking” crude into petroleum products such as refined gasoline. As the U.S. refining capacity has decreased, prices have begun to rise.
How bad is the current price? When adjusted for inflation, not that bad. Around the Twin Cities, for example, some chains are selling gas for $3.39 a gallon. That’s nearly the same price we paid in 1981, when today’s $3.39 was equal to yesterday’s $1.37 (the 1981 price).