Posted in: Opinion,
by Patrick DeHaan on Mar 17, 2010 02:43 PM
With gasoline prices on the rise the past few weeks, many of you have heard multiple reasons (some from yours truly) on why gasoline prices are increasing.
First of all, the economy has long since bottomed out, and perception is that with an improved economy comes higher gasoline and oil demand. It's held true in the past, but what we saw in 2008 was a large recession, one that some called the largest in decades. Reality is that gasoline demand will be slow to bounce back, and prices are out of line with that reality.
Secondly, there are supply concerns that are completely overdone. Looking at this week's numbers, refineries used just over 80% of their capacity. In the unlikely case of a large increase in demand, there's plenty of room to produce more.
Last but not least, we're moving closer to Summer. Apparently with the increase in temperatures comes an increase in blood pressure for investors who begin buying up oil, concerned over what amounts to be a relatively small or short-lived problem. It's the time of year that the smallest refinery issues become the largest concern. Any supply and demand news that typically is a non-event becomes the only thought, however reckless, driving prices higher. Investors are much more sensitive during the Spring and Summer as the stakes rise to meet demand for the Summer months.
This year, however, is not the typical Spring. In years prior to the recession, refiners had to be at the top of their game with production reaching near capacity. There were concerns nearly every year that demand may outpace supply. This is definitely not the case this year. Refiners are faced with lower demand and too much spare capacity. I do have to say that many concerns that have driven up gasoline prices are largely unfounded or unworthy of such hype. The dollar moving a penny can somehow result in gasoline prices rising as much as a nickle. Overblown? I'd say so.
Another thing to think about- springtime logistics for refiners. Shipping product only to certain areas, making sure refiners meet deadlines and local fuel standards becomes ever difficult. You can count on these government regulations adding to the price you pay this time of year as twenty different types of fuel begin production. I've floated the idea before of having one type of fuel nationwide, and while that idea may cost more today to implement, it would end up easing logistical and supply issues that drive up prices meaning lower prices down the road.
For tomorrow, I'll comment on today's Department of Energy report and what it means as prices continue to head higher.