Posted in: Gas Prices,
by Patrick DeHaan on Sep 10, 2010 11:01 AM
Many people have asked and continue to wonder- "why are gas prices rising?" There are many answers, all of which are quite complicated. See- gasoline prices are complicated. How prices are determined, how wholesale prices rise and drop- its not easy to figure out.
I thought that many would like to know- what's driving gas prices today? There are a few factors, some more responsible than others, for prices rising as of late. Keep in mind these factors are all my opinion- there's no ultimate answer to what is most responsible- but I'll try to state what I believe and keep any bias to a minimum, or better yet- have no bias.
Factors currently behind gasoline prices:
1) The U.S. economy/Jobs. As of the last few weeks, unexpected drops in new jobless claims have given the market positive sentiment. The feeling is that with any improvement in jobs will lead to a stronger economy, thus driving more people back to work, and increasing demand for gasoline in the long run.
2) World economy/banks/outlooks. Increasingly, inventors and oil players are looking at other economies for increased demand of gasoline and oil. In some of those countries, there is positive news (even though I don't think it outweighs the negative). Many times that positive news has to do with a country's outstanding debt. Some countries are reigning in, and in the long run, this may strengthen a country and increase demand. If you're noticing that traders and prices are impacted more on long term things, you're right.
3) Refineries/maintenance. Fall is the time of year that many refineries shift their focus from refining oil into gasoline to refining oil into heating oil. Plants will slow production of gasoline while they shift plants, adding risk of problems when the plants resume production. The reality is that even though investors are concerned, supply remains much above average.
4) Hurricane season. While this year's season hasn't been so terrible yet, traders are constantly having flashbacks to 2005 and 2008 this year. So far in 2010, we've seen a few weeks that have featured as many as four storms that we've had to track. Even though the storms this year haven't done much damage, with that many active storms at once, it brings back memory and concern that this year may get worse- impacting supply.
The things that aren't really impacting prices right now, but should be:
1) Supply. As I've outlined before, supply of motor gasoline is at all time highs for this time of year. Typically, supply drops as the summer progresses. This year, supply remained steady and closed out the summer at record highs. Moreoever, the U.S. has a record amount of oil in overall inventories (including the SPR). What sort of economic recovery can soak the excess up so quickly?
2) Demand. While demand for gasoline this summer was above last year, the economy has slowly improved, and we aren't seeing the negative activity that concerns people as much (banks going bankrupt, car companies folding). While demand remains above year ago levels, it was relatively unchanged this summer, up less than 200,000bpd on average. Taking supply and demand into consideration, there's no reason prices should average above $2.50/gallon.
Well, there you have it- for more or for less, that's what is influencing gas prices today and this weekend. Not to forget about the new crude pipeline spill in Illinois- which may also temporarily affect prices.