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.

References

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

17 thoughts on “Why Are Gas Prices Rising?”

  1. as usual, the voice of reason. I don’t fully understand why people don’t get the conservation message. Whether one lives in urban, suburban, or rural space, we all need to conserve every form of energy and be smart about how we use it.

  2. Agreed, the voice of reason. I always seek out Robert’s posts at TOD, and while he remains convinced the peak is a fair way off I can relax.

    Robert, just out of interest, could you list some criteria that would convince you that the peak is nigh? e.g. price point, inventory levels, sustained fall in production while prices are rising etc.

  3. Robert, just out of interest, could you list some criteria that would convince you that the peak is nigh? e.g. price point, inventory levels, sustained fall in production while prices are rising etc.

    This is a very good question, and one that I should expand upon in an essay. I started to go ahead and write this up as an essay, but I think I will leave the current one up through Monday.

    The question is difficult. People have so many different opinions on Saudi, and Stuart Staniford, whose views I respect, is putting forth the argument that Saudi has now peaked. I have detailed what I think is the problem with that argument: Namely, when they started cutting production oil inventories in the U.S. and in every area for which we have information were high and rising. That lends support to Saudis claim. In fact, I just posted the following at The Oil Drum, which represents the dates of the 10 highest levels of U.S. crude stocks this century (listed in chronological order).

    Apr 07, 2006
    Apr 14, 2006
    Apr 21, 2006
    Apr 28, 2006
    May 05, 2006
    May 12, 2006
    May 26, 2006
    Jun 02, 2006
    Jun 09, 2006
    Jun 16, 2006

    Those dates coincide with when the Saudis were making their cuts. If the inventories had been low, or even in the normal range and falling, it would have called their claim into question. Not long after they began their cuts, prices started to fall and are still well off their highs, while inventory levels are still high. I think this lends further support to the Saudi argument that the world would have been over-supplied had they not made the cuts. So, that is why I don’t agree with Stuart. It doesn’t prove he is wrong, but it would mean that Saudi had peaked at a very convenient time for everyone – just when the world was calling for less oil.

    But, that doesn’t answer your question. Forecasting peak is a tough business. I have come to appreciate the difficulty after going back and looking at the case of Texas. Some cite Texas as very representative of Saudi in that they were both swing producers and had similar production profiles. But, I have gone back and modeled the data that were available at the time, and the forecasting methods that are used would have started to call a Texas peak in 1960, and the numbers were so erratic that the 1972 peak would not have been confidently called until 1977 – 5 years after the actual peak. I don’t think many of the forecasters appreciate that these models often only become reliable years after the peak, because currently they are applying them to historical data.

    So, using the available modeling techniques, it is going to be difficult to forecast a Saudi (which will probably coincide with a worldwide) production peak. So, how can we do it? The short answer is that we can’t. So, I try to look at what they are doing with respect to what the market is doing. If prices continue to climb, they have an incentive to produce more. But there has to be a place to put it. So, we need inventory levels to come down. If inventory levels come down, that says that the market is being undersupplied, which, combined with higher prices, should give the Saudis ample motive for increasing their production. If they fail to respond by raising production, I would swing to the camp that their current decline is involuntary.

    However, as I have pointed out to Stuart, if they are actually holding a number of fields that they haven’t developed because they hadn’t forecast that the world would need the oil yet, they could just start bringing one field after another online. So, while their existing production may decline, the new fields may keep the decline in check. I just wish we could get independent auditors in there to verify their reserves. Then we would know.

    Having said that, I do think world oil production will peak around 2012, plus or minus 3 or 4 years. So, I believe we certainly need to be taking action to prepare for a post-peak world. I don’t think the majority of the public appreciates what is going to happen when production actually begins to decline. The higher prices of the past couple of years are probably mild compared to what’s in store. So, I definitely don’t think we can relax. But I do fear that the policy-makers will not take action until peak is obvious. If that’s the case, there is going to be (at a minimum) hardship for a lot of people.

    Cheers, Robert

  4. Considering that all big oil producing nations, all big oil consuming nations and all big oil corporations have a PROVEN history of manipulating oil prices (i.e. above ground issues), I don’t think it is fair to:

    – expect that people are not skeptical sometimes
    – that people should only think of below ground or refinery capacity or shipment issues, when they think of oil price swings

    Oil prices have been manipulated both up and down knowingly throughout the decades without any immediate & real supply/demand issues in the background.

    Now, this time, whether each price swing is due to real physical constraints, lack of capacity, speculation or outright manipulation is of course difficult to know for those of us not deep in the intelligence trade.

    Of course, most of us here and at TOD would believe that below ground & refining/production capacity constraints do play a major, if not the key part this time.

    But to expect people to somehow become believers in physical reality after few decades of exposed lying and manipulation?

    Isn’t that a bit naive too?

    Nobody is _innocent_ here. Not consumers, not producers, not oil companies.

    All have acted at some time in non-optimal ways, and likely will remain to do so (non-optimal: meaning pure free non-distorted markets and rational economic choice).

    There are no pure “free markets” of supply/demand operating here.

    It’s a complicated web of financial hedging, political cat’n’mouse games and real supply/demand issues that no oil company can immediately fix.

    IMHO, anybody who believes otherwise is deluding herself.

    Of course, this is not to say that people should not PREPARE for more/bigger swings in the future, because they can’t really control the price in any other way, but by cutting their own dependency/consumption rate.

    On that I agree 100%.

    But I don’t blame people for being skeptical, esp. considering most of them don’t have a background in oil business nor do they have time to hang out at EB&TOD several hours a week 🙂

  5. Good job, Robert, lobbying on behalf of the oil industy. Someone needs to protect ExxonMobil … and ConocoPhillips, too.

  6. Considering that all big oil producing nations, all big oil consuming nations and all big oil corporations have a PROVEN history of manipulating oil prices (i.e. above ground issues), I don’t think it is fair to:

    I have addressed this before. ExxonMobil, the biggest U.S. oil company, controls 3% of the world’s oil. They don’t have the stroke to manipulate prices. Saudi Arabia and OPEC, on the other hand, control a far greater portion of the world’s oil supply, and as such, can definitely manipulate prices. That’s what OPEC is all about: controlling prices. So, I never said that oil prices are never manipulated. But I have asked many times, without success, for someone to explain to me how a company that controls 3% of the world’s oil could manipulate prices.

    Cheers, RR

  7. Good job, Robert, lobbying on behalf of the oil industy. Someone needs to protect ExxonMobil … and ConocoPhillips, too.

    Hey Dave. Still nothing to say, eh? I knew it was you, because not too many other people derive pleasure out of these drive by postings where they say absolutely nothing.

    But, the mission of this blog is to educate people – even those as misinformed as you have shown yourself to be – about energy issues. So, did you have a question? I answer questions, sometimes even from trolls.

    RR

  8. Hello Robert,

    I can see that our conversation isn’t going very well. I did listen to your conference all with the API economists and must say … you did well.

    Did you want any questions from me?

    No, You aren’t going to get any. I have nothing to say to ConocoPhillips.

    The oil industry is in the business of exterminating humankind from the Earth. They are succeeding, too. I wish it well.

    Keep investing in the oil industry, Robert. It will keep you in your wealth for decades to come.

    David Mathews
    http://www.geocities.com/dmathew1

  9. Hello Robert,

    I can see that our conversation isn’t going very well. I did listen to your conference all with the API economists and must say … you did well.

    Did you want any questions from me?

    No, You aren’t going to get any. I have nothing to say to ConocoPhillips.

    The oil industry is in the business of exterminating humankind from the Earth. They are succeeding, too. I wish it well.

    Keep investing in the oil industry, Robert. It will keep you in your wealth for decades to come.

    David Mathews
    http://www.geocities.com/dmathew1

    LOL! No, folks, I am not psychic. You see, Dave is a very strange bird. So strange, that his posts are obvious even when he doesn’t sign them.

    A bit of background for you. I don’t watch TV. Dave has 200 channels on his satellite. I walk to the store. Dave drives. My fossil fuel usage is a fraction of Dave’s, so I am doing more to combat oil usage than Dave is. He just thinks I am evil because I work for an oil company. Dave is the worst kind of hypocrite. He preaches and preaches about the evils of the oil industry, without which he probably wouldn’t even be alive. You can bet he would scream the loudest if oil companies stopped delivering his gas. He just got banned from The Oil Drum because he was always abusive to other posters, and never added anything of value. You can see the pattern in the two posts above.

    Dave, this is an energy blog. It is for discussing energy issues. If you have some energy issues you would like to discuss, then you came to the right place. If you came here to insult and cast aspersions, well you came to the wrong place. I understand that you may have some mental health issues – that was the consensus of the TOD staff – but I unfortunately can’t help you out there. And I do want you to understand, that while I never delete people’s posts – even those who attack me without cause – I do have the power to do this and I won’t let you infect this blog as you did TOD. Seek some help. Seriously.

    RR

  10. For those who might wonder, I have started deleting Dave’s posts. I hope he gets some help soon. For those who think I am joking, e-mail any of the staff at TOD and ask them about Dave’s mental state.

    For Dave, understand that there is a difference between criticism, which is not what you are doing, and just hurling out abuse, which you are. I know you think you are martyred when you get kicked off a board, so I am going to martyr you. You are no longer welcome here. I have let people get away with a lot worse, but I saw what you did at TOD. You added nothing at all of value, and we have gone back to civil discussions on these important issues since you were booted. So take your hypocrisy elsewhere, and if you are so opposed to oil companies, please stop using our product.

  11. The oil industry is in the business of exterminating humankind from the Earth. They are succeeding, too. I wish it well.

    I doubt that is true Dave. Do you really think oil executives sat in their corner offices and conference rooms talking about mission statements and business models, and came up with, “Let’s make it our mission to exterminate humankind from the Earth.”?

    That’s about the dumbest thing I’ve heard.

    There’s no question humans are addicted to the energy oil provides, but that’s not the fault of the oil companies. (Sidebar: If oil is as heroin, then ethanol is as methadone. Not a fix, only another addiction.)

    There’s no question that humans will someday be extinct, but that has nothing to do with oil. When it happens it will most likely be an asteroid or meteor strike, or an encounter with a Black Hole.

    The Earth has existed for five billion years or so, and humans have been around for only about 100,000 years of that time.

    Most scientists think the Earth will last for about another five billion years until the Sun expands past the Earth’s orbit and makes global warming a truly inconvenient reality. It would be hubris in the extreme to think humans will last the full five billion years until the Sun engulfs the Earth, no matter what the oil companies do, don’t you think?

  12. So, we need inventory levels to come down. If inventory levels come down, that says that the market is being undersupplied, which, combined with higher prices, should give the Saudis ample motive for increasing their production.

    Robert, its my understanding that inventory levels in OECD countries are coming down (or at least forecast to fall to multi-year lows) or am I misinterpreting this graph?
    http://www.eia.doe.gov/emeu/steo/pub/gifs/Slide24.gif

    If true, we have one piece of the puzzle (falling inventories) and while oil prices are not rising they are at historically high levels and have been flat (around $60/bbl) for many months. Global oil production is not falling either, but has been flat also for several years.

    Its going to be an interesting (northern) summer and hurricane season.

  13. I can agree and disagree with some of the posts here. Firstly, I understand that, because of mergers over the last few years, the largest 5 oil companies control some 56% of the market and so they can indeed influence prices. Secondly, I do not understand why companies in an expanding market would fail to increase capacity. I refer to the fact that no refineries have been built in the last 30 years. If any action, or lack thereof, was ever designed to limit supply and thus increase prices, this must surely be it. I know that the refineries are incredibly expensive to build and take a long time to construct but when you consider that the oil companies have pocketed something in the order of $228 Billion since Bush came to power, there certainly is no shortage of funds. There is of course no incentive for the oil companies to build now since they are making so much money they do not know what to do with it.
    However, having said all that we are also to blame with our love of large cars and trucks etc.
    I believe that the oil companies should be compelled to invest more heavily in alternative fuels. Ethanol is not the answer since mileage suffers, electric cars are not the answer because the environmental impact of millions of used batteries being dumped does not bear thinking about. I believe that Hydrogen power could be an answer if it could be produced without using more power than it supplies, it is also one of the easiest on the auto industry since only minor alterations need to be made to current vehicles (BMW and Mercedes are well advanced here) but there is, as yet, no infrastucture and this is where the oil companies could and should contibute.
    I guess I have gone on long enough.

  14. Gas went from 1.09 to 2.25 within a matter of weeks. So, a huge surge in population and usuage? Not. There is no excuse for greed. There is not a shortage of oil. There is not a shortage of petro there is a shortage of ethics and accountability. Greed, greed, greed, greed, greed, greed. Anyone defending these criminals is walking in self delusion.

  15. actully the prices rise due to greaty oil company just trying to keep profits high,wheather you conserve energy or not, that how they got rich and they intend to stay that way

  16. the answer is obvious. obama and nancy pinocchio have friends in the oil industry so they let them raise the prices. after all when prices went up under bush that was the reason everyone put forth.

  17. how can stores raise prices 2 times in 2 days when they don't receive any loads in those days?

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