Why Are Gas Prices Climbing? / Economic Growth in Uncertain Times Seems to Be a Factor
Posted on: Monday, 6 March 2006, 12:01 CST
By GRE EDWARDS
Gasoline prices have been climbing since early December - after falling from post-Hurricane Katrina highs of more than $3 per gallon.
The price in the Richmond area yesterday, according to AAA Mid- Atlantic, was $2.27 per gallon, up 4 cents per gallon since Friday. A year ago, it was $1.66 per gallon.
Recent price increases appear to be based less on supply-demand economics and more on a perception by oil traders that a growing economy will increase demand for fuel at a time when the reliability of the U.S. gasoline supply is shaky.
The situation in the Middle East is unsettled, and the capacity to refine gasoline in the U.S. remains tight. But U.S. crude-oil supplies are greater than the five-year average, and warmer-than- normal winter weather has eased the demand on oil for home heating.
The lack of dramatic developments in the oil markets to account for rising prices has some observers scratching their heads.
"The question [by traders] about whether we will have enough gasoline for the spring and summer seems to be asked earlier and earlier," said John Zehler Jr., a Mechanicsville petroleum distributor.
Increased activity by investment funds in the petroleum markets seems to support the notion that the prospect of global economic growth is enough to keep prices high, he said.
The U.S. average price of regular gasoline yesterday stood at $2.327 per gallon, which was 8.9 cents per gallon higher than a week earlier and 53.4 cents higher than the same time last year.
But the February futures price of regular gasoline on the New York Mercantile Exchange - which tends to guide real-time wholesale prices - dropped nearly 5 cents per gallon yesterday and crude oil by 71 cents per barrel, indicating that traders may have concluded that oil markets are overheating.
The price of petroleum is 15 percent to 20 percent above where it should be, said Steve Yetiv, an expert on global oil at Old Dominion University and author of the oil-industry history, "Crude Awakenings." Said Yetiv, "There is no good reason, based on [economic] fundamentals, that the price of a barrel of oil should be where it is."
Geopolitical concerns are more limited than in the past, Yetiv said, despite worries about Iran's nuclear program, Russia's cutting natural-gas supplies to Europe and the leadership crisis in Israel. These are unsettling things, he said, but there has been more to worry about.
"Sometimes, there's no great reason for a market to move," Yetiv said. "Sometimes, it's fundamentals; sometimes, it's psychological."
Contact staff writer Greg Edwards at gedwards@timesdispatch.com or (804) 649-6390.
ILLUSTRATION: PHOTO
Source: Richmond Times - Dispatch
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