Can anyone stop the rise in oil prices?
Oil tops $57 a barrel, and a gallon of gas is at $2.05. Prepare for $2.50.
As the price of oil nears $58 a barrel, the price of regular gasoline at the pump may soon exceed $2.40 a gallon. And if oil crests above $60 a barrel, Americans could be paying as much as $2.75 a gallon by the time the summer driving season gets under way.Skip to next paragraph
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This sudden spurt - frustrating everyone from OPEC oil ministers to anyone filling up their tank - seems to be an intense combination of big demand, limited spare capacity, and speculation. "The market is pretty tight right now," says John Felmy, chief economist at the American Petroleum Institute (API).
Indeed, Thursday morning on the energy futures markets, the price of crude oil hit a record price of more than $57 a barrel (not adjusted for inflation). The price of gasoline also hit a record at $2.05 a gallon nationally, according to AAA.
"Who knows where it will go?" says Mike Fitzpatrick, a trader at FIMAT USA, a commodities trading firm. "Speculation is running rampant."
Mr. Fitzpatrick says part of the increase comes from new investors and speculators entering the oil markets. "Now, we're seeing pension funds, equity funds, people who feel they need a commodity component in their portfolios," he says. "They are unencumbered by numbers, by history."
Despite the high prices, energy demand continues to be strong. Some of this is weather-related: Cooler than normal temperatures have kept demand for home heating oil strong in the Northeast. "It's been a long, cold end of winter," says Mr. Felmy.
At the same time, Americans are driving more. On Wednesday, API statistics showed a 1 percent gain in gasoline demand in February. Some of this increased demand is the result of a healthy economy, says Felmy.
Globally, demand remains strong as well. The main forecasters continue to predict that China will represent a third of growth in demand. Some of the Chinese appetite comes from work on filling a strategic petroleum reserve of up to 750 million barrels of oil.
This week, OPEC said it would try to meet some of this higher demand by increasing production by 500,000 barrels of oil per day. Most of this will come from Saudi Arabia, which has spare capacity. "Unfortunately, it's the heavier grade, not the sweet stuff [which is better for making gasoline]," says Mark Baxter, director of the Maguire Energy Institute at Southern Methodist University in Dallas.
If crude prices remain at this level, Mr. Baxter predicts the price of gasoline could soon hit $2.40 a gallon. However, if the price rises to $60 a barrel, he says the price at the pump could move as high as $2.75 a gallon.
The price spike comes at a time when Congress is focused on energy. This week, the Senate, in a budget bill, moved to open up drilling in the Arctic. The legislation must now pass the House. And on Wednesday, President Bush, in a press conference, said he was concerned about the price of energy. "I'm concerned about what it means to the average American family when they see the price of gasoline going up," he said.
Indeed, the price of gasoline is now 33 cents a gallon higher than it was last year at this time. On an annual basis, this means that consumers spent an additional $40 billion at the pump. "It's a lot of income spent on gas that could have gone to other goods," says Felmy.
In fact, now that the price of gasoline is above $2 a gallon and rising, Baxter thinks Americans will start to change their driving habits. "They will become more efficient, make fewer trips," he says. "How high will it have to go before consumers start to trade in their SUVs for more efficient or hybrid types of vehicles?"
Some of those moves may be happening already. General Motors and Ford, which make many of the large SUVs, report significant increases in inventories. "The most recent numbers indicate some pretty dramatic declines in the sales of SUVs, particularly the larger ones," says Felmy.