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Some signs of relief on gasoline prices

But short-term pressures may keep them up for a while.

By Ron SchererStaff writer of The Christian Science Monitor / June 23, 2008

Cheaper wheels: A man rode his bicycle past a gas station advertising gasoline prices at over $4 a gallon in Arlington, Va., June 11.

Jim Young/Reuters

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Some of the long-term factors that have pushed oil prices to record levels are starting to change.

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In large part because gasoline prices are over $4 a gallon, demand for fuel in the US is falling for the first time in 17 years. China is raising prices for gasoline and diesel – a move that might ultimately lower demand. And, on Sunday, there were signs supply might increase as Saudi Arabia's oil minister indicated that the country would increase production through the end of the year if needed. Iraq is also set to sign contracts with foreign companies to hike production.

"It's all a step in the right direction," says Phil Flynn, an oil analyst and trader at Alaron Trading in Chicago. "These are certainly signs to the market that prices can't just continue to go up."

However, some of the shorter-term factors are becoming worse.

On Friday, the energy markets were digesting news of an attack on a Royal Dutch Shell oil platform in Nigeria that shut down over 200,000 barrels of oil per day in production. Then energy traders fretted over news of an Israeli military exercise involving 100 planes, with some speculating that the aim of the exercise was to send a message about Iran's nuclear ambitions.

And, it's not clear how badly the US corn crop, used to make ethanol, a gasoline additive, has been hurt by the flooding in the Midwest.

"These factors are keeping the price up for now," says Mike Fitzpatrick, vice president of energy risk management at MF Global, a commodities brokerage.

By the end of day Friday, the price of oil had closed at $134.62, down 24 cents for the week. Nationally, the price of gasoline is $4.07 a gallon, according to American Automobile Association, down 1 cent a gallon from the record high.

Short term tensions

The attack on the Royal Dutch Shell platform occurred last Thursday, about 75 miles offshore. Although Nigerian rebels had attacked oil rigs before, this is the furthest from shore they have ventured. "When the manager saw the attack, he immediately shut down production of the oil and natural gas," says Rainer Winzenried, a spokesman for Shell in The Hague, Netherlands.

As of Sunday, the Shell platform was still shut down. Mr. Winzenried says Shell has declared force majeure, a legal move that frees the company from its obligation to deliver oil. "It can only put upward pressure on the prices," says Mr. Fitzpatrick.

The energy markets were also roiled by a news story in The New York Times that Israel had mounted a military exercise involving 100 F-15s and F-16s. The article linked the exercise to Iran's nuclear ambitions. "What are the Israelis thinking?" asks Fitzpatrick. "It lights up the whole area."

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