Demand unlikely cause for soaring gas prices

There is an apparent upward thrust in gas prices early this year. Since December 2011, prices of gasoline on a national level went up by above 8 percent, to $3.52 a gallon according to the Energy Information Administration (EIA).

Historically, prices of gasoline normally go up during the first six months of the year, but unlike the past few years, gas prices surpassed the $3.50 level far too early this year. This year’s price movement may be compared with that in 2008 when crude oil prices per barrel reached $140 in the early summer months. In April 2011, gas prices hit $3.98 then tapered off the following month.

A $4.00 gas price may adversely affect global economy, which had early on shown signs of possible recovery.

Equity analyst for Morningstar, Jason Stevens said, “Anytime the economy spends 4 to 5 percent of GDP on oil, then you’re getting close to stall speed.”  This is what happened a year ago when countries like Japan and Libya blew up and prices went soaring. Demand growth inched a bit, however, economic growth has stalled.

Tom Kloza of Oil Price Information Service stated that it comes as a surprise that gas prices have gone up despite a slack in U.S. demand. The very low gas consumption is comparable with the situation in the summer of 1997. The public is concerned because while consumption is at a low levels, prices are still hovering up in the higher range of their comfort zone.

Kloza presumes that the rise in gas prices cannot be traced to demand but to the influx of funds into gas futures contracts at the onset of the year. “We’ve seen about $11 billion of speculative money come in on the long side of gas futures,” Kloza disclosed.

Current crude oil prices, particularly the way they’re moving up, had adversely affected oil refineries – some have opted to close down because of high operating losses. These oil refineries are not getting enough margin from gas sales because of soaring oil prices. Sales are not enough to gain a comfortable crack spread. Crack spread is the term generally used by refineries for the net amount gained after deducting cost of crude from sales of “cracked” crude, or what we call refined gasoline.  Refining capacities in the United States have declined amid rising prices.

It is noteworthy though that gas prices vary from state to state, prices in California, for instance, are about one dollar higher than those in the state of Wyoming. The cheaper gas in Wyoming and in some other nearby states is due to the cheaper crude marketed by Canada to the upper Midwest states.

Kloza went on to comment that this is the very first time that he’s seen such diversity in crude oil prices and that it’s something quite unexpected.