Rising US gasoline prices once again are the topic of many current headlines. Gasoline pump prices already are 26¢/gal higher than a year ago and the peak summer driving season—which typically begins around Memorial Day—hasn't even started.
Tensions in the Middle East, supply issues, and a rise in global oil demand all contribute their part to the current rise in oil prices, which accounts for nearly 75% of the price paid at the pump. Taxes account for about 12%, while refining, at 6%, and distribution and marketing, also 6%, round out the total price.
At this writing, prices for West Texas Intermediate crude was hovering at $106-107/bbl, which is an increase of 10% from a year ago. Brent crude prices also have risen, up 16% from a year ago—from $108.52/bbl in mid-March 2011 to more than $126/bbl.
The latest price spike at the pump has affected our driving habits; gasoline consumption continues to decline. Consumption of unleaded regular gasoline has fallen for the last 2 weeks and is down 5% from a year ago. The latest data available released from US Energy Information Administration shows finished motor gasoline for the latest 4-week average at 8.417 million b/d, down 7.2% compared with 9.017 million b/d a year ago.
Favorable events
Despite the recent rise in prices for US crude oil and gasoline, our economy isn't feeling the pinch—yet. Economic growth for the US is starting to rebound. Traditionally when demand is down due to higher prices, our economy typically starts to slow down. "It's surprising to see a recovery in the US with demand for gas as low as it is," said Avery Ash, manager of regulatory affairs for the American Automobile Association. "People are finding ways to save money by making a protracted effort to save on gasoline."
Refiners are experiencing big wins during this time but not just from higher prices. Product exports are at an all-time high thus leading the US as a net exporter of finished products. With higher domestic supplies of crude coming online—production at roughly 5.8 million b/d—up about 4% from a year ago, and lower gasoline demand are current market indices. These leading indicators demonstrate that the US could remain in a net export position for some time.
The automobile industry currently is showing signs of growth during this period of high prices. Consumers are trading in their less fuel-efficient cars now that they can afford to replace them after emerging from recent recession. February 2012 sales, according to automobilemag.com, showed an increase in sales for the Big Three American automakers: Chrysler, Ford, and GM. Compared with year-ago sales figures, Chrysler showed the highest increase with a resounding 40% rise in sales. Ford reported a rise in sales of 14%, while GM only gained 1%. Joe Lorio, with automobilmag.com, commented: "With gasoline prices shooting up, towards month end [in February], it's perhaps no surprise to see particularly strong sales among small cars, but if gasoline prices continue to spike, it could choke off new-car demand overall, and end this party just as its getting started."
Economic theory
In theory, the lack of demand is supposed to lead to lower prices. Economist Edward Yardeni of Yardeni Research hypothesized that speculators and traders held "long" contracts gambling that prices would rise based that the conflict with Iran will be worse, not because of a strong demand for gasoline in the US. Consumers are buying vehicles with better gas mileage and driving less.
James Williams, an analyst at WTRG Economics, summed it up this way: "All signs point toward a sudden price decline should there be a deescalation of tensions with Iran. Right now, the price of crude is at odds with the fundamentals."
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