Yesterday morning, reluctantly waking to the rude static of the clock radio I reach for the snooze but decided against ten more minutes of sleep. Instead I readjust the dial trying to find the local NPR station’s elusive, ever-shifting frequency. Squeezed in between the new Latino station and another springing reggae on unsuspecting early morning listeners, the hourly news had already broken in.
National gas prices are expected to rise above $4.00 a gallon soon…
“What? Why?” I say out loud, the remaining sleep washing away. Listening closer, “…due in large part to an increase in the cost of crude oil, refinery maintenance shutdowns and the shift to the more costly summer blend of gasoline.“
Okay, well those are, on the surface at least, apparently credible reasons but pondering a bit more upn them a few questions arise.
Increase cost of crude
Should this be surprising? Probably not, but that doesn’t help guard against the shock, especially after hearing just last week, on the same top-of-the-hour newsbreak, that gas prices are expected to fall over the next year. So why the turn around? Why are are crude prices going up?
Well, supply disruptions or reductions due to natural disasters, regional unrest, increased demand and decreased production are a few reasons for temporary fluctuations. But the drivers of the increasing volatility of oil prices over the past dozen years are due in a large part to the futures markets or speculators. These are markets whose players hedge bets on future crude prices on what are essentially “what-if’s”. What if the hurricane hits the Gulf Coast? What if revolution breaks out in the Middle East? What if a particular dictator passes wind in the wrong direction?
Currently, there are no natural disasters impeding supplies. There are no new wars breaking out. Demand, in the US at least, is low and production has not decreased. The price increases hinge upon speculation market-based fear. But what is the fear this time around? Perhaps markets are hedging the supply will fall or global demand will continue to rise. Maybe speculation is betting on this double-whammy. A St. Louis Federal Reserve study found between 2004 and mid-2006 speculation contributed more to the price of oil than both global supply and demand combined. The study concluded, even though global demand is the primary long-term driver, from 2004 to mid-2008 speculation accounted for 15% of the cost per barrel. It was a significant contributor to the boom and bust cycle of this commodity. Whichever the reason, it’s not actual traditional market forces that are causing these increases, it’s the anticipation of those forces moving in a particular direction.
This, right now is why up here in Far Northern California, prices at the pump are already between $4.17 and $4.27 a gallon depending on the station. While demand for California demand hasn’t necessarily increased, the balance between supply and demand is precarious with little room for fluctuation. So a shutdown of on refinery and planned shutdowns of other, oil traders are hedging their market investments along this years disruptions. California isn’t the only area dealing with this problem. Prices at Midwest pumps jumped 22.8 cents the beginning of this month. This caused a subsequent jump in the average price nationally.
Shift to costly summer blends
This is puzzling one. While much of the country is still in the grip of winter, the season switch to the summer blend is already taking place. There’s still more than a week left in February and Spring doesn’t officially begin until March 20th. So why are refineries switching early this year? No one appears to know, no one is providing any answers on this one.
So what’s to be expected for 2013? Higher gas prices from now and on through the summer. The reasons provided are fairly questionable with few answers given. In the end it seems speculation is again the primary driver, benefiting a select few while the rest are left to suffer the burden of higher prices for travel and for all those goods and services we all depend on to manage our lives day by day.