Posted on: Wednesday, October 6, 2004
Crude oil prices scrutinized
By Alejandro Bodipo-Memba
Detroit Free Press
DETROIT — Gasoline prices aren't expected to drop from current levels this fall and winter, but as cheap fuel becomes a thing of the past, some industry experts are scrambling to explain why crude oil prices are rising faster than retail gas prices — and what that means for consumers.
Crude oil hit a record $51.09 a barrel yesterday, as oil production in the Gulf of Mexico struggles to get back to normal levels following Hurricane Ivan. The price of crude was the highest ever recorded since futures began trading on the New York Mercantile Exchange in 1983. Over the past year, futures have jumped 67 percent.
Some industry professionals believe the price could go as high as $55 a barrel.
Meanwhile, gasoline prices have also surged in recent weeks. Nationally, the average price for regular-unleaded gas rose 2.1 cents to $1.94 a gallon in the week ended Monday Oct. 4. It was the highest price in nearly four months.
"The days of cheap gas are gone," said Jim Rink, spokesman for AAA Michigan. "I would be surprised to see prices that low at all this year. Most analysts, and we at AAA agree, that we can expect little relief through the first of the year."
Hurricanes blamed
High gas prices can be blamed on the loss of more than 11 million barrels of crude oil production over the last two weeks following hurricanes in Florida and Louisiana. In addition, industry observers say growing global demand for petroleum and unstable political situations in several key oil-producing nations have kept fuel prices high.
But what doesn't make sense to some oil experts is why the price of gasoline hasn't risen as dramatically as the price of crude oil, which has almost doubled in three years.
Rink said he couldn't put his finger on why pump prices aren't keeping pace with oil prices. Under normal circumstance, especially during the summer driving season, pump prices usually rise and fall in tandem with crude oil prices.
Others seem to think they know the answer — and it is more sinister than mere market fundamentals.
"What we're seeing is the creation of an oil bubble, much like the Internet bubble" of the late 1990s, said Fadel Gheit, senior oil analyst with Oppenheimer & Co. in New York. "Commodity speculators are to blame. No one really thinks that $50-a-barrel oil is justified."
Commodities bubble
A commodities bubble occurs when prices are artificially boosted, because institutional investors such as hedge funds bet on the energy markets.
Gheit, a longtime observer of petroleum trends, suspects crude oil prices are currently inflated by around $20 a barrel, based on his reading of market fundamentals. He suggests that perceived fears of potential supply disruptions in the Middle East and further uncertainty in Iraq have been "baked" into the current price of crude without much justification.
In recent months, the Organization of Petroleum Exporting Countries, Russia, and several other oil-producing nations have ramped up supply, in order to meet increasing demand from emerging economies such as China and India, according to Gheit. In addition, Iraq has increased its oil production to 2.8 million barrels a day since the end of official combat activities in Iraq some 14 months ago.
