honoluluadvertiser.com

Sponsored by:

Comment, blog & share photos

Log in | Become a member
The Honolulu Advertiser
Posted on: Wednesday, April 12, 2006

What's driving gas prices up so high?

 •  Expect another double-digit gas price hike

By John Waggoner, Mindy Fetterman and James R. Healey
USA Today

If you hear strangled screams, it's probably because you're near a gas station.

The U.S. Energy Department says gas prices will be 11 percent higher this summer than last.

Why are prices so high, and how will it affect you? Some questions and answers:

Q. Are gasoline supplies still down because of the last summer's hurricanes?

A. Yes, more than seven months after Hurricanes Katrina and Rita destroyed more than 100 oil platforms in the Gulf of Mexico and damaged major refineries along the Gulf Coast, refining capacity remains down.

The third-largest refinery in the U.S., the British Petroleum refinery in Texas City, Texas, just started up again this month after being shut after the hurricanes and after a fire that killed 15 people a year ago.

Gasoline production is still off by about 700,000 barrels a day, says Tom Kloza, chief oil analyst for Oil Price Information Service in Wall, N.J. But much of that will be coming back on line soon, he says.

"The next 30 days are going to be hairy," Kloza says. "But there's a lot of capacity coming back on in May."

Q. What else is pushing up gas prices?

A. Oil prices accounted for 59 percent of the price of a gallon of gas at the pumps, according to the Energy Information Administration. That's up from 47 percent in 2004.

The price of a barrel of light sweet crude oil soared from $53.71 a barrel a year ago to $68.98 yesterday. Prices are rising because of increased world demand — especially from China and the U.S.

Production hasn't kept up. The world produces about 86 million barrels of oil a day. Sounds like a lot, but it's not, because the world consumes about 85 million barrels a day. "For all intents and purposes, supply and demand are balanced out," says Charles Swanson, industry practice leader at Ernst & Young's Houston-based energy center.

Because supply and demand are so tightly matched, commodity traders worry that any increase in geopolitical risk could reduce supply and send prices soaring. Right now, some of the biggest producers — Iran, Nigeria and Venezuela — are wrapped in risk. Fears of a shortfall in supply add about $20 a barrel to the price of oil, says Mark Zandi, chief economist for Moody's Economy.com. Commodity traders are also worried about the beginning of the Atlantic hurricane season on June 1.

Q. Are oil companies gouging consumers?

A. To a large extent, they are simply passing on increases in the price of crude. On the other hand, they're not starving, either. ExxonMobil recorded a $36.1 billion quarterly profit in January, the largest quarterly profit in history.

Oil companies argue that profits go to fund further exploration. And, says Kloza, speculators have to take part of the blame by pushing up oil prices in commodity markets, where oil is bought and sold.

Q. If people drive less, will prices fall?

A. Yes. U.S. motorists consume about 10 percent of the world's petroleum production. But don't hold your breath. So far, the consumer response to higher gas prices has been "incredibly muted," Zandi says. He thinks it would take prices above $3 a gallon for an extended time for consumption to drop.

Q. Will the fuel-price increases finally flood showrooms with really cool, fuel-sipping vehicles?

A. Nope. A few additional gasoline-electric hybrids will be introduced soon, but those were planned anyway.

Also, it takes time to shift production to smaller engines — four-cylinders instead of V-6s, for instance.

Most experts don't think gas prices will remain this high for long. The government is predicting that prices will fall again later in the summer.