Niagara Gazette

February 10, 2013

Gasoline prices surge for third straight winter

By Mark Huffman
ConsumerAffairs.com

— Here we go again. For the third straight winter, retail gasoline prices have accelerated.

The national average price of self-serve regular is over $3.54 a gallon, according to AAA. It's up 15 cents in a week and 25 cents in a month.

In case you've forgotten, the same thing happened in early 2011. At the time, the increase was attributed to worries in the market that political instability in Libya would lead to supply shortages.

In 2012, when prices shot up again, it was blamed on tensions with Iran over its nuclear program. The worry was that any kind of Persian Gulf dust-up would interrupt oil supplies.

No Middle East turmoil

This year, there's a shortage of oil-producing Middle East tensions but that has not prevented retail gasoline prices from making their annual February surge. So what's to blame for this year's pain at the pump?

According to a consensus among industry analysts, this year's price rise is mostly to be blamed on U.S. refineries shutting down for scheduled maintenance. In other words, a completely foreseeable and, perhaps, controllable set of circumstances has caused the market to spike.

Other reasons that have been given for the sudden increase in price is optimism about economic recovery, even though the economy declined in the fourth quarter. Also, the fact that refineries, once they are operating again, will be switching over to summer-blends, which are more expensive.

However, consumers with long memories will recall that these annual occurrences rarely seemed to result in the big price increases we have seen over the last three winters.

Don't blame the service stations

It's useful for consumers to also remember that their local service station operator is not to blame for the price at the pump. The station buys the fuel from a wholesale distributor, who obtains the product on the open market. Beginning last month, that market has been very active.

Gasoline futures, traded on the New York Mercantile Exchange, have rocketed higher since mid-January. The price of futures contracts has risen 12% since the middle of last month.

At the same time, the price of crude oil has also been rising. Why? Not really because of supply. In fact, America's appetite for oil continues to decline while the country's domestic oil production continues to rise.

The Wall Street Journal links the rise in crude prices to pipeline problems, making it difficult to move product around the country. In other words, we have plenty of oil, we just can't get it where it needs to be. Because of that, the price rises.

Where's the demand?

If consumers were buying more gasoline, that would certainly help explain the recent rise in gasoline prices, both at the commodities market and the retail levels. But that isn't the case.

The U.S. Energy Information Administration (EIA) reports gasoline demand in the U.S. peaked in 2007. Last year's demand was a half-million barrels a day below that. Not only are people driving less, they're driving more fuel-efficient cars. Yet the amount of money they're shelling out for fuel continues to rise.

When consumers are suddenly hit with a big increase in gasoline prices, it has much the same effect as raising their taxes or cutting their pay. The effect on the economy can be toxic. In 2011 the economy was beginning to show signs of life when the large spike in gasoline prices coincided with the economy hitting what economists described as a "soft patch."

Futures prices retreat

That said, it's possible gasoline prices may level off, or perhaps even drop a few cents in the next couple of weeks. Energy traders in the futures market in recent days have begun selling their long positions. As a result, gasoline futures prices actually retreated a bit this week. Oil prices have also declined before hitting the $100 a barrel mark.

Why? It appears the market is now not so sure the economy is doing that well. Some analysts cite last weeks jump in first time unemployment claims, a highly volatile indicator that rarely moves markets. Others suggests the market for gasoline simply went up too fast in too short of a period of time.

The hedge funds that poured millions into the futures market in mid January, however, are looking at a handsome profit. Consumers, meanwhile, are looking at high gasoline prices, in what has become a winter tradition, along with Groundhog Day.

Story provided by ConsumerAffairs.