COMMENTARY | It is time to add another accusation at the feet of the economy: gas prices. Except this time, the economy’s improvement is causing the increase. As people go back to work, that extra money goes towards gas — and the price increases with each jump in demand. This and other factors have led to a 47 cents a gallon rise in cost over the last two months, according to CNN Money.
The start of the problem is with the cost of oil. Oil accounts for 70 percent of the cost of gas and the American Petroleum Institute has seen the cost of a gallon of oil go up by 52 cents in the last two months. Chinese and American economies are driving the demand for oil and along with it the higher prices. Although OPEC’s surplus production had dropped to 2.6 million barrels per day by the end of last year, the American Petroleum Institute has stated that the surplus is expected to increase by 3.6 million barrels per day by the end of this year.
Access to oil cannot be the main issue. If a surplus of the 3.6 million barrels per day is expected, the current demand would have to increase by a significant amount more before it would have this impact on oil. Oil speculators are helping to fuel the increase because of their worry about international politics.
As tension grows with Iran, oil speculation has taken on drastic proportions. With an economic sanction on it by the United States, Iran has been shipping the majority of its 2.2 million barrels of oil a day to Asia. It sits at a pivotal point on the Strait of Hormuz. Ships that pass by account for one fifth of the world’s production and if Iran were provoked, the transport of oil could be halted. Due to this, speculators have bet on the cost of oil rising in the next few months and this speculation has become a self-fulfilling prophesy.
The Energy Information Administration released a report on Feb. 27 also warning about the potential impact of oil refinery shutdowns. Two Philadelphia area refineries closed by the end of last year and the potential for another closer, Sunoco Philadelphia is possible. If Sunoco’s Philadelphia refinery is closed, nearly a quarter of refinery capacity for the East Coast will be out of commission. This could cause potential price volatility and problems with supply until a solution is worked out.
For now, the future is a murky one. Pad your wallet and prepare for potentially higher gas prices to come.
Sources
American Petroleum Institute
United States Energy Information Administration
CNN Money