You’re paying more for gasoline, and here’s why
06/26/2014 4:07 PM
06/28/2014 5:57 PM
Think you’re paying more than you should be for gasoline right now? You are.
Prices tend to spike around Memorial Day, when increased demand cuts against a limited supply as refiners convert from winter fuels to summer blends. But by the middle of June, gasoline inventories are up and prices typically retreat.
This year, they haven’t.
The reason why refutes the commonly held view that deteriorating political conditions in Iraq haven’t had much effect on gasoline prices. They have.
Despite no apparent hit to Iraqi crude production, and near-record levels of U.S. oil production, fears about the Middle East conflict have allowed financial speculators to bid up oil prices _ another contributing factor to high gasoline prices.
The authoritative AAA Motor Club had projected in May a drop between 10 cents and 15 cents a gallon during June.
But Michael Green, a spokesman for AAA on gasoline prices, said Iraq’s troubles are affecting prices more than expected. “U.S. consumers are paying higher prices than what they would otherwise, due to the higher cost of oil,” he said.
Speculative trading on the violence in Iraq is keeping oil prices about $4 a barrel higher than they would be otherwise, said Andrew Lipow, president of the Houston consultancy Lipow Oil Associates.
And that’s affecting consumers. Gasoline prices on Wednesday averaged $3.68 for a gallon of regular unleaded, up slightly up from $3.66 a gallon a month ago and more than 13 cents a gallon higher than at the same time last year.
If you assume that gasoline would revert back to about last year’s June price and add the recent jump, prices are about 15 cents a gallon higher than they should be.
In a car with a 15-gallon tank, that’s $2.25 more per fill-up.
Multiply that by at least 212 million American motorists and you’re talking real money: If every American motorist filled up this week, they’d collectively be paying $477 million more than they did in the same week last year.
Here’s the explanation for the stubbornly high prices: Fear has gripped oil trading markets, after the Islamic State of Iraq and Syria, known as ISIS, seized the Iraqi city of Mosul on June 10 and Fallujah soon afterward.
Financial traders fear a collapse of the Iraqi state that could suck Iran and Saudi Arabia into a regional conflict that threatens oil supplies. And those financial players far outnumber actual end users of oil in the markets where contracts for future barrels of oil are traded.
Iraq is a becoming a more important Middle East exporter over the past five years and is now the second largest producer in the Organization of Petroleum Exporting Countries. But OPEC Secretary General Abdalla El-Badri said this week that there is no oil supply shortage in Iraq and blamed the recent increase in oil prices on speculative trading in the markets.
“Right now the market is very well supplied,” he told reporters in Brussels on Wednesday. He pledged that OPEC could increase production if there is a disruption.
Iraq’s main oilfields are deep in the Shiite Muslim South, an area that is hostile to the Sunni Muslim ISIS. The global energy consulting firm IHS said the fields are protected by government forces as well as Shiite militias, and that an ISIS offensive against them would require substantial fuel and be difficult to sustain for long.
Despite the fears in financial markets, ISIS is unlikely to disrupt Iraqi oil exports, said IHS senior director Jamie Webster, a position widely shared among experts.
Robert McNally, an energy consultant and founder of the Rapidan Group in Washington, suggested that Iraq’s semiautonomous Kurdish region might be able to actually increase oil exports from northern Iraq after seizing the city of Kirkuk in the midst of the crisis.
There have been reports the Kurds already are starting to export oil independently while the central Iraqi government based in Baghdad is in turmoil.
While reports out of Iraq suggest production and export are, for now, unaffected, big global oil companies won’t discuss their production there.
“We don’t have any comment,” said Richard D. Keil, a spokesman for ExxonMobil in Irving, Texas.
There’s little incentive for Keil to discuss production, since the fear gripping financial markets is tantamount to free money for the oil companies. ExxonMobil and other large players reap a windfall from higher oil prices and suffer if prices collapse, as they did during the Great Recession.
What’s particularly galling for many Americans is that the energy industry and its allies in Congress, when pushing for the rights to expand domestic drilling of oil and natural gas, insisted this new production would amount to energy independence and insulate U.S. consumers from events in the faraway Middle East.
John Felmy, chief economist of the American Petroleum Institute, said the Iraq crisis comes at a time when the oil markets already have lost expected supplies of crude from other troubled areas of the globe. He pointed to sanctions against Iran and lost production as a result of problems in South Sudan and Libya.
“It’s not just Iraq, of course. We’ve lost a couple of million barrels per day of capacity . . . at the same time you’ve had growth in world demand . . . about 1.3 million (barrels per day),” Felmy said. “It’s a tighter market, and if not from the increased U.S. production, it would be even tighter.”
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