Subscribe to Newsletter

Categories

Most Viewed

Archives

Here’s The Real Reason Gasoline Prices Have Been Surging In The US

By Joe Weisenthal
Business Insider

In just a matter of a few days, gasoline prices have become a major worry for people pondering what might drag down the U.S. economy.

The essence of the problem is this chart, posted by CFR’s Blake Clayton (via Brad Plumer):

Given where we are in the year, prices are unusually high. And if trends hold, then the national average will be well over the $4 freakout point sometime this summer.

But whenever the discussion turns to gas and oil, logic tends to die, and people start coming up with all kinds of bizarre explanations for what’s going on — explanations such as the Bernanke’s money printing, Obama’s domestic energy policy, Obama’s foreign policy, speculators, price gougers, and so on.

So we thought it would be a good time to just clear up some misconceptions, and explain what’s really driving the price.

Of course, you can’t start a discussion about gasoline without talking about oil. So let’s begin there.

You may have heard that the price of a barrel of oil is around $109, but actually that’s the US domestic West Texas Intermediate price of oil. A better international benchmark is probably Brent Crude, and that’s now well over $120/barrel, having surged all year.

So what explains the sudden rise in oil? Well, basically, good old supply and demand.

In a note that went out this week, BarCap’s Miswin Mahesh and Amrita Sen explain how the oil picture seems to have changed dramatically in just the first several weeks of the year:

At the start of the year, the average call on OPEC crude for Q1 was 29.7 mb/d, while OPEC production was comfortably higher at 31 mb/d. A seriously warm winter and a series of extremely weak OECD demand indications paved for further downgrades to demand and demand expectations. This should have then allowed for the almost barren inventories to fill and provide somewhat of a cushion to tightening fundamentals in the second half of the year.

Yet, the year so far has evolved differently in a significant way. Despite what looked like a rather well-supplied prompt market, the weakness in time spreads has abated. While the spate of cold weather in Europe has helped to normalise balances, in our view, it has really been the uptick in Asian oil demand that has helped to absorb the extra OPEC volumesIndeed, we believe that Asian and FSU oil demand are growing at a faster pace than markets are currently pricing in. While US and European demand remains very weak, and as a result, the overall state of global oil demand may be nothing to write home about, equally, it is not declining, contrary to market expectations.

Further, while OPEC may be producing close to 31 mb/d, the high level of supply losses on the non-OPEC front have intensified. Output from Sudan, Syria and Yemen at a combined total of almost 1.2 mb/d has been compromised, while non-geopolitically based outages in the form of technical issues are also on the rise. As a result, while the extra OPEC volumes would have otherwise been a surplus at the margin, it has now become a necessity to simply maintain the status quo.

They go on to make a key observation about the global economy that you should probably remember for years to come …

The problem with judging the global pace of oil demand growth is that the epicentre of that growth has most definitely moved away from the US to Asia, and China in particular. Yet, due to the lack of prompt alternatives, the more readily available oil data from the US is still used as a global guide to the health of the oil markets.

Read More Here