Why has the price of gas jumped 18 cents a gallon?
Why are gasoline prices going up so much? I suppose I should be happy I am paying only $2.69 a gallon for mid-grade, instead of the $4.10 I paid in 2008. But it seems like the economy is not booming and oil supply exceeds demand, which would suggest oil prices -- and hence gasoline prices -- should be dropping. But they're not. And the reason is the same as last year -- speculators.
How much are gasoline prices up? CNN reports they popped 18 cents in the last two weeks. Self-serve regular was $2.655 as of October 23 -- up 17.82 cents since the last Lundberg Survey on October 9. Naturally, there are wide variations in price around the country -- CNN notes that the price is $2.67 in the Midwest; $2.62 on the East Coast; $2.52 for the Gulf Coast; $2.51 in the Rockies. Anchorage, Alaska, at $3.25 per gallon, has the highest price and Tucson, Arizona, the lowest at $2.24.
The fundamentals of supply and demand suggest that oil prices should be falling. On the exploration front, BusinessWeek reports that exploration is down 27.8 percent from 2008 with 309 rigs actively drilling, compared with 428 last year. Overseas there are eight percent fewer rigs drilling than there were in 2008 -- 764, down from 831.
BusinessWeek also reveals that crude inventories are bulging. U.S. crude inventories, at 339 million barrels, are up 27.7 from last year and at 725 million barrels, the strategic petroleum reserve stands at a 27-year record. There is no where to store the crude on land, so 125 million barrels' worth is sitting on tankers -- normally that amount is close to zero.Moreover, demand is down so much that refineries are operating with significant excess capacity. BusinessWeek reports that at 80 percent, U.S. refineries are operating at their lowest rates in two decades.
But despite supply exceeding demand, oil prices are rising -- up 152 percent since the $32 a barrel it traded at in January to $80.50 on Friday, reports BusinessWeek.
So why are oil and gasoline prices rising? Speculators. As I posted last year, 81 percent of oil trading volume is handled by Wall Street speculators -- like Goldman Sachs Group (GS), which will pay $23 billion in bonuses after its near-death experience 13 months ago.
Speculators borrow money to sell the dollar short and buy futures in commodities such as oil. Since oil is traded in dollars, the first bet almost ensures that the second bet will win. Fundamentals of supply and demand are overwhelmed by the role of the speculators.
The other 99.943 percent of Americans in a deep recession are out of luck when it comes to saving money on gasoline.
Peter Cohan is a management consultant, Babson professor and author of nine books, includingCapital Rising (due in June 2010). Follow him on Twitter. He has no financial interest in the securities mentioned.