Gas Prices Creep Up After the Spill, Despite Weak Demand

Gasoline prices May 2010
Gasoline prices May 2010

It's not clear if BP's massive oil spill in the Gulf of Mexico is the reason for rising costs at the pump, but the average price of regular gasoline has already crawled up five cents per gallon over the last week, according to the American Automobile Association. And prices could keep rising, given that Memorial Day weekend is just around the corner, and gas demand will likely increase over the course of the summer as American families take to the road for summer vacations -- perhaps more so than they did last year when the economy was far more fragile.

Before the extent of the oil spill became evident last week, some analysts projected that any gasoline price hikes would likely be "modest" and that there was little concern about a supply squeeze.

However, prices in many states -- such as California and New York -- are starting to move past the $3 mark. While high, that's still well below the July 2008 peak when regular unleaded gas went for upwards of $4 per gallon. Some analysts still believe that weak demand may still contain price increases, along with the not-yet-robust economy and high unemployment. And crude has been fairly stable lately, trading in the low to mid-$80s. In early trading on Monday, oil prices barely budged after China increased its bank reserves ratio to cap inflation.

"There's Plenty of Crude Around"

Opinions are mixed as to whether the spill is the root cause of gasoline price increases, but at least some analysts think oil companies may need to rethink the entire oil production process because of the spill, which could limit output and lead to higher prices. Of course, others say if gas prices rise, it's because energy companies are using the spill as an excuse.

"The retail gasoline market had an upward momentum independent of the oil spill, and the oil spill psychologically keeps that momentum going," says Ben Brockwell, Oil Price Information Service director of data pricing for the spot market. "I don't think from a supply standpoint [the spill] will have any impact on prices. There are only a couple platforms down, and there's plenty of crude around."

Brockwell thinks the upward momentum will likely push gas prices to $3 per gallon (they were most recently at $2.90) and oil prices to at least $90 per barrel (were most recently at $86). "My personal view is that this market is probably a bit overdone. I don't know that things are as rosy as oil investors think, but there has been no news to spook the market or to get investors to sell oil."

Conflicting Forces

Other economic indicators point to higher gas prices, though. Consumer confidence in March rose to its highest level since September 2008. The more optimistic consumers are about the economy, the more likely they are to hit the road and shop, and that means more fuel will be needed to transport those purchases.

And some economists point to weak job growth (despite slowing job claims) as an indicator that gas prices simply can't go up much higher if demand really isn't there. Still, pump prices are known to not always follow the logic of economic fundamentals.

Originally published