It’s no wonder gas prices are so high: Global demand for petroleum hit a record high last year — and the International Energy Agency forecasts an even greater increase in demand this year. At the same time, supply increases have slowed, especially in the United States.
In other words, the gas price story boils down to the cost of crude. At least, that’s how John Felmy, chief economist of the American Petroleum Institute, sees it.
“It’s a pretty straightforward story,” Felmy said today on a conference call with bloggers. “It’s demand increasing — and that’s on top of relatively slow supply increases, particularly in the United States, where, of course, we had a moratorium and a permitorium and we’ve seen setbacks in other parts of the country in terms of some production.”
Since November, crude oil price increases have preceded increases in gasoline prices — and both increases have been of roughly the same magnitude, Felmy said. Crude rose from $80 a barrel to $105 a barrel last week — about 60 cents a gallon — while gasoline rose from 285.4 cents a gallon to 355.8 cents a gallon, or roughly 70 cents a gallon.
What accounts for the 10 cents discrepancy? For one thing, the cost of ethanol — an ever more significant ingredient in pump-purchased gas — has also increased, pushing the cost of raw material for gasoline to about 65 cents a gallon.
For another, Felmy said, refiners actually lost money in the fourth quarter of last year — so the remaining five-cent price increase probably represents an attempt by refiners to simply cover costs — not to “price gouge,” as the liberals suggest.
“The margin did increase a little bit,” Felmy said. “But that’s not a surprise, given that [refiners] lost money in the fourth quarter. It’s not surprising that you’d see an improvement in margin to at least be breaking even.”
Events in the Egypt, Libya and elsewhere have exacerbated the problem. After all, “as tight as markets are, even a small decline in supply can have a disproportionate effect on the market,” Felmy said. But Middle East-based explanations only add to the picture that began to emerge long before the protests erupted. Gas prices will rise as long as demand increases outpace supply.
Tina Korbe is a staff writer in the Center for Media and Public Policy, an investigative journalism outlet at The Heritage Foundation.
