Oil price spike raising fuel prices, eyebrows

By Reuters Staff
March 24, 2008

Retail fuel prices in the United States have smashed the records and show no signs of reversing course — bad news for drivers heading into the summer vacation season.

The explanation is fairly easy — crude oil prices have quintupled since 2002 because of rising global demand and constraints on supply, and fuel prices have risen in turn. But there are also some eyebrow-raising oddities of note.

Among them, gasoline prices are at a record even though supplies are brimming at levels not seen since 1993. Back in 1993, a you could get a gallon of gas for 99 cents if you put a little effort into it. In fact, supplies are so high right now that oil refiners like Valero are even slowing production because they’re having a hard time making money with the cost of crude eating away at the bottom line. While the swelling inventories are of little comfort to people paying up at the pumps, it could be worse. Lower supplies would almost certainly raise gasoline prices further.

Another oddity: diesel is WAY more expensive than gasoline. This is odd because diesel has traditionally been the cheaper of the two fuels in the United States as it has been easier to produce and there has been relatively less demand for it. But recent environmental regulations slashing sulfur content in diesel alongside rising consumption of the fuel in places like Europe and Asia have changed the dynamics, pushing up the cost of production and the level of exports to overseas markets. The surge in diesel prices is not just a headache for people with diesel Volkswagens. It is a huge problem for trucking companies, major courier services, and other industries. Also, because of the close relationship between diesel and jet fuel, airlines have been taking a severe hit.

Another outwardly bizarre situation in the energy markets is the fact that OPEC — which only a few years ago said it wanted to keep oil in a range between $22 and $28 per barrel — has declined repeatedly to raise production with crude in triple-digit territory. Part of the concern, they say, is the uncertainty of future demand with the U.S. economy slowing down. Probably a reasonable worry, after the cartel got burned a decade ago in similar circumstance, raising output to head off a looming recession only to see crude prices fall to historic lows a couple of years later.


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