I predicted oil prices would increase for the summer last January. Well, it’s going higher than even I expected back then. Why? Even with a recession and high unemployment, the demand for gas to keep our cars and trucks running is still high.
There are a few other reasons. One is that the US dollar (USD), which was gaining strength during the first quarter, is now weakening against most major currencies. Since oil futures and prices are set globally in USD, the oil price goes up when the USD goes down. This means we pay more for oil in the US, but other countries pay about the same as before because the currency exchange rates mean they can buy more dollars with less Euros (example).
Another reason for the oil price increases is that there are hundreds of full oil tankers anchored off the US coast. The capacity of these tankers varies widely from 250,000 barrels up to 4,000,000 barrels. The average off the coast are in the 2,000,000 barrels range.
The cost to transport a barrel of oil from the middle-east to our Gulf refineries on average is less than 80 cents. The daily cost to sit off shore may be about 6 cents per barrel. So by holding the oil and coming to port a week later after the price of crude goes up $5.00/barrel, their profit jumps significantly.
The last stats I could find for 2007 indicated there are over 11,150 tankers in service around the world. If 5% were sitting full off-shore holding an average of 2,000,000 barrels of crude oil that comes to a total of 1,115,000,000 barrels of oil. That first 1 is a billion!
Some may have noticed that fuel prices (gas & diesel) never dropped as dramatically as crude oil prices dropped. The answer is that the price of crude only constitutes about 50% of the price of gas. There are fixed costs to refine the crude, and those costs continue to go up as the government applies new regulations to produce environmentally friendly and ethanol fuels. Then there are distribution cost to get the gas from the refinery to your local gas station. And there are marketing costs and Federal, State and local taxes.
The average price of regular gas in the US has increased from $1.65/gal in January to $2.60/gal last week. I expect it will hit $3.00 /gal by July 4th, when I also predict crude oil will continue to rise to $80.00 per barrel.
Most oil exporting nations are looking for oil to stabilize at $70 to $85 per barrel. This 100% mark-up on their cost to operate their oil fields means they generate enough profit to run their countries.
The US is still in recession and there is very high unemployment, but the summer vacation season is coming fast. The 91% of adults still working will be looking to get away. Many will drive their SUV to their vacation destination. Look for US oil and gas reserves to decrease over the next several weeks, which will push up the cost to the consumer.