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Higher Gas Prices? Yes. But Not $5 a Gallon
Posted By RVBusiness On February 23, 2011 @ 5:39 pm In Breaking News | 2 Comments
Americans could see gasoline pump prices spiking 10% to 18% higher in coming weeks as a result of the unrest in the Middle East — but they’re unlikely go above $4 a gallon — unless the uprisings spread to Saudi Arabia, AOL’s Daily Finance reported.
“We’re going to see gasoline prices going higher in the next week, the next months and maybe in the next six weeks,” says Tom Kloza, chief oil analyst at Wall, N.J.-based Oil Price Information Service. He forecasts a price in the range of $3.50 to $3.75 a gallon, up from the current $3.17 for a gallon of unleaded regular gas.
However, Kloza says he “disagrees vehemently” with analyst predictions that gas prices could shoot above $4 or even $5 a gallon. CNBC Tuesday (Feb. 22) quoted traders as saying gas prices could surpass $4 a gallon, and USA Today ran a front-page story saying that $5 a gallon gas “isn’t out of the question.”
One Giant Caveat
Kloza cites a good reason for why that seems unlikely: About 5.5 million barrels of excess capacity of crude oil are now available to drive prices down, of which the Saudis control 4.5 million barrels. And the Saudi oil minister rushed to assure the world on Tuesday that OPEC stood ready to raise output.
“Needless to say, everything is pure garbage if we wake up one of these days and we see there are riots in the streets of Saudi Arabia, or the royal family there is about to be overthrown,” Kloza says.
Michael Lynch, president of Winchester, Mass.-based Strategic Energy & Economic Research, adds that increased Russian and Canadian production has helped boost world supplies as the crisis in the Mideast spreads. “Generally speaking, there has been a pretty good performance from non-OPEC producers, and I think that will continue,” Lynch says.
Libya exports around 1.5 million barrels a day and has Africa’s largest proven oil reserves. While it’s an OPEC member, its effect on U.S. oil prices is limited because most of its output goes to European customers.
Deep-Seated Religious Conflict
A greater problem might be Bahrain, where deadly clashes have been ongoing for the last week. Although the island state has no oil of its own, it lies across a causeway right next to Saudi Arabia’s oil-producing eastern province. Like that Saudi province, Bahrain has a large Shia Muslim population, but the country has been ruled by a Sunni monarchy. That religious conflict — more than 1,000 years old — is behind the violence in Bahrain and could threaten stability in Saudi Arabia. Of course, that would be far more explosive for the U.S. than the current chaos in Libya.
Lynch says another major concern is Iran. If pro-democracy violence escalates there, it could seriously hurt that country’s exports, and the uprising potentially could spread to Saudi Arabia. “If Iran catches a cold, everyone worries about Saudi Arabia getting pneumonia,” he says.
Kloza notes that as bad as the Libyan tragedy is, similar chaos has afflicted Nigeria for many months, yet oil has continued to flow to the U.S. without letup. One big difference, though, is that foreign oil workers have been evacuated from Libya, while they have largely remained in Nigeria.
Kloza says for gasoline to get above $4 a gallon, crude would have to rise above $125 a barrel. It’s now around $106 for Brent crude, the European standard. “That couldn’t be sustained for weeks and months as it was in 2008, when the trading community lost their heads,” he says.
Why Brent Crude Prices Are Key
Kloza says consumers should focus more on the Brent crude price than the often-quoted gyrations of the U.S. benchmark, West Texas Intermediate (WTI). Although WTI is the focus of most financial transactions involving oil, Brent crude is a better price gauge because it more accurately reflects world oil demand, he says.
“The last thing you should do in the morning is wake up and hear that the price of WTI is up $5 or down $5 and assume that’s what everything else is doing in the oil patch,” Kloza says. In fact, WTI spiked $8 a barrel Tuesday, sending stocks sharply lower before retreating a bit, to close up $7.37.
The difference between Brent and WTI is around $7 to $10 a barrel, but it has been as high as $19. Still, the price of crude is nowhere yet near the level it would have to go before Americans find themselves shelling out $5 a gallon at the pump. With luck, it’ll stay that way.
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