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Oil prices spike, pushing up gasoline, diesel


Capital Press

Oil prices have shot up in recent weeks despite abundant production, pushing up prices for gasoline and diesel in the West, experts say.

The upswing is largely due to concerns about unrest in Iraq and Libya potentially disrupting oil supplies, said Jim Williams, energy economist for WTRG Economics.

"If you look at the fundamentals, it's really bearish for prices," he said.

Since mid-April, oil prices on the New York Mercantile Exchange have risen from about $86 per barrel to about $95 per barrel, which corresponds with higher fuel prices, Williams said.

However, output in the U.S. is strong due to innovations in extracting shale oil, with production increasing by about 50 percent in the past three years, he said. "It's changed the environment."

At the same time, the economic outlook for Europe is bleak while growth in China has slowed, crimping demand for oil, Williams said.

For those reasons, the pressure on fuel prices should be downward, but in reality prices are not solely determined by economic factors, he said.

"The geopolitical risk remains very high, and frankly it's just not predictable," Williams said. "The caveats are really big ones."

In Iraq, rekindled animosity between Shia and Sunni Muslims is seen as a threat to the country's unity -- and oil output -- with bombings and retaliation between the groups escalating in the past month, he said.

The country also faces pressure from Kurds who basically want to establish their own country in the north of Iraq, Williams said. "You have two different sets of instability."

In Libya, disagreements among tribal factions have also made for an unpredictable environment, he said. "It's just not a stable country."

Aside from geopolitical strife, the seasonal switch from winter to summer gasoline blends among oil refineries is also playing a role at the pump, Williams said.

Refineries must idle their plants during such reconfigurations, which disrupts the production of gasoline as well as diesel, he said. "You'll get short-term blips in prices in the spring."

Volatility in fuel prices has also increased due to consolidation among refineries, with fewer companies making decisions that affect the whole market, said Mike Hoelscher, energy division manager at the AgWest Commodities brokerage.

Fuel supplies often get shifted to regions where refinery companies see the best profit margins, he said. "They're playing a kind of cat-and-mouse game."

For example, the Midwest hasn't been experiencing the same rise in fuel prices due to the abundance of shale oil that congregates in the region, reducing crude oil prices, Hoelscher said.

In the West, increased driving during sunny weather still pushes up prices, he said. "That's more like a seasonal pattern that develops."

On a broader scale, oil prices are unlikely to keep rising and pushing up the cost of fuel -- it's more likely that oil will hover between $88 and $98 per barrel, Hoelscher said.

If the price dropped below that range, major exporters would curb production, but if it nears $100 per barrel, then demand weakens, he said. "The economy can't take that."


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