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What’s Behind The Recent Hike In Gas Prices?

Filed by KOSU News in US News.
February 22, 2012

Oil prices have jumped sharply in the past two weeks, and the price of gasoline is also moving up. Across the country, a gallon of regular costs nearly $3.60 on average, with some areas facing $4 gas. That’s causing sticker shock at the pump, and concern that rising prices could derail the economic recovery.

According to Daniel Yergin of Cambridge Energy Research Associates, gas prices are up because of the West’s current confrontation with Iran and sanctions over that country’s nuclear program.

“Right now the market focus is on a tightening of supply, because the whole direction of these policies is to do one thing, which is to reduce Iran’s ability to export oil,” Yergin says.

That’s driven crude oil prices in the U.S. to around $106 a barrel. But Fadel Gheit, senior energy analyst at the investment firm Oppenheimer and Co., says there’s an even bigger reason than Iran.

“The supply of gasoline has been declining,” Gheit says. “We have 700,000 barrels of refining capacity [that were shut down] in the last three months. That is almost 5 percent of U.S. gasoline production … now offline.”

Energy analyst Phil Verleger says that’s an amazing drop in refining capacity.

“I’ve been following the industry since 1971,” he says, “and never in my life have I seen so many refineries close all at once.”

Sunoco, Conoco and Hess have all retired outmoded, unprofitable refineries in the eastern U.S. and Caribbean. The shuttered refineries were not retrofitted to meet the requirements for removing sulfur from high-sulfur crude. As the supplies of “sweet” low-sulfur crude that they could refine have contracted and become more expensive, they became money losers.

And, according to Verleger, a big European refinery that sent gasoline to the U.S. has also closed.

Gheit says there’s still another interesting ingredient to consider.

“Because the global market is much more lucrative than the domestic market, for the first time in our history we are not importing gasoline,” Gheit says. “Not only are we not importing gasoline, we’re actually a net exporter of gasoline.”

So while gasoline supplies are short and prices are rising, big U.S. oil companies are exporting gasoline. Ironically, that’s because natural gas prices in the U.S. are so low. American refiners are using this cheap, domestic natural gas to produce the heat needed to crack crude oil into products like gasoline.

“That enables us to land gasoline in Mexico, for example, cheaper than Mexican refiners can produce it for,” Gheit says.

It’s part of the very surprising energy advantage the U.S. is developing thanks to techniques like fracking and horizontal drilling, which are producing once-unimaginable amounts of natural gas inside the U.S. But will the higher oil and gasoline prices stall the U.S. recovery? Yergin thinks they could.

“Every penny increase in the price of gasoline takes a billion dollars out of the pockets of consumers over a year,” he says.

That could hurt spending and cost jobs across the economy. But Verleger is more optimistic.

“For the first time in my life I’d say that this time higher oil prices might actually stimulate a little more economic activity rather than a little less economic activity,” he says.

That’s because the higher prices are causing many people to buy fuel-efficient cars, boosting the output in one of the country’s major industries. [Copyright 2012 National Public Radio]

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