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Why Gas Prices Are Rising Even As Demand Is Down

Filed by KOSU News in Business.
March 23, 2012

On Morning Edition this week we looked at “What’s Making Americans Less Thirsty for Gasoline?”

Now let’s examine another important question: “If our demand for gasoline is falling, why are prices in the U.S. rising?”

Well, there are lots of reasons why the price you pay at the pump might rise; from additional taxes levied by the government to threats of supply disruption in the Middle East. The latter, of course, is a big reason gasoline prices are higher now even though demand throughout the world is quite soft and falling in the U.S.

Fadel Gheit, managing director of Oil and Gas Research at Oppenheimer and Company, says the price of oil depends on several factors — “number one: crude oil prices.” Of course, crude oil prices are set in a global market. That means even if U.S. demand for oil is forecast to fall significantly over the next 25 years, Americans will pay more for each galloon of gasoline if the global price of oil rises, which is quite likely. While Americans are using fewer gallons of oil per person, consumers in India, China and other emerging markets are using more. In 2010, China added 10 million more cars. With a population of more than 1 billion people, that nation is going to use more oil in the future and that demand will likely drive prices up.

Gheit says the other thing that affects gasoline prices is “the supply and demand for gasoline itself.”

Of course, while U.S. demand for gasoline is on a long downward trend, there are also seasonal driving habits that cause demand and prices at the pump to rise and fall throughout the year. For instance, gasoline demand rose last week in the U.S. according to Mastercard, because families took advantage of the warmer weather and school breaks to get on the road. And traditionally, gasoline demand and prices tend to move up in the summer during the peak driving season.

Also, a shutdown of oil refineries in the eastern U.S. and Carribean has cut U.S. gasoline production by about 600,000 barrels a day. That reduction in supply has been accompanied by a new price dynamic, says Gheit; the U.S. has become “a net exporter of gasoline.” It’s been more than half a century since that’s happened. Ironically, foreign buyers are attracted to the U.S. gasoline market because U.S. refiners can produce gasoline more cheaply than refiners in Europe or Latin America, for a number of reasons. That means Americans are competing directly with foreigners for U.S. gasoline, says Gheit. That’s another a new force putting an upward pressure on U.S. gasoline prices.

[John Ydstie is an NPR correspondent/host.] [Copyright 2012 National Public Radio]

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