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Nuts & Bolts

February 7, 2013

Gasoline prices surge for third straight winter

(Continued)

Gasoline futures, traded on the New York Mercantile Exchange, have rocketed higher since mid-January. The price of futures contracts has risen 12% since the middle of last month.

At the same time, the price of crude oil has also been rising. Why? Not really because of supply. In fact, America's appetite for oil continues to decline while the country's domestic oil production continues to rise.

The Wall Street Journal links the rise in crude prices to pipeline problems, making it difficult to move product around the country. In other words, we have plenty of oil, we just can't get it where it needs to be. Because of that, the price rises.

Where's the demand?

If consumers were buying more gasoline, that would certainly help explain the recent rise in gasoline prices, both at the commodities market and the retail levels. But that isn't the case.

The U.S. Energy Information Administration (EIA) reports gasoline demand in the U.S. peaked in 2007. Last year's demand was a half-million barrels a day below that. Not only are people driving less, they're driving more fuel-efficient cars. Yet the amount of money they're shelling out for fuel continues to rise.

When consumers are suddenly hit with a big increase in gasoline prices, it has much the same effect as raising their taxes or cutting their pay. The effect on the economy can be toxic. In 2011 the economy was beginning to show signs of life when the large spike in gasoline prices coincided with the economy hitting what economists described as a "soft patch."

Futures prices retreat

That said, it's possible gasoline prices may level off, or perhaps even drop a few cents in the next couple of weeks. Energy traders in the futures market in recent days have begun selling their long positions. As a result, gasoline futures prices actually retreated a bit this week. Oil prices have also declined before hitting the $100 a barrel mark.

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