Forbes: $6 Gas?

[Patricia M. McBride]

Gas at $6.00 a gallon is very likely by summer and to at least $4.00 by spring, and according to this article, current conditions do not support such an increase normally.  Very likely, the president will do nothing or have nothing he can or is willing to do to stop it, because of other conditions that are causing speculation..................and yes, rejecting the keystone pipeline was not a good move.

Oil is plentiful as new discoveries continue to be made, natural gas exploration and production is up, the dollar has strengthened, it’s an election year, and so gasoline prices are going which direction? Down? Well, no, according to the experts, gasoline prices are rising and could top $6 per gallon by summer.

Each of the above conditions usually results in lower prices at the gas pump. If supply goes up on constant demand, then price should at least remain steady or go down. As new discoveries are made then supply goes up and at constant demand, price should go down. Even as production lags discovery, markets build in the worldwide supply figures. Natural gas production is soaring allowing for cheaper substitution for oil. When the dollar strengthens versus foreign currencies then each dollar buys more quantity of foreign oil and hence prices should go down for the same quantity. Usually election years result in government policies that are neutral for energy prices. So what is going on?

1) Iran has cut off supply to Western Europe as punishment for political stances. This has created increased demand for the remaining world supply from Europe although Iran likely will turn around and sell this supply elsewhere so perhaps this effect is temporary.

2) A possible military attack on Iran’s nuclear facilities could result in a closure of the Strait of Hormuz, the path for 20% of the world’s oil supply. This alone could result in $200 a barrel oil or about a doubling from the current prices. Defense Secretary Leon Panetta believes there is a “strong Likelihood” that military action will happen.

3) If Iran does cut off supply, Venezuela could follow and cut off their supplies to the U.S.

4) There is a shortage for U.S. east coast refinery capacity tied to the closings of several refineries.

5) While the dollar has strengthened versus the Euro, there still is concern that Federal Reserve policies and U.S. deficits will weaken the dollar. Weakness in the dollar feeds upward pressure on commodities like oil that is priced in dollars and thus is at a discount on foreign markets.

6) Storm season is coming again. Every year brings new worries about the potential impact of storms in the Gulf of Mexico on supply operations at sea and refinery operations on land.

7) Supplies from the Alberta oil sands now likely will go to Asia versus the U.S. now that the Keystone XL pipeline project has been stopped.

Last year was the highest priced year ever for gasoline and national averages for a gallon of regular are about $3.50 now.

read more here:  http://www.forbes.com/sites/steveodland/2012/02/21/6-gas/