The reason for the high gasoline prices is the same reason that they were $1 a gallon about 4 years ago - supply and demand. I didn't hear anyone complaining about the imbalance back then.
Here is a little history that some may have forgotten or do not know. The oil crisis first hit in 1973 when OPEC was created. Prices quadrupled from about $3 per barrel to $12. The current price is about $38-40 and has increased about 25% this year. Back about 4 years ago the price was about $15-18. If you factor in inflation, the current price is probably still less than 1973 and was a steal just a few years ago. OPEC (specifically Saudia Arabia) has managed the oil prices by controlling the supply side. When they couldn't control the price was during the 1980's when the U.S. and a lot of the rest of world went into a recession and started conserving energy. The price fell to about $18-22 for almost 20 years as the demand for gasoline and fuel fell significantly due to conservation efforts and new non-OPEC supplies. Due to the low demand and the cost of keeping up with new environmental laws on lead usage and air pollution, the oil industry shut down a significant number of refineries during the 1980's and 1990's.
What does all this history have to do with today's prices? Currently U.S. refineries are running at over 95% capacity and I have heard as high as 99%. That is an unsustainable level and means that there is not enough capacity for current demand. New refineries will not be built due to more stringent and costly environmental requirements and business risks if the price would fall sharply again. On the demand side, people are driving more and in less efficient trucks and SUV's. Demand is back up to 1970's levels but the supply side is less than back then. In addition, there is unrest in the Middle East again which always drives prices for crude oil up. Crude oil is also priced in U.S. dollars and with the weakness of the dollar, crude oil has not increase worldwide as much as in the U.S.
If you add it all up, we are where we should be. What will it take to lower prices again? A combination of lower demand, some new refineries (which carries significant business risk and environmental costs, and more stability in the Middle East. Outside of those issues, there is no problem. My prediction is that a combination of all three will occur and oil prices will again stabilize at about $22-25 per barrel. Even Saudi Arabia knows that if crude oil stays too high for a long enough period, the supply will increase through OPEC cheating, non-OPEC sources or new sources and their volume and price will decrease just like it did in the 80's. If people start conserving again, then the decrease can occur without the other supply changes.
I believe history will repeat itself.
Bill Pflanz
(ex-oil industry analyst)
