Do you remember when gasoline prices were civilized and you could count on those numbers at the pump to stay relatively constant?
This was not the case this summer, as customers were paying record amounts for a tank of gas.
The energy sector is inherently volatile, and little can be done about it except displacing any stress induced to consumers and businesses. There are a number of factors that can greatly affect energy commodities but are nearly impossible to control or forecast.
The most glaring example from the past year is hurricane season. The season itself is quite predictable - running from about mid-May to late-November - but neither meteorologists nor investors could have predicted that the Atlantic hurricane season in 2005 would produce a record thirteen hurricanes, including two of the top three most costly hurricanes in U.S. history (Katrina and Wilma).
The United States is the world's largest energy producer, consumer and importer. It consumes and imports more crude oil than any other country. Last year domestic production averaged 5.41 million barrels per day, but imports over the same period averaged 10.09 million barrels per day (each barrel holds 42 gallons).
Half of the total crude oil imported to the United States came from one of the member nations of the Organization of Petroleum Exporting Countries (OPEC), who together account for 40 percent of world's crude oil production and 16 percent of its natural gas production. OPEC is an inter-governmental organization - essentially a cartel - made up of 11 oil-producing and exporting countries. OPEC determines crude oil production, and since the organization accounts for nearly half of imported oil, it can substantially manipulate the market price of crude oil.
At the beginning of 2005, crude oil futures prices hovered around $43 a barrel. Six months later those prices were around $55. After Hurricane Katrina, futures prices peaked above $70 per barrel.
Oil futures are a derivative instrument: they are financial contracts where two parties agree to transact a set of physical commodities (an amount of crude oil) for future delivery at a particular price. The buyer is essentially agreeing to buy oil that the seller has not yet produced. The market is risky by nature because the contracts are speculative. During this price spike, analysts could not stop talking about oil prices breaking $80, $90 or even $100, with prices at the pump possibly breaking $4 per gallon.
The major culprit in this situation was supply, or more appropriately, interruptions to supply. These supply shocks can be attributed to both natural causes (inclement weather) and human factors. One quarter of all U.S. production of oil occurs in the Gulf Coast region. The U.S. Minerals Management Services recently said that 52 percent of daily oil production remained offline. But these refineries are slowly reopening. Increased gas imports have helped fill demand and resulted in greater-than-expected supplies, causing downward pressure on oil and gas prices. The national average price of one gallon of regular gasoline today is $2.38, compared to $2.48 a week ago, and a record high of $3.01 on Sept. 9.
An additional source of price fluctuation is uncertainty of supplies in turbulent Middle Eastern countries, particularly war-torn Iraq. Attacks on oil pipelines have occurred repeatedly since the war began.
Growing economies such as China and India have increasing demands for oil. China is the second leading consumer and one of the leading importers of oil in the world. The arrival of the summer driving season, coupled with the combined effects of decreased supply and increased demand, combined to create a rapid increase in the price of oil.
Prices have come down at gas pumps nationwide because these problems are subsiding. Demand for petroleum products fell by 3.2 percent from the same period last year, while demand for gasoline has fallen 2.2 percent. Gas prices should remain relatively stable. The past half-year has been an anomaly. With oil supply increasing and demand decreasing, we should see gas prices continue to fall.
