Gasoline, Obama, and Your Wallet

Gas is on the rise again and so is oil. The one truly remarkable thing about the current recession is how high the price of oil and gasoline have remained despite huge decreases in demand. This signals that the market still views supplies as tight and costs as high. As soon as the economy began to show any signs of life the price of oil and gas started to trend up again. The question on every one's mind now is how high can it go. I think that oil in the $150 a barrel range is probably a little too high to be sustainable - it would encourage a huge expansion in supply that would ultimately drive prices down. A better long-term guess is approximately $100 a barrel. Gasoline on the other hand will probably rise much faster and stay much higher compared to historical price trends with oil.

There are three major reasons behind this. First, refinery capacity has not changed significantly for many years in the U.S. The cost of building new refineries or expanding existing ones has increased enormously thanks to regulation making it unprofitable to expand. This results in the U.S. importing more of its gasoline at a higher cost (shipping gasoline is expensive because it is well flammable). Second, strict environmental and formulary regulations and requirements have added a significant cost to producing gas. On top of the federal requirements there are regional requirements that make it impossible for gas produced in one part of the U.S. to be sold in another. This means supply cannot readily shift to areas of increased demand or reduced refinery capacity. That can lead to huge price swings in certain regions, anyone remember hurricane season on the gulf coast. Third, Americans have in a large way pulled back from our conservation efforts when gas fell from $4 to $1.50. We have short memories and that means big swings in price are needed to get us back on a gas diet. These three factors will be the primary drivers behind the market price of gas going up and up as the economy recovers.

I wouldn't get too worked up though because even if we managed to open new refineries (try to get Obama's EPA to approve that one), relaxed regulations, and/or undertook new efficiency efforts our President would like to tax gas up to $5.00 a gallon as part of his environmental agenda. Personally I'd rather give my money to Exxon that Obama.