Factors Behind The Increase In Gasoline Prices In 2005 And 2006

By Scott Siegel

http://www.beatthegaspump.com

Since the beginning of 2005, U.S. retail gasoline prices have been generally increasing, with the average price of regular gasoline rising from $1.78 per gallon on January 3 to as high as $3.07 per gallon on September 5, as Hurricane Katrina further tightened gasoline supplies. But the hurricane is only one factor, albeit a dramatic one, which has caused gasoline prices to rise in 2005.

A major factor influencing gasoline prices in 2005 was the increase in crude oil prices. The price of West Texas Intermediate (WTI) crude oil, which started the year at about $42 per barrel, reached $70 per barrel in early September. Crude oil prices rose throughout 2004 and 2005, as global oil demand increased dramatically, stretching capacity along the entire oil market system, from crude oil production to transportation (tankers and pipelines) to refinery capacity, nearly to its limits. With minimal spare capacity in the face of the potential for significant supply disruptions from numerous sources, oil prices were high throughout 2005.

Part of what has fueled the dramatic increase of oil is the increase in world demand of oil.  That demand is led by China. The People's Republic of China is the world's most populous country and the second largest energy consumer (after the United States).  Rising oil demand and imports have made China a significant factor in world oil markets.  

In 2004 China used some 6.5 million barrels of oil a day and overtook Japan as the world's second largest user of petroleum products. The largest, the United States, consumes about 20 million barrels a day.  In 2004, China's thirst grew by 15%, while its output only rose 2%.   China accounted for 40% of the growth in oil demand over the last four years, says the US Energy Information Administration (EIA)."They have a problem," says Philip Andrews-Speed, an energy analyst at Dundee University and former BP China executive. China's problem is the world's problem as the increasing demand will continue to put pressure on global oil prices.

In addition to the increase in demand, Hurricane Katrina had a devastating impact on U.S. gasoline markets, initially taking out more than 25 percent of U.S. crude oil production and 10-15 percent of U.S. refinery capacity. On top of that, major oil pipelines that feed the Midwest and the East Coast from the Gulf of Mexico area were shut down or forced to operate at reduced rates for a significant period. With such a large drop in supply, prices spiked dramatically. Because two pipelines that carry gasoline were down initially, some stations actually ran out of gasoline temporarily. However, once the pipelines were restored to full capacity and some of the refineries were restarted, retail prices began to fall.

Increased gasoline imports in the fall of 2005, in part stemming from the International Energy Agency’s emergency release, also added downward pressure to gasoline prices. However, retail prices are likely to remain elevated as long as some refineries remain shut down and the U.S. gasoline market continues to stretch supplies to their limit.

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Scott Siegel is the author of "Beat The Gas Pump!"

Learn how to protect yourself as the price of gas goes up!  Learn more about saving money and gas at the pump.  Over 130 ways to save and
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