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Oil Prices Head Higher

What goes up must come down.

Or does it?

As crude oil prices soared to record heights in mid-March, some energy analysts hinted that gasoline and diesel fuel prices might hit $3 or even $4 a gallon in the not so distant future and stay there. The reason: increasing worldwide de-mand, especially in the United States and China, demand that doesn’t figure to go away. If anything, the fast-developing Chinese economy is just now whetting its appetite for oil products.

Crude oil prices blew past $56 a barrel on March 16. The price reached an all-time record high despite an announcement that same day by OPEC to authorize pumping an extra half-million barrels of oil a day. In the past, OPEC’s decision to either increase or decrease the amount of oil it produced almost immediately impacted the price of crude oil on the worldwide market. An increase in production usually meant a drop in price; a decrease in production translated into a price hike. When OPEC announced its latest production increase and the price of crude didn’t fall, energy analysts had to look for other reasons to explain the rising cost.

Some energy analysts pointed to a U.S. government petroleum report that showed domestic supplies of gasoline and heating oil fell sharply the week of March 7-11. Others noted that OPEC members had already exceeded their production quotas, were pumping oil at or near their capacity, and thus couldn’t crank out much more oil even if they wanted to.

The United States gets more of its imported oil from non-OPEC countries (with Canada leading the way) than OPEC members, which also helps explain why OPEC doesn’t have as great an impact on U.S. fuel prices as widely thought. According to 2003 numbers, the United States produces 39 percent of the petroleum it consumes. Non-OPEC countries supply 35 percent of the U.S. total consumption of oil, while OPEC members supply 26 percent.

By the way, the price of crude oil accounts for about half of the cost of a gallon of gasoline. The other half of the cost can be attributed to taxes (24 percent), refining (18 percent) and distribution and marketing (7 percent).

The U.S. trucking industry burns about 650 million gallons of diesel each week.

As usual, there is some good news and some bad news in the oil story. The bad news: Oil prices are 50 percent higher than they were at this time a year ago. The good news: Oil futures would have to exceed $90 a barrel to match the inflation-adjusted peak set in 1980.

Of course, if you’re an owner-operator and you’re used to paying $1.40 a gallon for diesel fuel and suddenly you’re paying $2 for that same gallon, it hurts regardless of how high the price was in relative terms 25 years ago or how it got as high as it is today.
Source: DOE