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June 12th, 2009

Gasoline prices climb for 45th day

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The news that gas prices are still climbing comes as no surprise to those of us who drive:

Gas prices rose Friday for the 45th consecutive day as summer travelers hit the highways and refineries hold back on fuel production.

That’s not altogether surprising; oil closed at over $72/barrel today. Like all goods, gas is subject to the economic law of supply and demand, just as we learned in school. However, demand isn’t climbing the way it usually does during the spring driving season:

Retail gas typically rises with demand during the summer driving season. But this year those dynamics have changed somewhat. The government expects motorists to drive billions fewer miles as an expanding population of unemployed workers stays home.

That is also why refiners are cutting back. Even though prices are rising, demand for fuel remains very weak compared with previous years. … refiners say if they were to produce as much gasoline as in year’s past, they’d go out of business.

But there are other factors at work — such as investors looking for a decent return on their money:

Analysts say investors have been piling into crude as an alternative to a falling dollar. The economic stimulus and Wall Street bailout are helping push the deficit past $2 trillion this fiscal year, igniting fears of a weaker dollar and inflation.

“This is all about money flow,” says Tom Kloza, chief analyst at the Oil Price Information Service.

That was the cause of last summer’s historically-high gas prices: there was a lot of money looking for someplace to invest, and oil became a target. Like all bubbles, it became unsustainable and popped, but not before we paid more than $4 per gallon. There are signs that speculators are again flocking to oil, which could mean more pain at the pump until and unless they find another, more attractive target.

And if, as we all hope, the economy is beginning to recover, that will also contribute to higher gas prices:

Crude prices are also rising on growing expectations that at least a modest economic recovery will begin later this year. The International Energy Agency said Thursday that it expects oil demand to fall less sharply this year than it previously forecast. And with oil companies slashing exploration during the slump, investors are already anticipating a supply shortage and price run-up in a few years, says Phil Flynn of Alaron Trading.

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2 Responses to “Gasoline prices climb for 45th day”

  1. Mitch Says: June 15th, 2009 at 12:22 am

    And here’s my problem with this oil and gas thing. Over the winter, the price of oil dropped drastically, yet my bills went way up. Why? Because it seems the rates for gas and oil are set at this time of the year, when the prices are really high, and thus we don’t get any kind of break when winter comes.

    My wife is always saying the oil, gas, and power companies are in bed together, and we’re all being scammed. I’m starting to agree with her.

  2. Tim Manni Says: June 15th, 2009 at 10:50 am

    Hey Mitch,

    Well you could be onto something. I’ll do my best to provide a few logical possibilities, but I may be acting naive.
    First, we should consider that oil is purchased through futures. It would makes sense that oil companies are stocking up in the summer when futures are high; that would be why summer’s high prices (b/c of increased demand) carry into the winter.

    Second, the companies know you need the oil to heat your home, so they have the ability to jack up prices.

    Just as OPEC sets desirable price ranges, perhaps the oil, gas and power companies are doing the same???

    I have read that several analyst expect oil to go back down…we’ll have to wait and see.

    Thanks as always for commenting,
    Tim

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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