What's Really Driving $5 Gasoline Worries

Rising pump prices tied to decreased supply and increased demand outside the U.S.

Get ready for a slew of political ads and campaign season stumping by Republicans blaming President Obama for rising gasoline prices that could be at or near $5 per gallon in many parts of the country by peak driving season this summer.

While $5 gas prices are catnip for Republican campaign strategists trying to take over the White House and Senate in November, the factors driving up gas prices have almost nothing to do with decisions and policies made by the Obama White House.

"As we continue to move towards warmer weather, gasoline prices will follow, with prices accelerating higher at a faster pace come late March into April, so if motorists think this is bad, they should really hold on to their chairs," says Patrick Doha, senior petroleum analyst at Gasbuddy.com.

Analysts point to a combination of factors: The shut-down of two major refineries that supplied 20 percent of the gasoline consumed in the Northeast; increased demand for fuel in Northern Europe, which has been experiencing a long spell of frigid temperatures; increased demand from China and other developing economies; and uncertainty about Iran's production, as that country saber-rattles about limiting its output or threatening a disruption of oil shipping in the Straits of Hormuz.

That last issue – driving up speculation on oil – is the only factor the White House could legitimately be expected to impact, say analysts, but that is not even the most significant catalyst driving oil prices.

"Whenever you reduce refinery capacity, you have the increased possibility of price spikes because you have fewer resources to fall back on in the event of a refinery disruption or an emergency," says oil industry analyst Phil Flynn of PFGBest Research.

The national average for gasoline began the year at $3.28 a gallon. The average price for February so far is $3.49 a gallon. That's up from $3.17 a gallon last February, a record at the time. Back in 2007, before the recession hit, the average for February was $2.25 a gallon.
Prices are higher on the East and West Coasts, where gasoline has risen above $3.70 in Connecticut, New York, Washington D.C. and California. This isn't unusual - states on the coasts charge some of the nation's highest gas taxes.

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The decreased demand for gasoline in the U.S., which would otherwise drive prices down if not for the global factors, is due to the soft U.S. economy and consumers driving more fuel-efficient vehicles.

When gas prices have spiked, as they have in each of the last four years, new-car buyers snap up hybrids and other more fuel-efficient vehicles. Too, toughening federal fuel economy standards have moved automakers to make their cars, SUV and even pickup trucks more less gas thirsty.

Demand for thriftier vehicles is expected to mount in coming months and drive their sticker prices up as well.

"We see the demand and market for more fuel efficient vehicles as a new normal for the U.S. and we are doing everything we can to push the fuel efficiency of our vehicles even higher," says Ford Motor Co. chief of global marketing Jim Farley. Farley notes that the company is now selling about 50,000 F-Series pickup trucks per month with a V6 EcoBoost engine, rather than than V8 engines. "The demand for that truck has far exceeded our expectations, and really shows that everyone is looking for better fuel economy."

In Los Angeles, the price of regular unleaded already is $4.93 a gallon and premium $5.09 at some gas stations, and the escalating fuel costs are expected to ripple throughout the economy, affecting everything from groceries to airfares.

The Politics of gas prices

Oil around the world is priced differently. Brent crude from the North Sea is a proxy for the foreign oil that's imported by U.S. refineries and turned into gasoline and other fuels. Its price has risen 11 percent so far this year, to around $119 a barrel, because of tensions with Iran, a cold snap in Europe and rising demand from developing nations. West Texas Intermediate, used to price oil produced in the U.S., is up 4 percent to around $103 a barrel. That's 19 percent higher than a year earlier.

A 25-cent jump in gasoline prices, if sustained over a year, would cost the economy about $35 billion. That's only 0.2 percent of the total U.S. economy, but economists say it's a meaningful amount, especially at a time when growth is only so-so. The economy grew 2.8 percent in the fourth quarter, a rate considered modest following a recession.

Republican presidential candidates Rick Santorum, Mitt Romney and Newt Gingrich have moved gas prices to top positions in their campaign stump speeches. Gingrich has made fuel prices a big new theme, launching a Facebook petition drive aimed at $2.50 a gallon gas, while bitterly criticizing the administration at every campaign stop.

"Stop bowing. Start drilling," the Gingrich website proclaims. Drilling for new oil in the U.S., would do nothing for this year's gas prices, and its doubtful that new drilling in 2008 or 2009 would be paying dividends today.

It can't be forgotten that the U.S. took a prolonged pause in opening new drilling contracts in 2009 when the BP oil disaster in the Gulf of Mexico occurred.

While U.S. drivers are seeing weekly gas bills climb through the summer, there will be plenty of finger-pointing over who is to blame. But the truth will probably take as big a beating as consumers' wallets.

The Associated Press contributed to this story.


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