Gas prices see ups and downs

Global oil output is barely outpacing demand, leading to a highly volatile market in which motorists may see the price at the pump change within hours.

July 13, 2005|By Meredith Cohn | Meredith Cohn,SUN STAFF

With the price of gas fluctuating with every strong wind, motorists locally and across the country are no longer just seeing the number change between trips to the pump.

They may even see it from the morning commute to the drive home.

"It's up to Exxon," said Amarjeet Sandhu, manager of the Exxon on Russell Street, a popular South Baltimore gateway for commuters. "They go up 5 cents, we go up 5 cents. I check twice a day."

Sandhu is one of 167,000 gas retailers nationwide who must constantly monitor his costs in an increasingly volatile oil market.

It's not the first time that prices have spiked or receded, based on weather, war or refinery problems. Prices rose sharply during the 1970s oil embargo by the Organization of Petroleum Exporting Countries, peaked in the early 1980s during the Iran-Iraq war, dropped after the start of the first Gulf War in the early 1990s and briefly again after the Sept. 11, 2001, terrorist attacks.

But experts say what has changed is that global supplies are barely covering global demand, especially with rapid development in China, making pricing more sensitive. Prices have shifted up and down several cents or more overnight in the past year at some stations, or in Sandhu's case, over the course of the day.

Last week, for example, from Thursday to Friday, the average retail price of a gallon of regular gas nationwide jumped about 5.5 cents, the biggest one-day jump of the year. Individual stations bumped prices more widely as they struggled to cover costs. The biggest leaps in 2004 came in May, when the price jumped about 3 cents overnight on two occasions.

Rayola Dougher, manager of energy market issues for the American Petroleum Institute, an industry group, said the recent spike was likely fueled by fears that Hurricane Dennis would cut a swath up the Gulf of Mexico and disrupt production. That was before the storm lost strength over Florida and was downgraded to a tropical storm last weekend. The United States gets about 30 percent of its oil from the gulf region.

Dougher said worldwide demand has risen so much that events such as hurricanes, even those that don't turn out to be as damaging as predicted, still affect the wholesale and retail markets. Producer strikes, refinery outages or even new rules about additives in California can also stir prices.

"We're sustaining a degree of volatility we haven't seen in years," Dougher said. "We dodged a bullet with this hurricane, but it's just the beginning of the season. We'll see how the rest of the summer goes."

There have been several double-digit price jumps from week to week during the last year. Typically, she said, the price at the pump moves up two to four weeks after the price of a barrel of oil rises. A record $61-a-barrel price was reached a week ago. The Internet and other communications technology now means information is more quickly and readily available to refiners, suppliers and retailers, allowing the price at the pump to move more in tandem with wholesale costs.

The world now produces about 85 million barrels a day and consumes about 84 million barrels a day, a historically thin 1 million-barrel margin. The world market had a 6-million barrel buffer just a few years ago. The system is being further strained with oil being bought to prepare for winter, the heaviest season of consumption.

Doug MacIntyre, a senior oil market analyst for the federal Energy Information Administration, said it will likely take a couple of years for supplies to catch up to demand.

Refiners that turn crude oil into gas have not been investing in new plants, he said. In the United States, residents often fight the construction of new facilities near them. And changing federal and state specifications for gas have meant the refiners have had to spend time and money updating equipment they already operate.

Even in the 1970s, when long lines at the pump and the rise of the Arab oil cartel became a national obsession and a pivotal political issue, there was ample supply worldwide to satisfy demand, just not always where it was needed, MacIntyre said. Temporary federal price controls on existing oil intended to boost exploration for new oil sources, pushed prices even higher in many regions where there were shortages, but did keep prices from jumping around.

The price of a gallon of regular gas hit a record this week of $2.33, according to the U.S. Department of Energy. Adjusted to 2005 dollars, however, the record was recorded in the early 1980s, when a gallon cost more than $3.

The volatility hasn't yet affected the economy or changed motorist behavior, analysts said.

"We're still showing demand is strong," MacIntyre said. "We're 2 percent above a year ago, and normal growth is 1.5 to 2 percent. If prices were lower, we'd see demand going even stronger."

He said that Americans are still driving and going on vacation.

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