Sunday, July 22, 2012

The fear premium pushes the gas price rollercoaster uphill

I concluded the previous installment in the ongoing ride on the gas price rollercoaster with this hopeful note.
Reuters reports...
Benchmark Brent crude oil in London returned to below $100 per barrel, tumbling $2.35 to settle at $97.97 a barrel. U.S. crude fell $2.08 to finish at $83.91.
According to the calculator at Econobrowser, that means that the average price of gas in the U.S. should be $3.29. Prices may still fall in the near future.
That didn't happen. Instead, gas prices in my neighborhood stabilized at $3.49 for more than a week, lasting until last Thursday, when I noticed that the corner gas station was selling regular for $3.69. Fortunately, the three stations just down the street were still offering regular gas at $3.49, so I filled up my tank at one of them. I expected the corner gas station to drop its price to $3.59; it didn't. Instead, when I drove past on Friday, its price for regular was still $3.69, and the three stations down the street had raised their prices to $3.59. Good thing I bought gas on Thursday.

So, what happened to make prices rise on Thursday and Friday? The price of crude jumped on Thursday, along with other commodities, as Reuters reports.

Corn, soy hit record highs; oil jumps on Mideast worry
Corn and soybeans hit all-time highs on Thursday as the worsening drought in the U.S. farm belt stirred fears of a food crisis, while crude oil prices rose to eight-week peaks on worsening tensions in the Middle East.
Oil prices hit an eight-week high as tensions in the Middle East -- which provides a quarter of the world's oil -- reinforced concern about potential supply disruptions.
U.S. crude's front-month contract settled up $2.79 at $92.66 a barrel after touching an eight week high of $92.90.

London's benchmark Brent crude jumped $2.64 to settle at $107.80 a barrel.
According to the Brent-U.S. gas price calculator at Econobrowser, Thursday's price for Brent should translate to $3.53. That same link shows that the price fell Friday to $106.86, which translates to $3.51. Gas is a little overpriced, but not much. Brent will have to decline several dollars for prices to drop more than a dime.

In case you're wondering why Brent went up, it wasn't the fundamentals of supply and demand. Instead, it was the fear premium.
Analysts said geopolitical concerns outweighed the latest U.S. Department of Energy supply report, which showed crude inventories in the world's top consumer fell less than expected last week.

"Overall, we are more concerned about the latest bombings in Syria and Bulgaria than about the DOE statistics," said Olivier Jakob, analyst at Petromatrix, in a report.
Speaking of the fear premium, I recommend that you read The High Cost of Cheap Gas over at Daily Kos, which details the externalities of oil dependence. I found its conclusion particularly appropriate to the point above.
The greatest irony of contemporary American life is that a nation which so prides itself on self-determination and independence has so willingly made itself a slave to oil, which corrupts our politics, dictates our foreign policy, threatens our environment, and bankrolls our enemies.
Today is a good day to walk.

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