Oil and Gasoline Prices Create Drag on the Economy

Posted by admin on January 23, 2012 under Energy | Be the First to Comment

by Tom Binnings

 

The coming year looks to be a repeat of 2011, when it comes to oil and gasoline prices. According to an analysis by the U.S. Energy Information Administration this will continue to place a drag on economic growth. While some areas, like Libya should be getting back to normal, there is Iran, as well as potential prolonged strikes among oil workers in Nigeria. The outlook for a softer oil market probably hinges more on the degree of declining demand as the BRIC (Brazil, Russia, India, China) economies cool down. However, even if their economies cool, the demand for autos among the emerging upper income households will probably keep demand for oil high in those nations. These events will keep oil prices volatile at the very least.

Another problem we have in the U.S. is the lack of summer gasoline refining capacity. Our refineries are aging and given the lack of growth in the U.S. market, the incentive for refiners is to invest their limited capital in growing markets like the BRIC nations. The need for additional summer refining capacity in the U.S. is to meet peak demand with different specs due to hot weather. Federal regs probably impact the investment decision as well.

Looking at recent history of gasoline prices, it looks as though oil price volatility based upon geopolitical events and then soft demand from the Great Recession has a greater impact on oil prices than refining capacity since the summer of 2008. Prior to that, late spring and summer seasonality shows up in the data. Here are the last six years of gasoline prices in Orange County, CA. http://www.OrangeCountyGasPrices.com/retail_price_chart.aspx?city1=OrangeCounty&city2=&city3=&crude=n&tme=72&units=us