Experts expect gas prices to continue to rise through 2011

Posted: December 10, 2010

As he pumped $60 of regular unleaded into his H3 Hummer Thursday, Chuck Miller anxiously calculated how much he's blown since gas prices, suddenly and sharply on the rise again, hit $3 a gallon.

"The last week-and-a-half, I've spent $120 just traveling to and from work," said the 45-year-old Clifton Heights man, as he topped off his tank at Bob Wark's Liberty service station in Merion, near his job in Narberth.

At $3.01 per gallon, Miller's 20-gallon tank swallowed another big chunk of his take-home pay as a supermarket meat-cutter: "Christmas is coming," he said. "I'll have to cut back on gifts for my children."

After a two-year respite from a peak of $4 a gallon in the summer of 2008, gasoline prices have spiked over the last month, and experts say they believe they will continue to rise well into next year, though not all agree on exactly why.

The numbers have shot up as quickly, it seems, as thermometers have gone down: On Thursday, the average price per gallon in Pennsylvania was $3.09, compared with $2.89 a month ago and $2.71 a year ago. In New Jersey, that figure was $3.03, compared with $2.84 a month ago and $2.59 a year earlier.

The reasons for the sudden increase are a matter of debate. Some call it a mostly supply-and-demand issue, sparked by signs of renewed economic growth abroad. Others blame Wall Street investment firms and the controversial bets they place on future prices of crude oil.

John C. Felmy, chief economist with the American Petroleum Institute, echoed the supply-and-demand argument Thursday as the reason for the surge.

"Worldwide demand conditions continue to grow," Felmy said.

Shawkat Hammoudeh, a Drexel University professor of economics and international business, largely shared that view. Unusually cold weather in Europe and America, combined with a weak dollar and strengthening economies abroad, are driving up crude prices, he said. That, in turn, is driving up gasoline prices.

He said recent manufacturing data, in particular, showed a resurgence of economic activity in Germany, China, and India, which has helped push up crude oil prices to match increased demand.

"The economic fundamentals are getting stronger," Hammoudeh said, "and that means there will be more demand."

And because crude oil is bought and sold in dollars, nations with stronger currency - such as those using the euro - can buy it more cheaply, which increases their consumption.

A weaker U.S. dollar may be only part of the story, said Michael Greenberger, a professor at the University of Maryland School of Law, where he teaches a course about futures markets and complex investment vehicles.

"The overriding cause of this," Greenberger said Thursday, "is excessive speculation by Wall Street types."

"The people I'm in touch with who are commercially involved in this market believe this is not a supply-demand problem but once again, as was true in the summer of 2008 . . . is the impact of sort of casinolike bets that are being placed through big Wall Street houses," he said.

Specifically, he cited conversations he has had with officials in industries whose fortunes rise and fall with crude prices - farming, air transit, and heating oil, among others.

"They will all tell you this is a false bubble," Greenberger said, "like the bubble we experienced in 2008."

Since Nov. 17, crude-oil prices have increased from about $80 a barrel to $89 a barrel, Felmy said. With 42 gallons in a barrel, that is an increase of about 20 cents per gallon, he said.

That means current crude prices are the highest they have been since October 2008, he said. They opened at about $70 at the start of the year and fluctuated after that.

Supply and demand are not the only factors that determine crude prices. Greenberger cited investment activity in what is known as commodity index swaps, offered by major Wall Street firms, as factors, too.

Using those vehicles, wealthy investors bet on the question of whether prices will rise or fall, he said, and that leads to a chain of other investment activities that serve to create a "false" appearance of supply-and-demand shifts in the crude market.

In July 2008, crude oil was $147 a barrel, he noted, and several Wall Street firms speculating in the swap markets were predicting it would hit $200. The fact that prices collapsed to $33 a barrel that December, he said, coincided with congressional action to curb speculation in those markets.

There seems to be general agreement on this much, for now: Prices are expected to continue to rise.

Greenberger and Drexel's Hammoudeh say consumers should brace for gas to hit $3.50 a gallon, and higher.

"I think when it comes near the end of 2011, people will start looking at $4," Hammoudeh said. "We're going to come back to $4. There's no doubt about it."


Contact staff writer Maria Panaritis at 215-854-2431 or mpanaritis@phillynews.com.

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