Photo Credit: Flickr/Don Hankins
As an energy writer, the most common question I get from friends and family concerns the price of gasoline. Just the other day I was talking to my dad when he mentioned that gas prices back home in New York were now over $3.80 a gallon. I guess I need to stop complaining about local prices that have now shot up to more than $3.30 a gallon.
The bad news, which I had to relay to my dad, is that prices aren’t likely to go down again anytime soon. Worse yet, drivers probably should get ready for higher gas prices. Last week’s $0.12 jump could only be the beginning because a confluence of factors driving supply and demand are likely to push prices higher. While that’s not what drivers want to hear, I do have a solution to help take away a little bit of the pain at the pump.
What’s driving prices higher?
Before I give you my solution, let’s take a deeper look at the problem. The average retail price of gas is made up of four components. By far, the biggest contributor to the price of gas is oil, which is two-thirds the price of gas. The price of oil is driven by both global and regional market conditions.
Globally, unrest in Egypt has been a big factor in oil’s recent rise. Believe it or not, Egypt is a big deal in the global oil market as it’s the largest non-OPEC oil producer in Africa. In fact, U.S. oil and gas producer Apache Corporation (NYSE:APA) is actually Egypt’s top oil producer, creating over 363,000 barrels of oil equivalent per day. The concern is that this oil production, as well as oil being transported through the important Suez Canal, could potentially be shut off if unrest in the country turns into an all-out civil war. The global oil markets are simply factoring this potential disruption into the price of oil.
The other problem is more localized as U.S. oil prices are spiking relative to the global oil benchmarks. As of the time of this writing, the spread between U.S.-traded WTI oil and globally traded Brent was a mere $0.30. This past February, that spread was more than $20 a barrel, meaning that oil produced in the U.S. was a lot cheaper to buy than imported oil. A shortage of pipeline capacity created a massive glut of oil in the U.S. which pinched producers’ profits but led to big profits for refiners and kept gas prices reasonable. In fact, for every dollar that refiner Phillips 66 (NYSE:PSX) could save on domestically sourced oil, the company could reap $450 million in additional net income. That caused its stock to nearly double from the time it was spun off from ConocoPhillips (NYSE:COP) last April until this past March when it hit its high point.