Decoding the gas price problem — 6 answers

hat’s Ahead for Gas Prices?
By Oregon Tax News,

Record high gas prices are expected to hit new records in the coming months. Below are a few questions and answers to better understand the current impact of high prices and what lies ahead as summer approaches:

1. How High Will Gas Prices Go? Gas prices have recently stalled, plateauing around $3.92 a gallon on average. Price slowdown, however, is likely just a brief lag on an upward summer trajectory, and prices will begin to spike in coming days as several refineries are scheduled to temporarily suspend production. The AP cites Patrick DeHaan, an industry expert, who says the national average could rise to $4.35 by the end of April. Currently, Oregon gas prices are the 9th highest in the country at an average of $4.11.

2. Why Is Consumer Spending up Even as Gas Prices Hit Record Levels? Some in the media, most notably the New York Times, have noted that rising gas prices have yet to show an adverse economic impact on the U.S. economy. Consumer retail spending is actually up over this time last year. Why are consumers spending more if gas prices are going through the roof? The answer likely lies in the reality that many factors affect household budgets. Some of these may currently more than offset the cost of higher gas prices. While gas prices are up, so too is per capita income. More and more consumers are also emerging from under oppressive mortgages and have greater income flexibility. Additionally, studies show that debt is less of a drag on household incomes than in the recent past. All these may partially explain why higher gas prices haven’t depressed consumer spending to this point. Perhaps, the biggest factor in overall home energy cost is the price of natural gas. Thanks to declining natural gas prices, consumers have benefited from a drastic reduction in heating costs—$204 less this year than the latest five-year average. According to a Motley Fool report, that savings offsets the increase in gas costs for a family using 60 gallons of gas a month. Consequently, even with the rise in gasoline prices, overall energy costs have been essentially the same or a bit below average.

3. Will High Gas Prices Impact Consumer Spending This Summer?
Now that summer is approaching, many consumers will rely on natural gas less and may feel the pinch of rising gas prices more acutely, especially since already high gas prices will escalate in coming months. Estimates indicate gasoline prices may reach $5 a gallon in some regions of the county during the summer. That could spell trouble for summer spending. The Miami Herald, which represents a heavily trafficked tourist region, recently cited an AAA study indicating that Americans will travel less because of high gas prices. According to an AAA spokesperson, vacationing Americans are already planning to travel shorter distances and spend less on meals, shopping, and other diversions. In fact, Americans are already driving 6 percent less than last year, according to a MasterCard survey. That upward trend will likely continue through the summer.

4. Will High Gas Prices Threaten the Economic Recovery? There is debate over the extent to which rising gas prices are negatively affecting or will negatively affect the U.S. economy. In Europe, however, rising gas prices have accompanied shrinking economies. Britain’s economy, for example, shrunk .3% the last three months of 2011 as gas prices rose to near $10 per gallon. Likewise, continental Europe’s economic woes are well-known and complicated. But all-time high oil prices are likely making a bad situation more painful. Since the first of the year, gas prices, among other petroleum products, continued to spike—up 6.7 percent. Rising prices could adversely impact U.S. economic growth, especially if the continuing spike occurs amid other major economic challenges as they did in 2008, and like they are currently doing in Europe.

5.Why Do Gas Prices Vary from Region to Region? Gas prices may vary by as much as a dollar-and-a-half depending on the region of the country. CNBC recently noted that gas prices in Fort Collins, CO might be $3 a gallon, while prices are more than $4.30 in parts of California. Prices, however, are not arbitrary. In fact, prices depend upon many regional factors, including refining capacity and the type of oil refined in a given region—both of which affect wholesale gasoline prices. The Northeast, for instance, has recently witnessed a reduction in refining capacity, and East Coast refiners rely upon Brent crude oil, which has reached $125 a barrel. Landlocked Midwest states process a cheaper crude than Brent oil. Consequently, the price per barrel of oil is only around $96. Even cheaper is a Canadian crude oil blend processed by other Midwest refineries with a price per barrel around $91. Differences aside, wholesale gasoline prices have been rising all over the country, which will result in increasingly higher prices at the pump. On a side note, the more refineries shut down or go offline for maintenance, the higher prices will go. That’s because reduced refining capacity reduces the number of barrels on the market.

6.Will the Government Release Oil Reserves to Help Consumers? There’s a U.S. led-effort afoot to tap national oil reserves to increase supply and lower prices at the pump. France, in particular, is considering the option, as well. If reserves are released, supply will increase and the lower the prices may go. In both the U.S. and France, rising gas prices could have an impact on upcoming presidential elections, making it more likely that leaders will act to limit the potential political fallout higher prices may exact at the polls. The mere talk of tapping oil reserves recently drove down oil prices by 2.5 percent in the U.S.

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