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U.S. Oil Supplies Up, and So Are Prices

National average gas price climbs to $2.54 per gallon

By Mark Huffman
ConsumerAffairs.com

June 3, 2009
Crude oil prices dipped in Wednesday’s trading but have risen sharply over the last two weeks, closing in on $70 a barrel. There are predictions on Wall Street this week that oil prices will cross the $100-per-barrel mark before the end of the summer.

The dramatic increase in prices has come at a time when the global recession has reduced demand. In the U.S., demand has risen slightly in 2009 but still remains weak. As a result, there’s plenty of oil on hand.

In its weekly report today, the U.S. Energy Information Administration said domestic crude oil supplies rose by 2.9 million barrels last week to 366 million barrels. Gasoline supplies continued to fall, however, as U.S. refineries operate well below their capacity. The latest inventory of gasoline shows the U.S. has 203.2 million barrels on hand, down 200,000 barrels from last week.

Consumers have probably noticed that gasoline prices have escalated sharply in the last month, despite no apparent spike in demand or sharp reduction in supply. The national average price at the pump today is $2.54, according to AAA’s daily Fuel Gauge Report.

So, what’s behind the upward move in energy prices? Are consumers being taken to the cleaners again?

Economists note that recent declines in the dollar are partly responsible for oil’s higher price. Renewed international concern about U.S. government deficit spending -- the printing of money -- has sent the dollar plunging, though it recovered slightly this week. With dollars worth less, the things you buy with dollars -- like oil -- cost more, even if there is no appreciable increase in demand.

Those same fears of inflation are sending many investors back to the oil market. Traders are buying oil futures as an inflation hedge, knowing that it will rise in price along with inflation. With more money flowing into the oil market, the same forces that drove oil to $147 a barrel last summer are at work.

And then there are the countries that produce oil. OPEC and other oil producers were thrown into economic crises when oil prices collapsed late last year. OPEC especially has been quietly working to reduce production to force prices higher.

They’ve managed to reduce world supplies some, but not by much, because of the world-wide collapse in demand. Because of the costs associated with extracting oil, industry analysts say most oil producers only break even when they can sell oil between $70 and $80 a barrel.

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