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Speculation leads to gas spike
Question of the Day
A surprise spurt in consumer demand and a growing wave of investor speculation have sent the prices of crude oil and gasoline soaring, creating worries for the overall economy and legislative peril for energy companies in the nation’s capital.
Oil prices topped $70 a barrel Tuesday, more than double the $31 going price in January. Gasoline prices at the pump rose to $2.62 a gallon this week, up nearly a third from $2 a gallon in January. Financial analysts say that while oil prices may have peaked, gasoline prices are still on the rise.
The Energy Department’s Energy Information Administration predicted Tuesday that gas prices will increase at least 8 cents a gallon before topping out at $2.70 a gallon next month. It also said that the price of crude oil will average $67 a barrel throughout the rest of the year.
Some analysts see financial speculation as a major cause of the price spurt. Investors expect the world economy to begin to recover in the second half of this year, spurring demand for oil. Consumption in China never stopped growing.
“The No. 1 fundamental driver of the crude market is money, and what we’re seeing now is a reflection on where money managers see the economy heading,” said Tom Kloza, chief oil analyst at the Oil Price Information Service. “People think oil prices will be much higher two years from now, so they’re buying.”
John Felmy, chief economist of American Petroleum Institute, a trade group for oil and gas drillers, agreed.
“The market is responding to expectations of an improving economy,” Mr. Felmy said.
But the higher prices have a downside.
Democrats in Congress and environmentalists are likely to use higher oil prices as ammunition to advance climate change legislation now pending in the House of Representatives. The legislation would force the transition to a clean economy and require oil companies and other users of fossil fuels to pay heavily for their carbon dioxide emissions.
When oil prices are around $30 or $40 a barrel, as they were six months ago, there is little incentive to invest in expensive wind and solar energy projects, so the legislation loses some of its appeal.
But “as oil prices rise, so will big oil companies’ profits, creating more importance to pass the legislation,” said Daniel J. Weiss, director of climate strategy at the liberal Center for America Progress.
Mr. Weiss added that higher oil and gas prices will soon return to the forefront of the climate and energy debate, helping to push legislation through the House.
At the same time, higher oil and gas prices are likely to slow the economy’s eventual revival. Energy Secretary Steven Chu warned last week that gasoline prices in the $3-a-gallon range could require the Organization of Petroleum Exporting Countries to increase production to stabilize the economy.
“There’s no question that increasing oil prices slow the economy because it takes more money out of people’s pockets,” Mr. Felmy said. He added that a $10 increase per barrel of oil subtracts 0.5 percent from gross domestic product.
Still, signs abound that the U.S. economy is no longer in a downward spiral. The Labor Department reported last week that jobless claims and unemployment rolls fell by record levels, sending oil prices above $70 a barrel. AAA reported gasoline demand before Memorial Day rose 2 percent more than it had in the previous year.
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