News Analysis: What is driving oil and gas prices? 2009-06-24 00:51:50   Print

    By Matthew Rusling

    WASHINGTON, June 23 (Xinhua) -- Despite Monday's slight drop in the price of gasoline, economists are debating whether prices will continue to fall or whether they will rise again to new highs.

    Moreover, economists are pondering the reasons why prices could go one way or the other -- everything from speculation to the recession to turmoil in the Middle East and Africa.

    After a 54-day run up -- caused by a rise in the price of oil --the trend broke on Monday when gasoline slid to 2.69 dollars per gallon, or three tenths of a cent from the previous day, according to the auto group AAA.

    Gasoline prices have risen since April, when the national average was 2.05 dollars a gallon. The increase was caused by oil's rise from 35 dollars per barrel in December to more than 70 dollars per barrel last week. Oil prices dropped on Monday below 67 dollars per barrel.


    Among economists' most commonly held beliefs is that market speculation is driving price hikes.

    Speculators -- often large institutional investors -- dump their money into commodities such as oil when they are unsure of the stock market.

    That causes prices to rise, said Mark Weisbrot, economist and co-director at the Center for Economic and Policy Research, a Washington, D.C. think tank. Such speculation was blamed for last year's surge to 140 dollars per barrel.

    Speculators are calculating that the recession may have bottomed out and are banking on a strong recovery, which will cause an increase in demand for oil and drive prices upward, they reckon. That will allow them to cash in on the trend.

    Such optimism, however, may be misguided, some economists said.

    The stimulus package is far too small to spur any real economic growth, they said. A shallow recovery will be marked by waning demand and push oil prices as low as 33 dollars per barrel, some economists said.


    Other analysts say supply and demand are still the primary price drivers.

    Matt Simmons, founder of Simmons & Co., expects prices to triple in the next year.

    Oil will continue to rise, as last year's plunge from record highs to below the 50 dollars mark caused many oil fields to halt production, he told reporters.

    When production decreased, tight supply drove prices up. Producers will remain unable to increase supply fast enough to keep up with a coming surge in demand. That will cause oil to surge to 200 dollars per barrel in 2010, he said.

    Allen Good, analyst at Morningstar, an independent research provider, also believes that supply has tightened -- refiners have cut capacity because of maintenance and facility upgrades, he said.



    Others say weak demand from the United States for imported goods will lead to flagging world demand for oil, causing prices to decline, they said.

    Some economists say the dollar's strength determines the price of oil and gas, and some are eyeing the greenback to predict gas and oil price trends.

    Good said when the dollar is weak, oil tends to go up. When it is strong, prices drop.


    In spite of a wealth of data at economists' disposal, predicting oil can be a tricky business, as violence and instability can render such tools useless.

    Indeed, geopolitical events are getting traders' attention in recent months, experts said.

    In Nigeria -- Africa's largest oil producer -- rebels seeking a larger share of the country's oil revenues have escalated violence in the southern region as the military ramps up operations to flush them out.

    In Iran, protesters are staging massive street demonstrations to protest election results.

    Experts said trouble in these regions could cause supply disruptions and drive oil and gas back up.


    Sharp climbs and drops in oil and gas prices impact nations in difference ways.

    Ken Green, resident scholar at the American Enterprise Institute, a Washington, D.C. think tank, said countries such as Canada and the United States -- where populations are thinly spread out -- could come out the losers, especially in industries that rely heavily on gasoline, such as trucking. Trucks spend much on fuel to haul goods across vast distances, as opposed to more densely populated nations such as China and India.

    Consumers could also take a financial hit, which could send a ripple effect across the economy.

    Good said high prices at the pump cause Americans -- who use their vehicles as their primary mode of transportation -- to pay less elsewhere. Restaurants could see fewer customers and resorts could see fewer vacationers, causing sluggish growth and layoffs, he said.

    China and India, by contrast, would be less likely to experience such issues, as fewer people have cars.

    Countries whose economies depend heavily on exports could see transportation costs increase, cutting into profits, experts said.

    But even among those economists who foresee a substantial rise in gas and oil prices, most are wary of making gloom and doom predictions.

    Desmond Lachman, resident fellow at the American Enterprise Institute, said it is important not to exaggerate the effects of rising prices, as recent price jumps are still far below last year's levels.

    "But if they keep rising, that will be a drain on global growth," he added. 

Editor: Mu Xuequan
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