MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

YOU DECIDE: Summer's here; will gas prices skyrocket?

By Dr. Mike Walden
North Carolina Cooperative Extension Service

Summer's here, school's out, families are looking forward to vacations, and — oh, yes — gas prices are up. It almost seems unfair. Just as the weather becomes nice and people can enjoy themselves outdoors, the cost of driving increases. As some of my students might say, “bummer.”

Summer is known in the gasoline business as the peak driving season. With more people on the road driving more miles, gasoline use increases. And with the increased usage come increased prices. Indeed, the highest prices for gasoline in a year typically come in the summer.

Some think this pattern is a conspiracy by oil companies to stick it to us just when we are most vulnerable. But as an economist, I look skeptically at such ideas.

Instead, the most reasonable explanation for high gas prices is that growing use is outstripping supply. Many people don't realize that oil supplies today are 25 percent larger than they were a decade ago. So high prices are not the result of less oil production. Rather, high prices follow from usage that's increasing faster than supply.

These tight market conditions occurred because new consumers entered the oil market in just the last few years. Half of the new oil consumed in the last five years has gone to Asian countries, mainly China and India. By comparison, the U.S. has accounted for only 17 percent of the increase. As countries like China and India have industrialized and developed, they have gulped down increasing amounts of oil.

Today's oil market operates on a razor-thin margin between consumption and supply. Five years ago, spare capacity, or the amount by which supply exceeds consumption, was 6 million barrels per day. Today it's less than 2 million barrels. This is why any factor, no matter how small, that even hints at reducing future oil supplies, can result in a major price hike.

Most recently we saw this happen after North Korea launched several military missiles. The world worried that a confrontation with North Korea could disrupt oil supplies. Similar price jumps followed threatening statements from Iran and warfare in Africa. Since there's very little wiggle room, or margin for error, in oil markets, every sneeze is like an earthquake to the oil sector.

High gas prices don't seem to be putting much of a dent in American's driving habits. Why? One reason is the economy is doing reasonably well, with jobs increasing and incomes rising. Such economic conditions contribute to more driving and greater gas consumption.

Where does this leave gas prices this summer? As usual, it appears gas use is picking us and in fact, a record amount of gasoline was consumed in the last part of June. So as during most summers, driving during the warm months will put upward pressure on prices.

There are some oil-related things to smile about, however.

Refineries are working overtime and inventories of gas are good. Energy efficiency continues to improve. Plus, forecasters predict that hurricanes will be more likely to hit the East Coast and stay out of the Gulf, where numerous oil platforms and refineries are located.

All in all, the gas situation looks normal for this summer, but when “normal” ranges from $2.50 to $3.25 a gallon, you decide if this good news or bad!

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Dr. Mike Walden is a William Neal Reynolds Professor and extension
economist in the Department of Agricultural and Resource Economics of North
Carolina State University's College of Agriculture and Life Sciences. He
teaches and writes on personal finance, economic outlook and public policy.
His You Decide column is provided every two weeks by the Department of
Communication Services. Earlier You Decide columns are available on the Web
at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm
Related audio files are at
http://www.ces.ncsu.edu/depts/agcomm/writing/walden/index.html