Speculators Will Drive Crude Oil Prices Higher until Demand Collapses

By Stouffer, Rick | Tribune-Review/Pittsburgh Tribune-Review, May 29, 2008 | Go to article overview

Speculators Will Drive Crude Oil Prices Higher until Demand Collapses


Stouffer, Rick, Tribune-Review/Pittsburgh Tribune-Review


The crude oil price bubble will burst, experts say. The question is when.

That's because the pricing of crude oil and gasoline mixes human psychology, bluffing and the actions of commodities traders who only see good times and higher prices ahead, industry experts agree.

The problem with permanent optimism at commodities trading markets like the New York Mercantile Exchange and others worldwide is that, eventually, good times and ever-higher prices will end, say the experts.

In the last year, crude oil prices have doubled, climbing 36 percent since Jan. 1 and 15 percent since May 1. Crude oil closed at $130.03 a barrel on Wednesday.

"We don't see any price relief until 2009," said Mary Novak, managing director for energy at consulting firm Global Insight in Lexington, Mass. "Global demand for crude oil continues to increase. Demand has to slow, to respond to price."

Traditionally, the cost of crude oil generally accounted for about 48 percent of the cost of a gallon of gasoline. Another 16 percent was the price to refine crude into gasoline plus profits, another 12 percent was the cost to transport and market gasoline at the retail level. The remaining 24 percent was federal and state taxes -- about 18 cents a gallon and 32.3 cents a gallon in Pennsylvania, respectively.

"In April, 73 percent of the price of gasoline was the cost of crude oil," said Jim Williams, president of WTRG Economics, London, Ark. "In May, the percent of gasoline's price tied to crude was even higher."

Surging crude prices translate into higher costs for refiners and skyrocketing prices at the retail pump. Williams said that when the price of crude increases by $1, the retail price of gasoline rises about 2.5 cents a gallon. That means a $10 jump in crude translates into a 25-cent increase at the pump. A crude oil barrel contains 42 gallons.

This week, the average gasoline price in Western Pennsylvania jumped 11.6 cents a gallon, according to AAA East Central's weekly Fuel Gauge survey. The average price of regular gas from a self- service pump was $3.946 a gallon, up from $3.83 one week ago, and 86.2 cents a gallon higher than the average $3.084 charged one year ago.

Hugh Campbell owns three Sunoco gasoline stations, including one in North Huntingdon that still does repair work, and two gasoline/ convenience stores in New Stanton and Monroeville. He's also president of the Western Pennsylvania trade group Petroleum Retailers & Auto Repair Association Inc.

"There's little profit on gasoline -- five or 10 cents a gallon," Campbell said. And "if you accept a credit card" it wipes out even that profit.

At $4 a gallon, Campbell says he makes about 63 cents profit on a $50 fill-up of about 12.5 gallons. But he must pay a 3 percent bank fee when a customer uses a credit card. On a $50 sale, that $1.50 fee means Campbell, in effect, lost 87 cents on the sale.

"We prefer cash," Campbell said. "You don't make money on gasoline, you make money inside the store or on repairs."

Crude prices are determined by what's known as the futures spot market price determined on major commodities exchanges like the Nymex. Prices quoted daily are month-ahead, spot market prices. Contracts between crude suppliers and refiners guarantee delivery -- not price. …

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Speculators Will Drive Crude Oil Prices Higher until Demand Collapses
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