As we noted in our earlier post last week, there was another mix of good and potentially bad economic news. While the Dow Jones Industrial Average (DJIA) broke through 13,000 for the first time since May 2008, gas prices were projected to approach levels not seen since the spring of 2008. Although actual gas prices are still below even those of May 2011 when gas reached $4.02 per gallon, this is undoubtedly bad news in a nation that consumes more energy than any other nation on earth.
The factors driving this latest rise are the same as those that drive any market: supply and demand. Basically, gas prices are up because supplies are (at least potentially) down. In 2008, surging gas prices were the result of two factors: decreased supply due to U.S. refinery problems, and surging crude oil prices. While there was little to be done about the latter (other than consumer behavior decreasing demand), the U.S. was able to get refinery capacity back and, as the graph below shows, gas prices decreased steadily after that. As for the current rise in gas prices, the primary factor is once again supply, or more correctly, the fear of diminishing supply and a little international political intrigue that is driving that fear.
In recent days, Iran placed an oil embargo on France and Britain and considered extending that embargo to other European Countries. While this does not directly affect the United States, which has banned the import of Iranian Oil since the Hostage Crisis of 1979, it does introduce new buyers competing for oil normally purchased by the U.S. However, it is unlikely that a supply shortage will actually occur. For that to happen, Iran would have to stop supplying oil to the world market and, given that oil is Iran’s main source of income, it is doubtful that will happen.
We are interested in your thoughts on this. Did you know gas is actually less expensive now than it was in May 2011 or July 2008? Join the discussion below or let us know via Twitter or Facebook.