Oil Keeps Climbing, but What About Gas?

Oct. 29, 2007— -- With the price of oil shooting up more than 20 percent in the last two months, most Americans have been bracing themselves for a hike at the gas pump. But what many of them don't know is that it's already happening.

The rise can be seen when comparing gas prices from this time last year.

The price of gas usually rises and falls according to the demands of the seasons, with the peak typically occurring during the summer. Once Labor Day hits, prices typically start to fall.

But not this year.

According to the U.S. government's Energy Information Administration, the average price of regular unleaded gasoline was $2.80 a gallon on Labor Day, which fell on Sept. 3 this year. This week, the price had climbed slightly to $2.87 a gallon.

In contrast, last year the price of gas fell from $2.73 on Labor Day to $2.21 during the same week at the end of October -- a 19 percent drop that consumers have not seen this year.

The price of oil hovered closed above $93 a barrel today in New York trading -- part of a massive run-up in the last few months. Back around Labor Day, oil was trading at $75 a barrel. This time last year, it was trading at about $58 a barrel.

Oil has seen numerous nominal record closes in the last few weeks and is edging up against the all-time inflation-adjusted record.

That record -- roughly $101 in today's dollars -- was set in the spring of 1980, during the height of the Iranian hostage crisis.

A mix of factors has caused today's run-up, beginning with supply and demand. There has been is a decline in crude stockpiles in various countries around the world at the same point that overall demand has not declined. Even as the price of oil has climbed, there is "little evidence to suggest that demand has softened in response," Salman Partners noted in a recent analyst note.

The issue is compounded with concerns about geopolitical instability in the Middle East, most recently exacerbated by tensions between Turkey, Iraq and the United States.

Finally, there is the problem of the falling dollar. Oil is traded in U.S. dollars, and as the price of the dollar falls compared to other world currencies, the price of oil goes up.