Gas Prices Going Up

Feb. 21, 2011 — -- Why are gas prices going up?

"In a word: Libya," says petroleum expert Andrew Lipow, president of Lipow Oil Associates in Houston. He has been following gas prices one way or another for more than 30 years.

Unlike Egypt and Bahrain, he says, Libya is a significant exporter of light sweet crude.

Most of that gets exported to Europe: Italy, Germany, France and Spain. So, how does it affect the United States? We import 40 percent of our crude from Europe, refine it, and then export back to them the distillates, including gasoline and diesel. So, any disruption in Europe gets felt in the 50 states.

"You hear that we import a lot of crude," says Lipow. "And yes, we import about 9 million barrels a day. But less than 1 percent of that comes from Libya. What the oil market is worried about now is, we've seen unrest spread throughout the Middle East -- Morocco, Algeria, Tunis, Egypt. What if that should spread to Saudi Arabia, which accounts for 9 percent of the world's supply? They are the supplier of 11 percent of our crude oil. The market is worried about that supply being disrupted."

Oil prices jumped to nearly $88 a barrel in Asia today amid fears the violent protests in Libya could disrupt crude oil supplies.

"Oil hates uncertainty. It hates political turmoil," says John Hoffmeister, CEO of Citizens for Affordable Energy and the former president of Shell Oil. "And traders will be having customers buy it as quickly as they can to lock in supplies, and that drives the price up."

Victor Shum, an energy analyst with Purvin & Gertz in Singapore, says fears that the turbulence spreading across the Arab world would shut down oil production are most likely unfounded, but they are still having an effect on prices.

"It's unlikely we're going to see any meaningful disruption of oil from the Middle East or North Africa, but the spread of this unrest has raised anxieties," Shum tells The Associated Press.

Over the next seven to 10 days, says Lipow, the U.S. consumer is going to see rising prices -- almost immediately. That's because there's not a lot of lag time when it comes to pricing.

"Much of our imported crude and imported product (gasoline, diesel) is priced the minute it lands in the U.S.," he says.

Prices will get worse, he predicts, if the unrest gets worse.

"We should be concerned that unrest will affect oil prices and, consequently, impact the economy," he says. "Today, according to AAA, the average cost of gas in the U.S. is $3.17 a gallon. A number of years ago, it went to $4. At that point, you begin to see it have a significant impact on discretionary spending by consumers."

Why is gas still $3 a gallon at the pump in the Midwest? Because, says Lipow, we have a glut of crude right now in the Midwest, but we can't easily get that crude to refiners on the East Coast, the West Coast or to refineries on the Gulf.

Since those refineries can't make use of it, they instead have to use imported oil selling at $105 a barrel, not the $90 quoted on the Chicago Merc.

Meantime, Lipow says, the United States continues exporting 15 percent to 20 percent of the gasoline and diesel distilled right here on our own shores.

"Our refineries are tooled to make a lot of gasoline -- not only for our domestic needs, but for exports," he says.

If Libyan oil became unavailable altogether, how would that affect pump prices?

Right now, says Lipow, the United States has 726 million barrels of various grades of crude stored in the Strategic Petroleum Reserve.

"The SPR is in fact full, but we have no government reserve of gasoline or diesel," he says.

Even so, 726 million gallons buys a lot of breathing room.

"If Libya provides us with less than 1 percent of what we need in crude, we'd still have several years of supply," Lipow says.