High Gas and Oil Prices: It's Not Just About the Middle East

March 28, 2011 — -- Gas prices are still at their highest levels since 2008 in part over the Japan earthquake and turmoil in the oil-producing Middle East. But analysts say the price of oil and gas would still hover at a surprisingly high level despite geopolitical concerns.

Oil futures settled at $105.40 a barrel Friday, the third consecutive day above $105, according to the Chicago Mercantile Exchange Group.

Today, the Department of Energy will release its weekly gas prices and analysts expect they will remain mostly unchanged. Last week's national average was $3.51 per gallon for regular gas, an increase of 74 cents from a year ago, and .05 cents from the prior week. Last week was the 13th consecutive week that the average was above $3 a gallon. The last time gas was above $3.50 was Sept. 29, 2008, when the weekly average was $3.64.

Robert Powell, Middle East analyst with The Economist Intelligence Unit, estimates that even without the current conflicts in countries including Syria, Yemen, Bahrain and Libya, oil would still be around $90 a barrel. Why? The simple rules of supply and demand, he said.

"The fourth quarter of last year was pretty robust globally," Powell said.

In fact, the Commerce Department on Friday announced that the U.S. economy grew more quickly than first thought. Gross domestic product in the U.S. grew at an annualized rate of 3.1 percent, revised from 2.8 percent.

Charles Dewhurst, national energy practice leader at BDO, agrees with Powell that without the recent global events, oil prices would be around $90 a barrel. He points to events in Libya and Japan, in particular, as contributors to the high price of oil.

"My perspective is there probably is a $15 price premium right now because of those two events," Dewhurst said. "The Japanese economy is going to need its electric power from oil-based sources as a backup to their nuclear problems. Their demand for oil has already increased."

"Libya's dreadful civil war is the other side of the equation," Powell said.

Powell also said increased production from industrialized and developing nations has contributed to high demand of oil, and therefore an increase in oil prices. China and India especially have had a voracious appetite for manufacturing inputs, according to Powell.

"The China story is pretty spectacular," Powell said.

China is the second biggest consumer of oil, behind the U.S., and is expected to increase its demand by 6.5 percent this year, according to the U.S. Energy Information Administration.

This week, Ian Christmas, director general of the World Steel Association, said China and emerging economies will intensify global steel production to new records this year, according to Reuters.

Powell said the "political risk premium" is greatly affecting oil prices. These are traders' concerns about future risks to oil supply and demand, whether oil will disappear from the market or not.

"The political risk premium is slightly overdone," said Powell, estimating that after the summer driving season, "When the market realizes these do not affect major oil producers or are affecting small oil producers," there will be "some relief in oil price."

"You'll see demand slowing and that's just natural," Powell said.

Leo Abruzzese, director of global forecasting of The Economist Intelligence Unit, expects oil and gas prices to decrease around the end of summer for two reasons.

Demand for oil will decrease slightly from Europe, the U.S. and possibly China, around the summer time from the current high demand levels, he said. Once the Middle East protests subside, the risk premium will fall, and that will decrease gas prices.

"While I can't make a gas price prediction, we think it's at its peak now and will be for a few more weeks," Abruzzese said. "We think there will be modest reductions at the pump and it will cost drivers less to fill up in second half of year than it does now."