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Why Oil Is Rising and Gasoline Isn't


Consumers shouldn't fret that oil is up 20% in three months.

Demand for oil remains bearish with unemployment near 10%, slow economic growth ahead, and ample fuel supplies on hand. But the weak dollar and fear of inflation has led some to bet on oil as a hedge against the falling greenback, driving the price of oil to nearly $80 a barrel.

A barrel of crude oil fetched $79.05 in Asia on Monday, the highest since last October but 46.3% below the high of $147.27 reached in July 2008. Last summer, oil prices spiked on high worldwide demand and limited supply. In the US, the price receded in Monday's trading to $78.82 a barrel on the New York Mercantile Exchange.

"We hope the recovery is imminent, we hope jobs rebound and consumer spending recovers," says Sarah Emerson, president of Energy Security Analysis in Wakefield, Massachusetts "But right now, the Dow and the financial institutions are way ahead of the curve and pulling oil with them -- and that's just fear of inflation."

For the consumer, this means gasoline prices will rise but won't suddenly spike and won't come anywhere near the $4 a gallon or more seen in some regions of the nation in the summer of 2008. Last week, the US Energy Information Administration said gasoline averaged $2.50 a gallon across the nation, up $0.02.

"This isn't about Exxon (XOM), BP (BP), and Shell stealing money from the consumer at the pump," Emerson says. "It's about institutional investors wanting to hold commodities."

The US Energy Information Administration reports that gasoline supplies totaled 8.5 million barrels for the week ended October 9, down from 9.4 million the preceding week. Still, US supplies of distillates, including gasoline, diesel, and jet fuel, stood about 30% above the five-year average for the period.

Even if the economy rebounds, demand for gasoline is expected to rise slowly in the US but almost certainly won't match the annual summer run-up in price. If crude oil prices don't change dramatically due to an international crisis, gasoline prices typically increase $0.10 to $0.20 a gallon from January through summer. Good weather and vacations typically cause US gasoline prices to average about 5% higher during summer than the rest of the year.

Last month, the Organization of Petroleum Exporting Countries said it would leave production quotas unchanged at 24.8 million barrels a day, counting on a rebounding world economy to maintain prices. OPEC produces about 40% of the world's crude oil. Last year, the cartel cut production by 4.2 million barrels a day in an effort to prevent a global oil gut and falling prices.

Nevertheless, crude oil prices have risen about 20% in the last three months despite large stockpiles of refined fuel. Such an increase in crude oil prices may be overly optimistic and may be hard to sustain. If so, that's good news for consumers pulling up to the pump and so-so news for investors betting on higher prices in the immediate future.

A strong rebound in demand would be good news for producers. During the economic slump, production cutbacks were routine and Valero (VLO) and Sunoco (SUN) closed some plants.

Cheap, or at least reasonably priced gasoline is likely to reduce short-term demand for electric or hybrid cars developed by major automakers such as Ford (F), Toyota (TM) and Honda (HMC). This could mean fewer dollars devoted to research and could hamper the next generation of electric cars.

The good news for consumers is that despite the recent increase in crude oil, gasoline prices at the pump won't suddenly climb close to last summer's record high.

"You tell me why the Dow Jones Industrial Average is over 10,000 and I'll tell you why oil is near $80 a barrel," Emerson says. "This is not a fundamentally sound market for crude oil."
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