The finance ministers of the Group of Seven most industrialized nations released a statement Tuesday urging oil producers to expand output in the face of sharply higher oil and gas prices: “The current rise in oil prices reflects geopolitical concerns and certain supply disruptions. We encourage oil-producing countries to increase their output to meet demand,” reads the statement. WTI light sweet crude has risen more than $15 to $95.60 from the low set in June this year. Gas prices increased 9 cents last week alone and now stand at $3.80 for the nationwide average according to AAA, which tracks gas prices on a national level.
According to AAA spokesman Robert Sinclair Jr., the recent increase in crude and gas prices was mainly “speculative” in nature. He thinks that the recent steep increase in crude and gas prices is due to a couple of factors, but we are not facing an immediate supply “crisis” at this moment and the recent bid-up was probably “overdone.”
One of the reasons for the speculative increase is Hurricane Isaac, which made a second landfall Wednesday in Louisiana and has prompted oil producers to shut down two-thirds of production in the Gulf of Mexico. According to Sinclair, we can expect “minimal” damage and some regional disruption, as Isaac is a much smaller storm than Katrina, which knocked out electrical supply to rigs and refiners, thereby impacting production beyond any direct damage sustained. He also expects companies to be better prepared this time around: “[Katrina] was a category five—the most powerful that you can get—and this one is having a tough time to get to category one.”
The next big factor contributing to the price rise, according to Sinclair, is the geopolitical tension surrounding Iran. He cites that sanctions—The International Energy Agency reports that oil consumption from Iran went down to 1 million barrels per day since the sanctions began—are another big reason for the dramatic price increase in gasoline futures: “There is a threat that Iran will mine the Strait of Hormuz, through which about 20 percent of the world’s crude oil transits.” The Strait of Hormuz is a very narrow sea-passage at the southern end of the Arabian gulf and Iran has voiced the intention to block the strait for transit should tensions escalate.
On the flip side, the end of the driving season, which sees 85 percent of American holiday makers set off by car during the summer months is coming to an end and might ease demand pressure a little bit. “That’s just one of many factors that influences the price of gasoline,” says Sinclair, who also thinks that it’s hard to predict future oil prices due to the many factors that influence pricing.
What Western Governments Can Do
Since Western industrial governments consume more oil than they produce, they are limited in their options. Apart from putting pressure on producers, which the G7 is apparently trying to do, there are only a few other options. One of them is releasing oil from strategic reserves to artificially lower the price. This was done in 2011 to ease stress during a supply disruption during the Libyan civil war.
“That option has been on the table for some time, and remains on the table, but we have no announcements to make today,” a spokesman for the White House said according to a Reuters report. Both the IEA—which mostly represents Western oil consumer nations—and Sinclair do not believe that this is a good option at this point in time.
Maria van der Hoeven, the executive director of the Paris based IEA said in an interview with Reuters: “Higher prices alone are not the trigger for an IEA collective stock release and at this moment we see that the crude oil market is adequately supplied.” AAA spokesman Sinclair said: “We at AAA think it would be a mistake to release any supplies from the strategic petroleum reserve as a way to provide relief from higher prices. Those reserves are in place to deal with major interruptions in supply.”
According to Sinclair, the final version of the rules concerning fuel efficiency of American automobiles issued Tuesday is a step in the right direction: “The other thing that can be done to save gasoline by having more fuel efficient vehicles is certainly a good thing. … Americans are only 2 percent of the world population but use up 25 percent of fossil fuels. That is not sustainable.”
According to the White House, the Obama administration rules will increase the average car’s mileage per gallon from the current level of 29 mpg to 54.5 mpg in 2025. These rules require car manufacturers to increase efficiency for normal passenger cars by 5 percent throughout the program. The 13 biggest car manufacturers in the United States support the measures, which are expected to save a total of 12 billion barrels of oil—14 percent of daily consumption—and $1.7 trillion in expenditure on gasoline over the life of the program.
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