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At a Gas Station Near You — $3 Gasoline

Temporary Spike or a new Trading Range?

When prices move higher, it is sometimes a reflection of temporary conditions. Last year’s hurricane season is a good example.

The recent price surge seems different, more linked to underlying market fundamentals. While we do not embrace some of the spectacular predictions about oil and fuel prices, there is increased risk.

A look at some basic facts about supply and demand provides the right perspective.

graph_chinaoilproduction20.gifThere were ten million vehicles on Chinese roads in 1995 and now there are 27.5 million. Growth is rapid — and it is just getting started.
China has already become the second largest oil consumer in the world. Industrial demand is “soaring.” (WSJ)

The US consumes 25% of global oil supplies and “shows no sign of slowing.” (WSJ)

Refinery operations have been running at over 95% of capacity, with little chance for maintenance.

Demand is growing more rapidly than capacity, making this problem worse.

graph_oilconsumption2005.gifSoaring Demand — Restricted Supply

There is not enough slack to absorb any shocks to the system. This creates a climate where major gas price increases are more likely.

(This article was previously published in the print version of “Pumps”, Vol. 1)

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