Gas Prices

The last decade has seen an alarming increase in the price of gasoline. Many drivers are asking the question, will the trend of rising gas prices reverse itself and when? An examination of the facts, however, reveals a situation more complicated than greedy corporations out to gouge the consumer.

Dale Madill of Service Nova Scotia says there are many factors that go into determining the price of gasoline. Among the many determining factors are geo-political forces, particularly diplomatic relations with oil-producing countries such as Iran and Venezuela.

Market forces also play a role in determining the price the consumer pays at the pump. It has becoming common practice for brokerage houses to buy and sell oil on the commodities market, which can cause the price to fluctuate up and down.

 

Weather can also play role in affect gas prices Madill says. Hurricanes can force rigs in the Gulf of Mexico to suspend drilling operations and can delay oil tankers at sea, decreasing the available supply. Seasonal shifts are another major factor. As winter weather sets in, many refineries shift from producing automotive products such as gasoline and engine lubricants to home heating fuel.

The real determining factor, according to Madill, is supply and demand. Each week the U.S. Department of Energy releases a report listing how much oil and gasoline has been consumed in the United States and how much remains. Madill says this is a good way to track rising gas prices because a drop in the size of the remaining reserves is usually a sign of an increased demand and by extension an increase in price.

“I don’t have a crystal ball,” says Madill when asked if he thinks the current trend of rising gas prices will continue. What he does know is that the demand for gasoline has remained consistently high, despite the already high price consumers are paying to fill their cars. So long as the supply decreases, Madill believes that the price will continue to go up as the cost of energy continues to rise.

Madill admits that he is not sure at which point gasoline will become too expensive to purchase. The public demand for sport utility vehicles is increasing, he says. People are buying cars that require more fuel. This pushes up the already high demand for gasoline. It is reasonable to assume, though, that at some point the demand will outpace the supply and the price will come back down to a more reasonable level. “I don’t know if or when we’re going to hit a tipping point,” says Madill.

He believes, however, that a time will come when alternative fuels and other technologies will become economically competitive with gasoline. When that happens, Madill predicts that consumers will begin to switch from gasoline to cheaper alternatives, not only because they are better for the environment, but because they are easier on the pocket book.

Madill also doesn’t believe that oil companies have been adversely affected by higher prices at the pump. If they were, then prices would be lowered to entice consumers into buying more gas, he says. Investment in new technologies, alternative fuels and more efficient ways of producing energy are most likely to have this kind of impact, says Madill.

Madill is not sure if or when the oil industry will start to see the effects of the shift towards alternative fuels, but he believes that, “at the end of the day, the consumer is the person that will decide, ‘I am going to be more fuel efficient, I am going to use mass transit…I am going to conserve.’” Until this happens, it’s business as usual for the oil companies, say Madill.

Steven Atkinson of Ultramar Fuels agrees. Thus far, there has been no impact to the company’s revenues because of rising gas prices, he says.

Like Madill, Atkinson believes that the price of gasoline is vulnerable to external geo-political and economic forces that are beyond anybody’s ability to control. Fewer disruptions means that the price of oil per barrel will be cheaper and will in turn bring down the price at the pump. In the long run, however, Atkinson believes that the price of gas will continue to be volatile and will most likely continue to rise.

Atkinson doesn’t know exactly when gasoline will become too expensive to purchase, but he believes that if the price of gas rises much beyond $1.50 per litre, many drivers may start to examine their driving habits in an attempt to save money.

This won’t affect the market share, he says, because the problems that stem from rising gas prices are the result of changing perceptions of the oil industry and an increasing emphasis on environmentalism.

If the trend continues, the effects will be felt more directly by the oil companies that the consumers, says Atkinson. The reason for this, Atkinson says, is because the issue is a strategic one and doesn’t really affect Ultramar’s financial standing. As alternative fuels become more and more common place, the market will have shift to accommodate them.

Atkinson believes that the real driving force behind rising gas prices and the shift to alternative fuels isn’t economics, but climate change. Like Madill, Atkinson believes that in the long run consumers will do what is best for the environment and their pocket books.

Advertisements

About this entry