March 29, 2017

Gas Prices Soar Amid Libyan Crisis

During the week ending March 7th, the national average for a gallon of gas increased fourteen cents to $3.57, according to the US Energy Administration. Among the last fourteen weeks, this is the thirteenth week with an increase in the average price of gas. While there is a broad trend of rising gas prices, there were drastic price rises in the last two weeks. These drastic increases are primarily due to the crisis in Libya, which began nearly three weeks ago on February 15th.

At the end of November, a gallon of gas nationally averaged $2.91 per gallon. Eleven weeks later, when the Libyan revolt began, gas had risen to a national average of $3.19 per gallon. Even though the average price for a gallon of gas increased in ten of those eleven weeks, the average increase was modest at three cents per week. In the past three weeks, contrarily, the average increase was much higher at thirteen cents per week. These sharper increases also correlate to the start of the Libyan revolution and the subsequent rise in the price of oil.

Following the first week of the Libyan crisis, gas prices rose five cents to $3.24 per gallon. The next week, gas prices rose nineteen cents to $3.43 per gallon. Last week, gas prices rose fourteen cents to $3.57, as mentioned above. These price increases are directly related to the rising price of oil, which has increased as the Libyan crisis unfolded.

On February 15th, when the serious nature of the Libyan revolt was still unknown, the price for a barrel of oil closed at $87.50. The price of oil slightly climbed through the first week of the Libyan crisis and closed at $89.81 on Friday, February 19th. Then, on February 22nd, the price of oil rose almost 6% in a single day and closed at $95.37. The price hovered around $100 per barrel until the end of last week, when it closed at $104.91 per barrel on March 4th. As a result, the price for a barrel of oil has risen about 15% in the last two weeks.

A $10 increase in a barrel of oil typically translates to a 24 cent per gallon increase in gas prices, according to the US Energy Administration. This formula generally correlates to the recent increase of gas prices. With this formula, a 15% increase in oil prices would result with a 36 cent per gallon increase in gas prices. In the last two weeks, gas prices have correspondingly risen 33 cents.

Without doubt, the price of oil has caused the hike in gas prices. Though, more importantly, the reason for the sharp increase in oil prices is due to the ongoing crisis in Libya. Libya is the world’s twelfth largest oil exporter with 1.5 million barrels exported per day, according to the International Energy Agency. Even though this is only 2% of the world’s oil, this causes a worldwide shift in the supply and demand of the energy market.

At the same time, developing countries around the world, particularly in Asia, the Middle East, and Africa, are increasing their demand for oil and also contributing to a shift in the market. Gas prices were modestly increasing prior to the Libyan crisis likely because of this growing global demand for oil. The combination of this growing demand and the Libyan crisis are the two main contributors to the rising prices in the energy market.

In an attempt to ease rising energy prices, officials in the Obama Administration, such as the White House Chief-of-Staff William Daley and Treasury Secretary Timothy Geithner, have suggested tapping the strategic petroleum reserve. With 727 million barrels of oil, the US oil reserve is the world’s largest and was established in 1975 after the 1973-’74 oil embargo to respond to future market disruptions. Since 1975, the reserve has sold oil on only five occasions, including:

  1. 1985 – Test sale of 1 million barrels.
  2. 1990 – Test sale of 4 million barrels.
  3. 1991 – Desert Storm sale of 17 million barrels.
  4. 1995 & ’96 – Deficit reduction sale of 28 million barrels.
  5. 2005 – Hurricane Katrina sale of 11 million barrels.

As these five sales show, the US government rarely uses the oil reserve. An argument against use of the oil reserve for the current rise in oil prices is that the market is not currently facing a major disruption. Although this is probably true for the time being, if the price of oil continues to climb, the disruption to the oil market could become more severe and eventually require use of the reserve. Whether or not to use the oil reserve is at the discretion of the Obama Administration.

Meanwhile, a sharp rise in energy prices ultimately decelerates a recovery in the US economy. Over 200,000 jobs were added in the private sector during February, but rising energy prices could prevent job growth from sustaining this relatively high level. Energy prices are certainly a growing concern for the US economy, especially as current gas prices are higher than any other point throughout President Obama’s term.

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