Why Gas and Oil Prices are so High

05/01/96

It's no secret that gas prices are high, and many are quick to point out that they are currently as high as they have been since the Gulf War 5 years ago. Amidst calls for the repeal of gas taxes and/or government intervention in the market, however, you may well ask why gas prices are so high right now. Keep reading.

Most accounts attribute high fuel costs to three or four factors, but underlying each of them seems to be the recent behavior of the oil companies, which have focused on slashing inventories as a way to cut operating costs and keep shareholders happy. Combine the conscious effort to reduce oil stores with an unusually severe winter in North America and Europe and you get what the industry calls "tight supplies." Additionally, the industry is currently incapable of increasing supplies, even if they wanted to. Spring is the season for the oil company rush to build up inventories ahead of the peak summer driving season: any extra oil produced is not considered surplus, but necessary, so supplies will remain tight.

The American Petroleum Institute reported domestic gasoline stocks for the week that ended April 19 were at 203.5 million barrels (7 million below last year's level and nearly a 20-year low). U.S. crude oil supplies are even lower at 297.6 million barrels last week (40.6 million less than last year).

The final reason cited for rises in prices is geo-political in scope: negotiations between the United Nations and Iraq have stalled, but they could allow Iraq to sell oil 700,000 barrels of oil a day to buy food and medicine. Refiners have keep inventories low, anticipating lower oil prices if Iraqi oil goes on the market.

Paul Dever -- The Auto Channel