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Demand is the demon behind high gas prices

Tuesday, August 15, 2006

ANCHORAGE, Alaska -- The nation's journey to $3 per gallon gas has been more like a drag race than a meandering road trip.

With the partial shutdown of Prudhoe Bay last week, motorists who have felt the pain at the pump had more to moan about as the simple dynamics of supply and demand kept the prices hovering at a level that seemed unfathomable a few years ago.

"I complain when I can, if anybody will listen," Victor Gianotti said Monday in Raleigh, N.C. "As long as we're involved and we stay involved in the Mideast and we're not self-sufficient we're going to have to take it in the teeth."

The latest target of drivers' venom is BP PLC, which admitted it failed to properly test and maintain pipes that became corroded and leaked twice this year near the edge of the Arctic Ocean.

While the loss of about 200,000 barrels of Alaskan crude a day will contribute to the high price of gasoline, $3-per-gallon gas is likely to become the norm until the desire for it declines.

"The real story here is this is demand price shock, not a supply shock," said Severin Borenstein, director of the University of California Energy Institute. "$3 a gallon is not much of a story anymore. People don't like it, but they adjust and go on with their lives."

Sam Ahmed, of Dade City, Fla., said he thinks the prices are exaggerated, and he hopes they don't go higher.

"Hopefully it's going to stay around $3 so we can buy gas," he said as he filled about half the tank of his Ford F-150 pickup for $50. "But if it goes to five bucks I'm going to have to buy one of those mopeds."

The last time the market was normal was in January 2003, Borenstein said. That was before the U.S. invasion of Iraq. The economy was still lukewarm and the price of a barrel of oil was in the $20s and forecast to stay that way for another 20 years.

Americans are beginning to adapt to the higher prices with summer travelers taking shorter trips closer to home, according to AAA spokesman Mike Pina.

A poll released last week by the Pew Research Center found 55 percent of drivers said they were driving less because of high gas prices. About one in five had started carpooling or sharing rides more often, while 12 percent had begun using mass transit more frequently.

Yvette Mcintosh, 37, a hospital clerical worker from Detroit, said her family has car pooled, trimmed personal expenses and cut back on vacation.

"I'm gonna have to start catching the bus," Mcintosh said Monday as she paid $2.97 a gallon. "I'm really thinking about it if gas prices keep rising."

Fuel alternatives, such as ethanol, have some promise but other long-term solutions, such as raising the federal gas tax to inspire people to drive less is not likely to find favor with motorists or politicians.

And increasing domestic drilling in places deemed sacred by some -- oil fields off the coasts of Florida and California and in Alaska's Arctic National Wildlife Refuge -- is fiercely opposed by environmentalists, said James Sweeney, professor of management science and engineering at Stanford University.

Phil Flynn, an analyst at Alaron Trading Corp. in Chicago, said he remembers when energy officials said the price of gas wouldn't top $2 a gallon. Now, the reality is we'll probably never see those prices again as crude oil rises about $10 a barrel each year.

"I have a hard time believing we're going to see a dramatic drop in price over the next few years unless the world economy takes a turn for the worse," Flynn said. "I think we're going to be in a boom time for oil for the next 20 years."

With the slight hike in prices last week many motorists were shaking their fists at BP, which like other oil companies reported record profit as the price of gas skyrocketed.

But Borenstein said the laws of the market, not the oil companies, are to blame.

"People seem to think this is shocking and outrageous," he said. "Gas costs a lot and anyone who has it is going to make more money. It's like asking someone in San Francisco to sell a home below market price because they're already making a lot of money."


Associated Press Writers Samuel Spies in Raleigh, N.C., Brian Witte in Baltimore and Brian Charlton in Detroit contributed to this report.


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