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Bubble may burst

The future at the gas pump is a murky one.

General consensus holds that prices will continue their record-setting rise through the summer, possibly topping $4 per gallon, before fall and winter bring some relief.
Beyond that, however, the picture blurs because the cost of crude oil, which is the driving force in the recent run-up in gasoline prices, is governed by a web of global factors — high demand, low supply, troubled stock and bond markets, drifting currency exchange rates, speculation and fear, to name a few.
A gallon of regular, unleaded gasoline in the Scranton/Wilkes-Barre/Hazleton metro area averaged $3.77 on Friday and diesel fuel hit $4.65, both all-time records.
Likewise, crude peaked just shy of $128 per barrel, a record high and more than double the levels seen last May, before retreating slightly later in the day.
“The balance of supply and demand shows that prices should go down, but the reality of Middle Eastern politics is that it could go anywhere” toward the end of the year, said David Wyss, chief economist at Standard and Poor’s.
“I’ve heard people say $40 and I’ve heard people say $200,” said Wyss, who pegged his own crude estimate at $100 per barrel by the end of 2008. “You have people on both sides of this. Some say this is just a bubble, and you have people who say this is the reality, this is all the oil there is.”
The world produces and consumes about 86.6 million barrels, or more than 3.4 billion gallons, of oil on an average day, according to the U.S. Energy Information Administration.
The United States takes the biggest gulp, swallowing 20.8 million barrels. China, the next largest consumer, uses 8 million barrels, but that balance is shifting.
U.S. and European demand has stabilized recently while China and India have seen near double-digit increases in their demand for the black fossil fuel as their economies expand and more drivers hit the roads. The supply of oil – the remains of prehistoric flora and fauna subjected to intense heat and pressure – has not keep pace.
“The world is consuming it faster than we’re adding new wells,” said Tim Considine, Ph.D., a professor of natural resource economics at Penn State. “It’s going to be an issue that’s going to be with us for the next five to 10 years.”
China and India “are where we were back in the early 1900s in terms of petroleum use per capita,” said Tancred Lidderdale, economist at the Energy Information Administration. “The potential for growth there is large.”
Experts also point to the weakened dollar and U.S. credit troubles as culprits in the spike. Investors seeking a hedge against the greenback and shelter from the turbulent stock and bond markets have set their eyes on commodity-based investments, oil chief among them.
And along with that comes speculation from investors who jump at the chance to buy during what they believe to be the beginning of a price increase with the hopes of selling high.
Wyss said he believes between $10 and $20 in the price of crude is attributable to a bubble created by investors.
Drivers can expect some good news, though. As refineries prepare to switch from the summer gasoline blend to the cheaper winter blend Sept. 15, they sell off inventory at a slightly discounted rate to clear space.
A number of new oil fields are also expected to start producing crude toward the end of this year and the beginning of 2009. Oil companies are now willing to seek out hard-to-reach deposits found in the depths of the Gulf of Mexico or extracted from shale because the higher prices make the more expensive processes economically viable.
The increase in supply and more conservative consumers should lower prices, experts say.
But of course, that is subject to revision. Muddling the math are countless geological, meteorological and geopolitical factors.
Turmoil in oil-rich nations, unanticipated moves by the Organization of Petroleum Exporting Countries or nationalized oil companies, slack yields from new wells, and the weather could all come into play.
“One of the great uncertainties is the hurricane season,” Lidderdale said. “Normally we expect one, two or three hurricanes to go through the Gulf of Mexico and temporarily stop production.”
Hurricane Katrina in 2005, for instance, wreaked havoc on refineries and wells around the Gulf and sent gas prices to highs not seen again until this year.
Experts agree the higher prices, on some level, are here to stay.
“Short term, in the next few years, I think you could see a decrease because prices went up too far, too fast,” Wyss said. “Long term, I think the trend is upward. The bottom line is, there were only so many dinosaurs.”
Source: Standard Speaker

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