You’re paying more for gas: Here’s why

Source: AAA Fuel Gauge Report

Think you’re paying more than you should be for gasoline right now? You are.

Holiday travelers can expect to pay the highest holiday gas prices in six years this July 4.

Prices tend to spike around Memorial Day, when increased demand cuts against a limited supply as refiners convert from winter fuels to summer blends. But by the middle of June, gasoline inventories are up and prices typically retreat.

This year, they haven’t.

Despite no apparent hit to Iraqi crude production and near-record levels of U.S. oil production, fears about the Middle East conflict have allowed financial speculators to bid up oil prices — another contributing factor to high gasoline prices.

The authoritative AAA Motor Club in May projected a drop between 10 cents and 15 cents a gallon during June. But Michael Green, a spokesman for AAA, said Iraq’s troubles are affecting prices more than expected.

“U.S. consumers are paying higher prices than what they would otherwise, due to the higher cost of oil,” Green said.

Speculative trading on the violence in Iraq is keeping oil prices about $4 a barrel higher than they would be otherwise, said Andrew Lipow, president of the Houston consultancy Lipow Oil Associates.

And that’s affecting consumers.

Metro Atlanta prices averaged $3.68 June 27. The highest paid per gallon in metro Atlanta was $4.11 in 2008, according to AAA.

“AAA expects the majority of U.S. drivers likely will pay the highest gas prices for Independence Day since 2008. Today’s national average price of gas is about 20 cents per gallon more expensive than the average on July 4, 2013, which was $3.48 per gallon,” the group’s latest report says.

If you assume that gasoline would revert back to about last year’s June price and add the recent jump, prices are about 15 cents a gallon higher than they should be. In a car with a 15-gallon tank, that’s $2.25 more per fill-up.

Multiply that by at least 212 million American motorists and you’re talking real money: If every American motorist filled up, they would collectively be paying $477 million more than they did in the same week last year.

Here’s the explanation for the stubbornly high prices: Fear has gripped oil trading markets, after the Islamic State of Iraq and Syria, known as ISIS, seized the Iraqi city of Mosul on June 10 and Fallujah soon afterward.

Financial traders fear a collapse of the Iraqi state that could suck Iran and Saudi Arabia into a regional conflict that threatens oil supplies. And those financial players far outnumber actual end users of oil in the markets where contracts for future barrels of oil are traded.

Iraq is a becoming a more important Middle East exporter in the past five years and is now the second-largest producer in the Organization of Petroleum Exporting Countries. But OPEC Secretary General Abdalla El-Badri said there is no oil supply shortage in Iraq and blamed the recent increase in oil prices on speculative trading in the markets.

“Right now, the market is very well supplied,” he told reporters. He pledged that OPEC could increase production if there is a disruption.

Iraq’s main oil fields are deep in the Shiite Muslim south, an area that is hostile to the Sunni Muslim ISIS. The global energy consulting firm IHS said the fields are protected by government forces as well as Shiite militias, and that an ISIS offensive against them would require substantial fuel and be difficult to sustain for long.

Despite the fears in financial markets, ISIS is unlikely to disrupt Iraqi oil exports, said IHS senior director Jamie Webster, a position widely shared among experts.

Robert McNally, an energy consultant and founder of the Rapidan Group in Washington, suggested that Iraq’s semi-autonomous Kurdish region might be able to actually increase oil exports from northern Iraq after seizing the city of Kirkuk in the midst of the crisis.

There have been reports the Kurds already are starting to export oil independently while the central Iraqi government based in Baghdad is in turmoil.

While reports out of Iraq suggest production and export are, for now, unaffected, big global oil companies won’t discuss their production there.

“We don’t have any comment,” said Richard D. Keil, a spokesman for ExxonMobil in Irving, Texas.

There’s little incentive for Keil to discuss production, since the fear gripping financial markets is tantamount to free money for the oil companies. ExxonMobil and other large players reap a windfall from higher oil prices and suffer if prices collapse, as they did during the Great Recession.

What’s particularly galling for many Americans is that the energy industry and its allies in Congress, when pushing for the rights the huge expansion in recent years of domestic drilling for oil and natural gas, insisted this new production would amount to energy independence and insulate U.S. consumers from events in the faraway Middle East.

John Felmy, chief economist of the American Petroleum Institute, said the Iraq crisis comes at a time when the oil markets already have lost expected supplies of crude from other troubled areas of the globe. He pointed to sanctions against Iran and lost production as a result of problems in South Sudan and Libya.

“It’s not just Iraq, of course. We’ve lost a couple of million barrels per day of capacity at the same time you’ve had growth in world demand — about 1.3 million (barrels per day),” Felmy said. “It’s a tighter market, and if not from the increased U.S. production, it would be even tighter.”