Energy & Entrepreneurs

Gas Prices, the Summer and Beyond

by Raymond J. Keating

Gas prices certainly affect consumer pocketbooks, business bottom lines, and the economy. In many ways, rising prices at the pump act as a kind of tax increase.

In recent times, the rise in gas prices has been notable. As of March 21, the one-year increase in the average price of regular gasoline jumped by 26 percent. Compared to two years ago, prices are up by better than 80 percent.

With spring here, many wonder what's ahead for the late-spring and summer driving season?

Based on its latest Short Term Energy Outlook, released on March 8, the U.S. Energy Information Administration is looking for the monthly average regular gas price to peak this year at $3.75 per gallon in June. The EIA puts the chances of gas moving above $4 per gallon in July at 25 percent.

Unfortunately, the unknowns are considerable when it comes to key factors impacting where the price of gas might be headed.

First, oil and gas demand will depend on the state of the U.S. and global economies. But growth is still uneven, and downside risks have increased, for example, with the dire developments in Japan. If growth steps up, rising demand will exert pressures pushing prices higher.

Second, the Middle East and North Africa region continues to be a tremendous source of uncertainty. Keep in mind that, as the EIA has reported, over a third of the world's liquid fuels are produced in the Middle East and North Africa. The ongoing unrest and violence in the region has injected a "fear premium" into the price of oil - and therefore, gasoline - and since no one knows how matters will shake out in the region, no one really knows where oil prices will go.

Third, the Federal Reserve's expansive monetary policy since September 2008 - which is without precedent - has raised serious threats regarding inflation and a diminished value of the dollar. Those, in turn, drive up oil prices, particularly with oil priced in dollars.

It is worth noting that gas prices have risen over the past two years during a period of recession and under-performing recovery. That points to the Middle East/North Africa and U.S. monetary policy serving as key influences.

Unfortunately, the energy policy advanced by the Obama administration, including keeping key offshore and onshore areas off limits to energy exploration and development, only works against making gasoline more affordable at the pump - now and for the foreseeable future.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.