If you are a driver or have a friend who drives, you may have noticed that rising gas prices are draining people’s pockets. In fact, driving and fueling behaviors have begun to change as a result of the 14.1-percent year-to-date increase in regular fuel costs. Analysts expect gas to push to $5 per gallon by summertime when drivers ramp up their gas expenditure. I will expand on two causes that I consider most culpable and explore U.S. political and business options.
One of the most recognized causes for the price hike is the Iranian dispute. The nuclear program in Iran has been widely criticized by both the Obama and Bush administrations for elevating geopolitical risks in the Middle East. While countries and international organizations have condemned and even placed sanctions against the oil-rich country, Iran is not backing down. Claiming its nuclear program is devoted to the country’s energy production, Iran threatens to cut off its oil exports and even seal off the Strait of Hormuz if it were attacked by Israel or the United States. The former threat was partially carried out in February when Iran stopped crude oil export to British and French firms in response to the European Union’s new sanctions, while the latter still remains a grave threat to the global economy.
The Strait of Hormuz is a strategic waterway, and 20 percent of the world’s oil is transported through it. Though the risk of Iran obstructing the strait is small — as it would result in Iran losing all of its oil revenue — the potential downside to such an action is significant and brought the West Texas Intermediate Crude Oil benchmark price up 7 percent since the inception of the dispute in December 2011. While the sealing of the strait is highly improbable, evidence suggests Iran may intend to drive up the price of oil to boost the Iranian economy, which is positively correlated with the price of oil.
Iran’s Supreme Leader, Ayatollah Ali Khamenei, celebrated the revolts in Tunisia, Egypt and Bahrain that pushed the oil price above $110 per barrel last spring, claiming that the revolutions are in line with the Iranian spirit during its 1979 revolution. In reality, there have been more social and political crackdowns and human rights infringements in Egypt. Perhaps Iranian officials wish to avoid a civil war like those in the Middle East and North Africa to preserve their power. An Iranian-American student at the University, who preferred to remain unnamed, called the government “incredibly corrupt.” As long as the Iranian economy can keep profiting off of the oil price, the government will take on any measure to aid that cause.
A second contributor to high fuel costs is the reduced supply of refined petroleum. Since 2010, four east coast refineries processing approximately 1 million barrels of oil daily are expected to or have already ceased operations. Analysts conclude that thinning demand is cutting margins below what some smaller refineries can afford, driving them out of business before the real demand rises for the spring and summer time. The United States exported more refined petroleum than it imported in 2011 for the first time since 1949 as a result of a higher foreign gasoline price that drove domestic fuel supply abroad. With a smaller supply of gasoline and a heavily inelastic demand for petroleum due to lack of economical substitutes such as natural gas vehicles, hybrids, or electric vehicles, American drivers could face record-setting gas price by this summer.
Strategically, the United States should not wage a war against Iran as it could lead to another global recession triggered by a 20-percent drop in crude oil supply. Similarly, the United States should monitor Israeli responses to Iran’s nuclear program, as an Israeli attack on Iranian soil may trigger retaliation by Iran.
Domestically, the United States has the option to establish energy initiatives that would eventually transition the country from an oil-driven nation to a society predominantly fueled by natural gas, which has been trading at a decade-low price of $2.50 per million British thermal units. This can be accomplished through tax breaks on gas stations that provide liquefied petroleum gas and reimbursement to drivers that convert their vehicles to use LPG, which costs about $3,000 per conversion.
If you are an investor in the stock market, I would not leave the trading day short on oil, gasoline or any healthy energy stocks that have wide distribution channels in the United States. You should be especially cautious when holding securities that are highly sensitive to oil price, such as airline and industrial companies. Be sure to consult with your financial adviser and hedge your own exposure to the energy market.