SUPPLY, DEMAND AND GAS

In Economics 101, students learn two basic principles. One is that the more demand there is for a commodity, the higher its price. The second principle, related to the first, concerns supply. Prices drop on a commodity when demand is low and supply is high.

So when crude oil set a new record this week, topping $103 per barrel, one would assume demand had increased and-or supply had dropped. This is not the case, according to many industry experts.

As financial analysts predict $4 per gallon gasoline prices this summer or sooner, consumers rightly wonder what is driving the spike. Shortly after the U.S. invasion of Iraq, the disruption in crude production from that country due to damaged infrastructure and sabotage explained some of the price increases. Then it was Hurricane Katrina, which damaged Gulf Coast refineries. The following summer, it was fear of hurricanes that pushed up prices.

Now, many analysts say, demand and supply are both flat, but oil speculation – buying “futures” of the commodity, betting it will sell for higher prices in the near future, is driving up cost. With the U.S. dollar at a very low value compared to other currencies, those with money to invest are finding oil futures a safe haven.

Opposition to the influence of speculation is coming from surprising sectors.

“Energy prices are completely disconnected from market fundamentals like supply and demand,” Shane Sweet, executive vice president of the New England Fuel Institute said in a press release this week. “The energy market is now completely controlled by speculators and profiteers who have driven prices to artificial highs, and the fact is these artificially high energy prices are crippling consumers, businesses, the country and quite possibly the global economy,” he said.

A coalition of fuel dealers from Virginia to Maine, which includes Mr. Sweet’s organization, is calling on Congress to hold hearings on the problem and perhaps even suspend trading. The group argues that the Mercantile Exchange and InterContinental Exchange were created to “discover the true value of energy commodities,” yet have become a place for nervous investors to “park … their shrinking U.S. dollars.”

Many experts, including a former head of Exxon Mobil, says speculation has grown so much over the last 30 years that it now adds 20 percent to 30 percent to the price of a barrel of oil. An oil analyst was quoted in Britain’s Guardian newspaper saying that oil prices typically run at triple the cost of extraction. Extraction costs are now estimated at $15 to $18 globally, he said, which means consumers are picking up a $57 per barrel speculation premium.

Supply and demand will factor into prices in the coming months, Pat Moody of AAA of Northern New England said. Beginning this month and continuing into next, refineries shut down to switch over to summer blends, which are mandated by federal emission laws. Some refineries do maintenance during this period, meaning even less production. Then, peak demand hits from Memorial Day to Labor Day.

Believe it or not, Mr. Moody said, gasoline prices are typically at their lowest in January and February.