Friday, March 17, 2006

Gas prices will most likely rise this summer but don’t blame the oil companies:

The FT currently has an interesting article on where gasoline prices could be going this summer that I would like to share along with my take.

The summer driving season is almost upon us and with that an increase in demand for gasoline. Historically the price of gasoline always goes up in the summer because of the increase demand and the usual hurricanes. This year though gasoline prices will most likely go up more than normal but not because of greedy oil executives. The rise instead will come from our attempt to move to energy dependence and cleaner fuel sources.

As many are aware last year President Bush pushed hard to get his energy bill passed as an answer to our growing dependence on foreign oil. Part of the bill states that companies will now be liable for ground contamination by an old additive used in gasoline called MTBE. The concern of large fines is forcing oil companies to move to a replacement to MTBE, which is environment friendly ethanol. The problem is that ethanol is still fairly new when it comes to its use in gasoline and is already running a full production capacity. This means investment is going to be needed to increase production, which will raise prices of refining fuel in the short term. Then when you add the fact that ethanol costs more to transport because of its limited availability it means that prices will need to raise just at the height of the driving season as or government made sure to make the new rules effective starting in April.

Somehow though, being an election year, I’m sure Hillary and the rest of the crew will find a way to blame the oil companies.

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