Why Exactly are Gas Prices Rising?

The price of gas is continuing to pose a problem for businesses and individuals in 2012 and doesn’t look set to ease in the short term. What are the drivers behind this?

Back in 2008, gas prices were already rising, but the drivers were primarily down to surging demand in emerging markets, a belief that oil supplies were limited and disruption to the efficiency of the supply network.

Geopolitics and global influence

In 2012, the main reason for rising gas prices seems to be geopolitical. In November 2011, the world suspected that Iran was developing its nuclear weapon capability. Since then, the West has responded with various sanctions designed to curb Iran’s oil exports, which account for more than 50 per cent of the nation’s government revenues. The objective was to cut revenue to Iran and effectively force a halt on its programme for nuclear development. However, Tehran responded to the perceived threat, conducting significant naval exercises in a bid to show power and threatening to block the Strait of Hormuz, which facilitates distribution for more than 35 per cent of the globe’s oil exports.

Rising prices and restricted capacity

Oil prices across the globe have risen since December by an average of 20 per cent. This development has unfolded in the wider context of a tight world market for oil, where there is little spare capacity. Already, at least 500,000 barrels every day are prevented from entering the market due to Syria’s civil war and disruptions in Yemen and South Sudan. Economic pressures therefore would naturally force a limited market to raise prices. However, the market is already operating under the expectation of further restrictions on supply, as the European and US sanctions against Iran begin to take effect and the likelihood of subsequent military action intensifies.

World news shaping gas prices

As the world reacts to such front-page news, there is very little that individual governments, not excluding Washington, can do to reduce gas pump prices. In fact, the picture would be even more challenging if it were not for a 20 per cent increase in oil output in the US since 2008. It is possible that more efficient oil pumping could help to get oil fields up and running more speedily, but lead times for such projects are still prolonged. Additional problems exist because of an outdated infrastructure, such as the out-of-date pipe system that flows between North Dakota and Canada.

As the market continues to respond to the anticipation of more difficult times, price manipulation and speculation continue to cause concern. Questions in the US are being raised about the Strategic Petroleum Reserve and whether it can be used to counteract large disruptions that may threaten economic growth, or to control prices in the market. This is an issue that the government is attempting to solve.

The events in Iran are set to increase uncertainty. As sanctions continue to pressure the country’s rulers, they will also place upward pressure on the global price of oil, with the possible effect that Iran will be able to maintain margins by selling smaller volumes of more expensive gas. At the same time, the higher price of oil could threaten a European and US economic recovery. The true offset could be achieved through a reduction in demand and consumption, particularly with China’s growth targets slowing. However, a rebound in growth would translate to a subsequent rise in oil demand. The market is all to play for   unfortunately, the results can be observed every time you fill up your car!

This article was contributed by Lloyd, a freelance writer and blogger, who is currently working with SO Switch – experts in marketing comparison.

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