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Oil Goes Over $79 A Barrel

Gasoline prices are also on the rise

By Mark Huffman
ConsumerAffairs.com

October 20, 2009
Normally, gasoline prices go up in the summer but moderate in cold weather. But after a summer of relatively stable gas prices, motorists may now face rising winter-time gas prices because of the rising price of oil.

Oil prices have been rising since labor day and Monday breached the $79 a barrel mark on the New York Mercantile Exchange. It's the highest point in more than a year.

What's behind the rise? Two things.

First, oil traders are becoming increasingly convinced that the world economy is recovering and with it, a new appetite for oil. While conditions are still weak in the U.S. and Europe, the developing world -- notably China, India and Brazil, are recovering at a faster pace. The last time traders believed the world economy was in a state of growth, oil prices climbed to $147 a barrel.

Second, the U.S. dollar -- the currency currently used to price oil, is extremely weak and getting weaker. Oil prices have been rising at about the same pace as the dollar has declined. Dollar-priced gold has also been rising at a similar rate.

What does this mean for the price of gasoline? If history is any guide, prices should go higher. But the good news for consumers is those prices might not go back to 2008 levels, at least not anytime soon.

Even though U.S. energy demand has increased slowly this year and U.S. stockpiles of crude oil and gasoline remain at very high levels, prices at the pump have begun to rise again. Refiners say the increase is necessary for them to stay in business.

With the country swimming in gasoline and demand growing at weak levels, refiners' profit margins are being squeezed. Sunoco, the U.S.'s second largest refiner, announced earlier this month it would shut down a New Jersey refinery because it couldn't sell its 145,000 barrels a day of fuel.

So if a weak dollar does, in fact, push up the price of gas, it remains to be seen whether consumer demand will pick up to the point that these higher prices can be sustained.

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