You’re paying more for gasoline, and here’s why

06/26/2014 7:23 PM

06/26/2014 7:25 PM

Think you’re paying more than you should be for gasoline right now? You are.

Prices tend to spike around Memorial Day, when increased demand cuts against a limited supply as refiners convert from winter fuels to summer blends. But by the middle of June, gasoline inventories are up and prices typically retreat.

This year, they haven’t.

The reason why refutes the commonly held view that deteriorating political conditions in Iraq haven’t had much effect on gasoline prices. They have.

Despite no apparent hit to Iraqi crude production, and near-record levels of U.S. oil production, fears about the Middle East conflict have allowed financial speculators to bid up oil prices – another contributing factor to high gasoline prices.

The authoritative AAA Motor Club had projected in May a drop of 10 to 15 cents a gallon during June.

But Michael Green, a spokesman for AAA on gasoline prices, said Iraq’s troubles are affecting prices more than expected. “U.S. consumers are paying higher prices than what they would otherwise, due to the higher cost of oil,” he said.

Speculative trading on the violence in Iraq is keeping oil prices about $4 a barrel higher than they would be otherwise, said Andrew Lipow, president of the Houston consultancy Lipow Oil Associates.

And that’s affecting consumers. Gasoline prices on Wednesday averaged $3.68 for a gallon of regular unleaded, up slightly up from $3.66 a gallon a month ago and more than 13 cents a gallon higher than at the same time last year.

In Modesto, the average price for a gallon of regular unleaded Wednesday was $3.98, according to, down from $4.01 a month ago but up 14 cents from $3.84 a year ago. Statewide, the average price Wednesday was $4.11.

At the Stop n’ Save store and gas station on Hatch Road at Church Lane in Modesto, the manager, who asked to be identified only as Sheryl H., confirmed that turmoil in Iraq is the reason she’s heard for prices not taking their usual post-Memorial Day drop.

Customers haven’t seemed to notice or mind, she said. “They’re getting kind of used to the prices,” Sheryl said Thursday. “For a while, we were over $4.” But she said her store always tries to be competitive. “For several weeks, we were cheaper than even am-pm.

“There are three other stations around me that I check, and I submit that (price information) to corporate and they say whether to go up or down. ... We have pretty loyal customers,” said Sheryl, who’s worked for Stop n’ Save for 30 years.

Still, some drivers are finding even the lowest prices around too much for their wallets. Pumping gas for a friend at the Stop n’ Save on Thursday, Jesse Montelongo of Modesto said prices are so high, he prefers to ride the bus these days.

If you assume that gasoline would revert to about last year’s June price and add the recent jump, prices are about 15 cents a gallon higher than they should be.

In a car with a 15-gallon tank, that’s $2.25 more per fill-up.

Multiply that by at least 212 million American motorists and you’re talking real money: If every American motorist filled up this week, they’d collectively be paying $477 million more than they did in the same week last year.

California drivers might – just might – catch a little break at the pump soon. The California State Board of Equalization announced Thursday that starting July 1, the excise tax rate on gasoline will go down to $0.36 per gallon.

“This is good news for Californians traveling this summer,” said Board of Equalization member George Runner. “But unfortunately, California will still have the second-highest gas tax in the nation.”

The new rate of $0.36 – down from $0.395 – was reached after the board voted in February to lower the rate for the 2014-15 fiscal year, which ends June 30, 2015.

But while Californians will be paying less in state excise tax at the pump starting July 1, the board’s news release notes that doesn’t necessarily mean it will translate into lower gasoline prices. Other factors, such as world crude oil prices, also affect California’s gasoline prices.

Here’s the explanation for the stubbornly high prices: Fear has gripped oil trading markets after the Islamic State of Iraq and Syria, known as ISIS, seized the Iraqi city of Mosul on June 10 and Fallujah soon afterward.

Financial traders fear a collapse of the Iraqi state that could suck Iran and Saudi Arabia into a regional conflict that threatens oil supplies. And those financial players far outnumber actual end users of oil in the markets where contracts for future barrels of oil are traded.

Iraq has become a more important Middle East exporter over the past five years and is now the second-largest producer in the Organization of Petroleum Exporting Countries. But OPEC Secretary General Abdalla El-Badri said this week that there is no oil supply shortage in Iraq and blamed the recent increase in oil prices on speculative trading in the markets.

“Right now, the market is very well supplied,” he told reporters in Brussels on Wednesday. He pledged that OPEC could increase production if there is a disruption.

Iraq’s main oil fields are deep in the Shiite Muslim South, an area that is hostile to the Sunni Muslim ISIS. The global energy consulting firm IHS said the fields are protected by government forces as well as Shiite militias, and that an ISIS offensive against them would require substantial fuel and be difficult to sustain for long.

Despite the fears in financial markets, ISIS is unlikely to disrupt Iraqi oil exports, said IHS senior director Jamie Webster, a position widely shared among experts.

Robert McNally, an energy consultant and founder of the Rapidan Group in Washington, suggested Iraq’s semiautonomous Kurdish region might be able to increase oil exports from northern Iraq after seizing the city of Kirkuk in the midst of the crisis.

There have been reports that the Kurds already are starting to export oil independently while the central Iraqi government based in Baghdad is in turmoil.

While reports out of Iraq suggest production and export are, for now, unaffected, big global oil companies won’t discuss their production there.

“We don’t have any comment,” said Richard D. Keil, a spokesman for ExxonMobil in Irving, Texas.

There’s little incentive for Keil to discuss production, since the fear gripping financial markets is tantamount to free money for the oil companies. ExxonMobil and other large players reap a windfall from higher oil prices and suffer if prices collapse, as they did during the Great Recession.

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