Abbas Grammy

Recently, gasoline prices have gone up sharply across the nation.  In California, the average retail price of reformulated regular gasoline has gone up $1.06 (or 48 percent) from $2.21 in the first week of January to $3.27 in the first week of June.  The largest price increase has occurred since the first week of March when drivers had to pay $0.79 (or 33 percent) more for one gallon of regular gasoline.

In the absence of evidence supporting price gouging by oil companies, several reasons are given for the recent rise in gasoline prices:

• Soaring oil prices, partly due to anxiety about future supply from the OPEC
• Greater scarcity and higher production cost of domestic light and heavy crude
• Reduced gasoline inventories 
• Limited refining capacity
• Damages to oil drilling structures in the Gulf Coast
• Rising demand from American drivers and foreign consumers, especially India and China
• Added costs from producing lower-sulfur gasoline

In particular, the switching to lower-sulfur gasoline will phase out an older chemical additive that made gasoline cleaner, but has been found to cause cancer. Making lower-sulfur gas is expected to add 2 cents to pump prices, while it slashes harmful emissions by 90 to 95 percent.

Analysts expect gasoline prices continue to rise throughout the busy summer driving season. In the absence of any unexpected events in the international oil market, high gasoline prices are likely to stay with us for a longer time.

Rising gasoline prices would have negative effects on economic growth since they push the overall inflation to higher rates.  To control inflation, the Federal Reserve System would continue raising short-term interest rates.  Higher interest rates discourage consumer spending and business investment, thus slowing the pace of economic growth.  The experience energy crises of the 1970s prove that rising inflation accompanied by slower growth poses a serious policy dilemma.  Actions to control inflation would hinder growth, whereas measures to accelerate growth are generally inflationary.

Sources: The U.S. Energy Information Administration and www.economagic.com