Gibson began an interview with a financial contributor for "Good Morning America" by asking if $3 a gallon was inevitable this summer. Mellody Hobson answered yes, then pointed out that oil prices managed to rally despite the warm winter.
Then Gibson complained, "Which leads everybody to be very cynical about what the oil companies are doing: it's a warm winter, so they have extra supply of oil; and they made record profits last year. So they can't get ready to give us decent supply this summer?"
Hobson: "Well the supply may be there but the issue is the market sets the price for gas around the world. And so if they can sell gas at $60 a barrel in the rest of the world, they're going to sell it at $60 a barrel in the U.S. They're not going to sell it cheaper."
Hobson did not mention that last year’s energy bill is also leading to higher prices for gasoline. As of this May, gasoline will no longer be required to contain an oxygen fuel additive, the most common of which is MTBE. Producers of MTBE have used the Congressional requirement as a defense in environmental lawsuits, but when Congress dropped the requirement it also failed to grant MTBE producers liability protection. Now the industry will replace MTBE with ethanol to meet clean air standards, but there may be bottleneck problems and localized shortages of ethanol. The threat of shortages has helped pushed prices higher.
Gibson next asked, "Is it really, truly a supply and demand issue as so many people wonder or is it that the oil companies gouge us?"
Hobson: "It's a supply and demand issue. This is basic Economics 101. Supply has been down because of instability in the Middle East, it's been down because of oil production in our own country because of Katrina and Rita, and also demand has been very high because of China, India and the U.S. And so those two factors together have led to this very, very tenuous situation."
Additional factors influencing the market include Nigeria and Venezuela, both OPEC members. Nigeria produces light sweet crude, which is the easiest to refine into gasoline and other products. It’s the oil U.S. refiners most want, but rebels have reduced Nigerian production by 600,000 barrels a day. With Venezuela, experts believe Hugo Chavez will reduce oil exports once the Iran crisis heats-up.
All of these factors have the oil market in a state of what traders call "contango," meaning that futures contracts are higher in price for each month into the future. In this state the market is paying the industry to store oil. If just a few of the market’s fears become reality, the extra inventory will be consumed faster than Charlie can get to the food during a cooking segment.
