A reader recently asked why the BP Gulf oil spill hasn't raised gas prices. Good question.
First, world oil production is 87 million barrels per day. The Gulf spill is, at most, 2.7 million gallons per day (there are 42 gallons to a barrel of oil). Even though this is the largest spill close to shore in the U.S., and is wreaking huge environmental damage, it's still less than .1% of total production. It's not really enough to change the price.
Second, gas prices have less to do with supply and demand, and more to do with commodities traders. Oil futures contracts are agreements to buy or sell oil at a specific date in the future at a specific price. Commodities traders look at projected supply and demand to help them decide how high to bid on oil futures prices. However, if all traders think the price of oil will be high, they can create a self-fulfilling prophecy by bidding up oil prices. This can create high oil prices even when there is plenty of supply on hand. Once this starts, other investors will bid on oil prices just like any other commodity, such as gold, creating an asset bubble.
Fortunately, this didn't happen with the BP oil spill. It could be because, at first, everyone thought there wasn't as much oil leaking.
What It Means to You
The Federal government also has access to the Strategic Petroleum Reserves. It can release extra oil, if needed, to keep gas prices from skyrocketing. For example, it was used to keep prices from rising even higher after Hurricane Katrina. Gas prices rose $3 a gallon because Katrina affected 19% of the country's oil supply. Releases from the Strategic Petroleum Reserve helped prices quickly return to normal.
Related Articles
(Photo Credit: Scott Olsen /Getty Images)
Join me on Facebook | Get my Twitter updates
Comments
Hi Kimberly –
“The Gulf spill is, at most, 2.7 million barrels per day.”
I certainly hope not! Did you mean to say 100,000 barrels per day?
FTR, your basic point is quite correct. I might have to fault your math.
Much better!
Thanks, Real Time.
I appreciate that you took the time to let me know!
Kimberly
Also, the oil from the BP well was never on the market and thus doesn’t represent current supply withdrawn from global production. The well was being capped for future production.
KA- yours is the first time i’ve remotely seen why gas prices hit $4 gal about 5 years ago. but it doesnt make me feel any better. my guess is that it was a stress test of some kind, driving prices from about $1.70 in the sw us at that time to settle now at about $2.70 and make us feel happy about it.
@ jsw – You are correct. That was a new well for BP.
@ Mark Lymer – Thanks! I’m glad I could clarify things. But I don’t understand what you mean by stress test. Are you saying that someone deliberately raised the price then just to make us (I live in the SW US) feel better about $2.70?
If so, I don’t think any group has that much ability to finely control the economy. Unfortunately, I think the economy is a little more uncontrollable than that.
If you read this, please explain your point further. It is an interesting one!
Kimberly
The price has gone up at BP are price in Saint Charles Illinois 3.19 and 3.39 for Regular gas at some BP sations in this area Chicago is much higher at 3.69 a gallon before oil spill 2.40