Kathleen Hartnett White, Director of TPPF’s Armstrong Center for Energy & the Environment, and I recently published a commentary at Forbes noting the effect that rising precautionary oil demand has on oil prices and subsequently the price of gasoline. The increased violence and instability in Iraq, which exports about 2.3 million barrels of oil per day of which 300,000 goes to the U.S., has put upward pressure on global oil prices (i.e. West Texas Intermediate (WTI) crude and Brent crude).
Precautionary oil demand is a concept economists use to explain the affect geopolitical issues have on the price of oil. Specifically, rising precautionary oil demand puts upward pressure on oil prices from traders purchasing oil futures contracts today to hedge against potential supply disruptions leading to higher oil prices in the future.
If you’ve purchased gasoline lately you may have experienced sticker shock at the pump. If you haven’t paid a higher gasoline price yet, you soon will. Why? Partially from people driving more now that school is out. But more importantly, the recent instability in Iraq has led traders to bid up the price of oil to near nine-month highs with the expectation that there will be less global oil supply.
Oil futures prices for WTI and Brent increased by about $4 per barrel-roughly 4 percent-to $106 and $112 per barrel, respectively, in just the last week.
If these higher oil price trends continue, and this is highly speculative but not out of the realm of possibility given past events with instability in the Middle East, the price at the pump could pack a punch in the range of $4 per gallon nationally to about $3.80 in Texas.
Higher oil prices will likely shave off some economic growth in the second quarter. Not a good sign considering the first quarter contracted by 1%. Another example of how bad foreign and domestic public policies hurt Americans.
This is something we should keep in mind as President Obama discusses different approaches with how to deal with the violence in Iraq. It is also something to consider when budgeting your travel and expenditures this summer.
More oil produced in stable places like the U.S. will likely lead to less volatile and lower oil and gasoline prices. This provides reason for Americans to demand President Obama to stop delaying the Keystone XL Pipeline.