Rising gas prices - one expert's view

8:48 AM, Jul 22, 2013   |    comments
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GRAND RAPIDS (WZZM) - Drivers are bracing themselves for more pain at the pump this summer, with Michigan gas prices jumping 32 cents last week. In fact, gas prices are up across the country due to unrest in Egypt and production disruptions in the U.S. and other countries.

Professor Paul Isely, the chair of the economics department at Grand Valley State University, says those circumstances have pushed the price of crude oil back above $108 a barrel and by extension, increased the price of gasoline.

"Over the past month they have gone up about $12 a barrel. And every dollar that a barrel of oil goes up, gasoline goes up about 2 1/2 cents," he said. "by all accounts, crude oil is reacting to Egypt. People are worried about the Suez Canal being shut down and so people are competing for more oil and it is driving the bid prices up."

He also said part of what has happened is over the past 10 to 15 years there has been a change in the oil markets where players from India and China, in the market, are buying more oil.

"As a result there is not as much excess capacity. When there is a problem and you have excess capacity you can deal with it. Now we don't have that So every time there is a problem it affects the price," said Isely.

Latest crisis, included, drivers have become accustomed to seeing gas price increases almost weekly. Many have become programmed to look for signs every time they pass a gas station to catch prices before they go up. Which seems to frequently happen on Mondays and Thursdays.

Isely says there is a reason for that.

"A lot of industry data comes out on Monday and you have a group of people who sell gasoline in the area who adjust their prices to that data and as a result we see that change the day that data comes out," he said. "Monday, the industry gets its internal data and on Wednesday the government gives out data. If the government data doesn't agree with that Monday data then you see an adjustment on Wednesday night or Thursday."

He says price fluctuation is also a function of how competitions happens in our particular region.

"So if you look at a city like Grand Rapids that is not in this area, like Madison, Wisconsin. It is in the Midwest. It is about the same size and same distance from refineries. Their prices don't go up and down like ours do here and part of the reason is they have a minimum mark up law. You can take people to court if they charge too little for gasoline," said Isely. "Here, people hold on to the price too long and they start losing money so they make a big adjustment and then it will adjust downward over time and they will make another big adjustment so they are making a big adjustment every week. Where in a place like Madison they are making small adjustments every day."

At the end of the day, what most drivers want to know is can they expect prices to go down and stay down.

The reality is prices are so sensitive to what happens in the world there is no concrete answer. However , Isely is encouraged.

"What we are starting to see is a decrease in demand for product and we are producing more oil so the end result is that keeps prices from going to far up. The bad news is that right now the marginal costs, the costs of that last barrel of oil produced, during the winter is about $75 to $85 a barrel and during summer is about $85 to $95 a barrel. So you know the prices aren't going to drop below $75 a barrel for very long," he said.

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