5 Disasters Affecting Gas Prices

By Ryan C. Fuhrmann | May 31, 2011 AAA

Global gasoline prices have been unusually volatile so far in 2011. Earlier in the year, geopolitical fears sent gas prices to their highest levels in the last three years, but more recently, prices have been on a downward path as demand has been crimped in the United States from a number of natural disasters. Here are five recent disasters that have been affecting gas prices lately and contributing to the unusual volatility.

TUTORIAL: The Oil Services Industry Handbook

Middle East Unrest
With supply a major determinant of gas prices, fears over political unrest in the region with the majority of the world's oil reserves have certainly affected prices lately. It started in Egypt in late January and quickly spread to other countries near or in the Middle East, including Libya and Tunisia. In the United States, gas prices quickly rose above $3 per gallon and moved up to more than $5 per gallon in certain parts of the country, but have quickly receded as the world's major producers in the region, including Saudi Arabia, remain relatively stable. (For related reading, see Getting A Grip On The Cost Of Gas.)

Tornadoes
Tornado activity in the United States has already made 2011 one of the deadliest years on record when it comes to tornado fatalities. This hasn't had much overall impact on national supply, but local supply has definitely been adversely impacted, as has demand. Tornado destruction in Alabama has been blamed for crimping supply on the destruction of local gas stations and this has also affected areas in Missouri and other parts of the Midwest. And with cleanup efforts underway, there has been a shift in focus from driving to work and taking car vacations to rebuilding homes and businesses in the worst hit areas. (Do you live in an area prone to tornadoes? For more, see The Importance Of Property Insurance.)

Alberta Wildfires
Oil sands in Alberta, Canada represent the largest oil reserves in Canada and some of the largest in North America. Production is still ramping in this area and recently became more important as higher oil prices have made extracting oil from tar sands, which is more expensive than other traditional drilling activities. Recently, wildfires in Alberta have caused the closing of tens of thousands of barrels of production and, if sustained, those closures could increase prices in both the United States and Canada. (For more, see Canada's Commodity Currency: Oil And The Loonie.)

TUTORIAL: Why Demand and Supply Matter

Pipeline Spill
Toward the end of May, a pipeline operated by TransCanada Corp., which transports oil from Alberta to a delivery point in Oklahoma, was discovered to have a leak. Shortly thereafter, its pipeline system in Kansas was found to have another leak, and a couple of weeks ago a leak was discovered in North Dakota. The leaks have so far been addressed and have not shut down overall distribution, but there are fears of a more widespread shutdown to investigate other potential leaks that could put more upward pressure on oil prices in the near term. (For more, see What Determines Oil Prices?)

Speculation?
The role of financial speculators does not technically qualify as a natural disaster, but sentiment toward the class of investors is certainly as unfavorable as the role that natural disasters play in affecting gas and other commodity prices. For the most part, empirical evidence has demonstrated that supply and demand changes are the major drivers of gas prices, but speculators can push prices up and down on the fringes, as occurred in 2008 when oil hit record highs and fell quickly to lows during the financial crisis in 2009. (For related reading, see Market Speculators: More Help Than Harm.)

The Bottom Line
Demand and supply are the two primary determinants of gas prices, and historically they have been quite volatile in both the United States and globally. Global, national and local fluctuations are also contributing factors, though the recent bout of natural disasters throughout North America is definitely more unusual compared to years past. (For related reading, see Peak Oil: What To Do When The Wells Run Dry.)

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