A question was asked….

(1) Any thoughts on why the price of gas is going up? In my informal tracking, it seems the price of gas may have gone up $0.25 in about three weeks. That seems a pretty steep increase. It just jumped 4 cents today. What is the explanation?

(2) Back during the last gas price surge the cost of diesel sky-rocketed far ahead of gas prices. If my memory serves me correctly, the per gallon cost of diesel was like 1 or 2 dollars more than gas. When I drove past the gas station today I read this: Gas 2.43 Diesel 2.41. I couldn’t believe it. Why is diesel staying so low this time, when during the last spike it went even higher than the gas?

The standard answer being handed out is that the spike in gas prices is a result of the seasonal switch over from winter to summer gas. This is undoubtedly part of the reason for the recent run up in prices. Robert Rapier has an explanation of what the seasonal changeover is all about here and here.

But there may be more to the recent price rise then the seasonal switch over. One of the reasons I say this is that the price of many commodities has been mirroring the price rise of gasoline. (Keep in mind that you should only be looking at the part of the chart that shows the price action over the last couple of months if you want to see why gas has started shooting up. The charts themselves go back to the middle of 2007 but I am trying to get you see the an emerging trend that has started recently) For example, compare the price changes in gasoline with the price changes in copper. Or how about Platinum? Or how about Coffee? What these things suggest is that the recent run up in gas prices is part of a broader phenomenon and not just about the seasonal change over.

Even more telling is the way that the price of many different foreign currency has mirrored the rise in the price of gas. Again, keep in mind that you should only be looking at recent price action. For example, compare the price action going on with gas to how many dollars it takes to buy a Euro. Or how about the much despised British Pound? Or how about the New Zealand Dollar?

What this all suggest to me is that the recent run up in the price of gas has something to do with the loss of the dollar’s purchasing power on the world stage over the last couple of months. I think we can all come up with reasons for why this may have happened.

Certainly these prices increases are not happening because of economic strength. That brings us to our correspondent’s puzzlement over the price of diesel. Certainly he reveals himself to be young. Or at least, not to have been paying attention to fuel prices until very recently. Even in my relatively short life I have seen diesel cheaper then gas often enough that I do not find the occurrence all that surprising. In fact, it use to be normal. Here is the Energy Information Administration’s explaining why diesel has become more expensive then gas….

Until several years ago, the average price of diesel fuel was usually lower than the average price of gasoline. In some winters when the demand for distillate heating oil was high, the price of diesel fuel rose above the gasoline price. Since September 2004, the price of diesel fuel has been generally higher than the price of regular gasoline all year round for several reasons. Worldwide demand for diesel fuel and other distillate fuel oils has been increasing steadily, with strong demand in China, Europe, and the U.S., putting more pressure on the tight global refining capacity. In the U.S., the transition to low-sulfur diesel fuel has affected diesel fuel production and distribution costs. Also, the Federal excise tax on diesel fuel is 6 cents higher per gallon (24.4 cents per gallon) than the tax on gasoline.

So what has changed to make diesel drop back behind gasoline?

The simplest explanation is that diesel is primarily an industrial fuel. Gas is primarily a consumer fuel. Industrial use of transportation has fallen off far more sharply then consumer expenditures. In other words, truckers have cut back on their driving far more than have suburbanites. If I was not so lazy it would be simple to dig up charts that would prove this. But anyone who has been paying attention to the news should realize that fall in manufacturing has been a leading indicator, not a lagging one. In other words, where the truckers go, the suburbanites will soon follow.

Even if I am right about the dollar weakness translating into higher prices here in America, the drop in diesel usage is still going to cause the relative price difference between gas and diesel to change. But there is probably even more at work here than the simple fact that the users of diesel are cutting back faster then the users of gasoline.

Typically, America imports gasoline and exports diesel to Europe. But given that Europe is in far worse economic trouble than America if statistics can be believed, it is unlikely that Europe is buying much diesel from abroad at the moment.

None of these answers has been proved definitively. They can’t be until the question is moot. But hopefully they make more sense to you than the knee jerk claim that oil companies are evil.