Why Are Gas Prices Soaring, and What Can U.S. Do?

Host Steve Inskeep talks to Vijay Vaitheeswaran, a correspondent for the Economist and co-author of Zoom, about the reasons behind high oil prices. They also discuss what the U.S. government can do to help the situation.

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STEVE INSKEEP, host:

So, let's try to help explain why oil and gas prices are so high. We've called Vijay Vaitheeswaran, a correspondent for The Economist. He follows the oil industry. Welcome back to the program.

Mr. VIJAY VAITHEESWARAN (Correspondent, The Economist): Good to be with you.

INSKEEP: Okay. We already know, and I assume that traders have known for a long time that there's increasing demand from places like India and China and elsewhere in the world. So, given that that's been known for a while, what has driven the incredible increase even again in oil prices in the last few weeks?

Mr. VAITHEESWARAN: It is very curious, because if you look at the fundamentals, the oil market is actually well supplied right now. The supply inventories have been building globally, particularly in Europe and in America. We have actually some excess supply going into a weak spring market. And demand in the U.S. is the lowest it's been in quite some time.

INSKEEP: Oh, because there's an economic slowdown in the United States, they can come back on again.

Mr. VAITHEESWARAN: That's one of the main reasons. But the reason we're seeing short-term spikes in prices - there's a little bit of crunch right now because over the last two days, you've seen both in Nigeria and in the United Kingdom -both of which are big oil producers - strikes by oil workers, military strikes by terrorists in Nigeria. A combination of things have taken out a significant amount of oil from the market. That's a short-term disruption. No one expects that to last.

But that has fueled kind of a speculative frenzy in the marketplace that was anyway frothy. But that's not related to, I would say, real fundamentals of the market.

INSKEEP: Well, $115 a barrel, which is one of the prices we've seen in the last 24 hours, is that where the market belongs, then?

Mr. VAITHEESWARAN: I think that anyone who predicts the correct price of oil should immediately be sacked…

(Soundbite of laughter)

Mr. VAITHEESWARAN: …because you're bound to be proven wrong any moment. But I think most analysts that actually look at the supply-demand fundamentals say the market is very well supplied. And we're going into a spring period, when traditionally the market's slower than either during the winter heating demand or during what's called the summer driving season, when many Americans take to the road. So the fundamentals actually do point to weaker prices, not stronger ones. And that's what's so curious, that we're, at this moment, seeing sharp price spikes. I think that it has a lot to do with the speculation in the marketplace and some of these temporary disruptions in Britain and Nigeria.

INSKEEP: We started the program talking about the complexities of trying to fix the situation. I want to ask about this complexity: There is talk in the presidential race of a gas tax moratorium, which would cut the price per gallon for Americans. But it makes you wonder if you cut the price back down per gallon, would Americans then drive a little more, increase demand, and the price would go back up again?

Mr. VAITHEESWARAN: I think you nailed it right on the head. The - it sounds really promising, especially for hard-working Americans who are now being forced to pay $4 a gallon, that repealing the gas tax should be in our interests of every man. But, in fact, what you're likely to see is what's called a rebound effect, that feeling a little bit wealthier from a lower gasoline price, people are probably going to drive more. And particularly this summer, as people think about skipping that foreign holiday and instead maybe driving a little further to visit relatives, stay cheaply with them, there's a lot of reason to think that any repeal in gas tax would be offset dramatically by people simply driving more.

INSKEEP: Now as we try to sort through what's going wrong in the economy here, I want to ask about another news item. This comes from the Reuters news service, telling us that Iran - huge oil producer - now says it's conducting all of its oil trading in euro and yen, not selling oil in dollars, which is what everybody else or almost everybody does and has done for decades. We're not sure - we don't have that confirmed, but they were already saying they were doing 90 percent of their trading in euro and yen. Is this significant if oil producers move away from selling dollars? Does this effect the United States?

Mr. VAITHEESWARAN: I think Iran alone cannot move the market. Let's remember the big kahuna of oil production is Saudi Arabia. The Saudis are the world's biggest producer of oil. They're the central bank of oil, in a sense, and they're firmly anchored to the US dollar. Even Iran, as well as if you look at Kuwait, the United Arab Emirates, the countries around Saudi are pygmies compared to the Saudis, who have a quarter of the world's remaining oil reserves.

INSKEEP: Still, here we are, nervous about the future of the US dollar and where that's heading.

Mr. VAITHEESWARAN: I would say the real concern, if we're concerned about America's economic prospects in oil, is the rise of resource nationalism in these producing countries - not just in Iran, but Venezuela, Russia, a number of other oil producers where the government has taken over oil investment and essentially kicked out foreigners. Because of underinvestment by those countries, the future prospects for supply are in question. And at home, unless we take measures to curb our own demand and develop alternatives to oil, I think that's really the risk to consumers when you think about oil, not so much the weak dollar.

INSKEEP: That's some analysis from Vijay Vaitheeswaran. He's correspondent for The Economist and co-author of a book called "Zoo: the Global Race to Fuel the Car of the Future."

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INSKEEP: It's MORNING EDITION from NPR News.

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