The recent positive economic news strengthens hope that the economy will continue to gain momentum during 2012.  However, one potential fly in the (petroleum-based) ointment is rising oil (and hence gasoline) prices. 

Gas prices at U.S. service stations have been rising again recently, following increases in crude oil prices (see chart above).  As we look ahead, two particular risks are often reported by private-sector analysts that could keep gasoline and crude oil prices at high levels or cause them to increase further: Iran in the short-run and increased demand for crude oil by emerging economies in the long-run.

To put these risks into some numerical perspective, the chart below shows that while the U.S., China, Europe, and Japan all consume much more than they produce, Iran consumes half of what it produces and exports about 2.2 million barrels per day.  The rest of the world currently produces 26.8 million barrels more a day than it consumes.  Therefore, Iran accounts for 8 percent of the world export market.

The longer-term risk to energy prices is the growing demand for oil from emerging-market economies.  The following table shows that since crude oil prices began rising in 2004, the U.S., Europe, and Japan have cut the number of barrels of their oil usage by 2.9 million barrels day.  However, world crude oil demand rose by 7.3 million barrels a day over this period, primarily because emerging market countries increased their demand by 10.2 million barrels a day.  China accounted for 37 percent of this, or 3.8 million barrels a day.  If, as private-sector forecasters expect, China continues to grow at a healthy clip in the next few years, its demand could continue to put pressure on world oil prices.

~Mark Doms, Chief Economist, U.S. Department of Commerce

February 22, 2012

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