Making Sense Of The Oil Mess

A Reality Check by CBSNews.com's Christine Lagorio.

News of the price surge is accompanied by an often-baffling barrage of futures, stock figures, utilization percentages, inventory comparisons, consumption rates and the stock market's reaction to all of that.

Amid this confusing fog of numbers and statistics, a couple of simple facts stand out: Oil stockpiles in the U.S. are hovering at an eight-year high and the post-Katrina price shock is long gone. So why are gasoline prices skyrocketing?

"It's very odd," said Morris Adelman, an emeritus professor of economics at MIT. "But if you credit people with some sense of the future, then it's not odd at all."

Global fears and gloomy predictions that often lack a soild factual foundation drive up prices, market analysts, economists and scholars tell CBS News.com.

Apprehension about instability in oil-rich nations – including al Qaeda attacks on Iraq's pipelines, fears that Venezuela will nationalize its oil industry and friction between the U.S. and Iran - combined this week to drive up the price of oil.

Also in the global fear matrix were rebel attacks on foreign oil companies in Nigeria that have produced a 20 percent drop in production, according to Bloomberg News.

"Oil futures are based on people's fears. It's almost exactly similar to the stock market," Dan Kammen, a UC-Berkeley professor and co-director of the Berkeley Institute of the Environment, said. "We buy oil on the futures market. So if you look out in the future, you have to say, is it likely that Iran will have a conflict?"

Some experts and analysts have said the market's acutely speculative quality (investors get spooked whenever the global crude cost increases) has added a "fear premium" of $10 to $15 per barrel.

A decade ago, just less than 100,000 futures contracts for light, sweet crude oil were sold in a typical day on the New York Mercantile Exchange. But on August 30, 2005, the day after Hurricane Katrina struck the Gulf Coast, more than 400,000 contracts traded hands, according to the gasbuddy.com. For six years Toews has been avidly watching the market and running the site, which he says gets a half-million viewers per day.

A barrel of oil, which reached a record price of $75 Friday, is 42 gallons. Once distilled, about 35 gallons of gasoline can be made from a barrel of crude. Each dollar a barrel rises on the market pushes pump prices up more than two cents. And that premium reaches consumers almost immediately, due to oil companies' reactions to the commodities market.

Crude oil comprises between 40 and 60 percent of the retail price of gasoline. In 2005, crude accounted for 52.5 percent of the pump price, according to the U.S. Energy Information Administration.

Today, it's closer to 60 percent, an adjustment that reflects the disproportionately high cost of the crude compared to refining and transporting it, Adelman said.

Aside from the crude oil, when buying a gallon of gas, a driver pays for state taxes (about 23 percent), refining costs (18 percent) and distribution and marketing (12 percent).

While it's easy to take out fueling frustration on convenience-store owners, their pricing is a negligible part of the squeeze on consumers. In fact, they're getting squeezed, too, in order to lure customers who might back off from purchasing at higher prices.

The National Association of Convenience Stores calls it a "high-stakes game of chicken to remain competitive, absorbing some or all of wholesale price increases until they see others pass along their wholesale price increases."

Increased consumption has also driven up oil prices. Future expectations play an important role here too. Adelman says China's rapidly climbing oil consumption has created a belief that "the Chinese are going to keep buying, and that will push prices up."

The traditional pre-summer price spike is adding to motorists' woes.

"This is the time of year that oil companies are switching over from their winter driving blend to the summer driving blend, and during this time they incur a higher cost in processing," Toews said. "We're coming up into summer driving season, so we always see a bit of a price rise anyhow."

The blend of refined oil that consumers know as "unleaded" is not only being altered at refineries to lessen its evaporation rate for summer, but is this month being infused with a higher ethanol content. The Energy Policy Act of 2005 (.pdf), signed on Aug. 8, 2005, by President Bush, mandates that that the U.S. uses about four billion gallons of ethanol this year in fuel. Refineries are in the midst of a formula change, which again can decrease their inventories. But the ethanol boost also affects the markets, because there is concern about the availability of enough ethanol to comply with the law — that's said to be causing the unleaded shortages in Philadelphia and Virginia Friday.

All this adds up to the Energy Department's announcement last week that supplies of gasoline fell by 5.4 million barrels.

"You typically see crude's inventories start to build around this time of the year, so seeing that they're decreasing right now, that was a little surprising. But given that we're going through this switchover, you have to decrease your inventories significantly," American Petroleum Institute chief economist John Felmy said.

Many experts believe the summer price of gasoline will hit $3.25 or $3.50 per gallon.

Will gas prices eventually reach the dreaded $4 mark? Experts say yes, but that prices will tick up gradually — barring a geopolitical crisis, which would mean instant pump shock.

"It could happen — it is going to happen." Toews said. "We're going to see $4 gasoline in the U.S. The days of cheap gas are over."