Oil Surges: Will $5 Gas Follow?

Last Updated Feb 22, 2011 5:21 PM EST

Oil prices are soaring to their highest levels since October 2008, as mounting violence in Libya and escalating unrest continues in the Middle East. Here are the oil-related questions (and answers) that I have fielded this morning:
  1. Why are oil prices going up so much more with the Libya uprising than with Egypt? Libya is an oil-producing member of OPEC, exporting over 1.8 million barrels of oil a day. It has already halted about 50,000 barrels a day of production. Conversely, Egypt is not an oil producer, though its Suez Canal traffic is an essential component of the global economy.
  2. Why are there two different prices for oil? One news report says oil is at $110 and another says $95--which is it? Not to make you too crazy, but there are in fact two different oil contracts that are quoted. Brent Crude is traded in London, while West Texas Intermediate Crude (also called light sweet crude) is traded on the New York Mercantile Exchange. The difference in price differential is explained here, but the main culprit appears to be a pipeline issue. Both contracts are up 7-8 percent in the last two trading sessions, with Brent over $107 a barrel and WTI crude trading near $95 a barrel, after closing at over $86 a barrel on Friday.
  3. Will this surge in crude oil mean $5 gas prices at the pumps? AAA said gas prices hit an average of $3.171 last week in the US, which is 20 percent higher than a year ago, but about 23 percent lower than the record $4.11 average we saw in July 2008. Given the recent rise, many analysts say that we could easily see prices at the pump jump to $3.75-$4 a barrel by the start of the summer driving season. However, unless the unrest spreads to Saudi Arabia and the United Arab Emirates, we should avoid $5 gas.
  4. Will the oil spike push us into another recession? Economists say a short-term increase in oil prices shouldn't derail the economic recovery. But if we see elevated prices for three months or more, it will surely siphon growth from the global economy and if prices were to go high enough, there would be an increased risk of recession.

Here's a primer on what goes into a dollar of gas at the pump:
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    Jill Schlesinger, CFP®, is the Emmy-nominated, Business Analyst for CBS News. She covers the economy, markets, investing and anything else with a dollar sign on TV, radio (including her nationally syndicated radio show), the web and her blog, "Jill on Money." Prior to her second career at CBS, Jill spent 14 years as the co-owner and Chief Investment Officer for an independent investment advisory firm. She began her career as a self-employed options trader on the Commodities Exchange of New York, following her graduation from Brown University.