Who's to blame for $4 gas

Prices have surged over the past four years - and there's a bunch of reasons why.

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By Steve Hargreaves, CNNMoney.com staff writer

America's Money: Gas crunch hits home America's Money: Gas crunch hits home America's Money: Gas crunch hits home
The record-high price of gasoline is putting a strain on motorists - and spurring some to shift their habits. Here are their stories.
Soaring demand, limited supply and investor interest are behind a doubling of gas prices over the last four years.
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NEW YORK (CNNMoney.com) -- It's hard to imagine now, but in 1999 gasoline sold for 90 cents a gallon. How'd we get from there to $4 a gallon?

There is no short answer - many things happened, and together they formed a chain of events from cheap gas to $100 tankfuls.

2004: Demand pressure

One of the most common reasons cited for the price jump is supply and demand - we are using more oil, which accounts for 70% of the price of gas, and finding less of it.

Why we are finding less oil and using more of it is partly a result of the low prices during the 1990s. Those low prices - partly caused by low gas taxes in the U.S. compared to other developed nations - both encouraged rapid consumption domestically (think SUVs) and underinvestment in new production by the world's oil companies.

By the time 2004 rolled around - and developing economies around the globe roared to life - the world was left in a pinch.

"Our demand has skyrocketed, but our ability to supply that demand has stagnated," said Stephen Schork, publisher of the industry newsletter The Schork Report. Gasoline prices topped $2 a gallon for the first time ever in May of 2004, "and we've been off to the races since then," said Schork.

As demand grew and the supply of oil remained relatively flat, the difference between the amount of oil the world could produce and the amount it consumed narrowed. That meant a supply disruption from one place in the world could not be easily covered with spare oil from another part.

2005: The storm

This was illustrated in September 2005, when Hurricane Katrina knocked out a significant chunk of U.S. refining and gasoline prices spiked above $3 a gallon for the first time ever.

"It exposed how little surplus refining capacity we have in the U.S.," said James Crandell, an energy analyst at Lehman Brothers.

A new refinery hasn't been built in the United States in three decades, although capacity at existing refineries has been expanded.

2006: Hot tempers

The lack of spare supply has kept other geopolitical events in the forefront for the last few years. Iran and the spat over its nuclear program dominated the news in early 2006, and combined with Israel's invasion of Lebanon in the summer of that year to cause another spike in gas prices to over $3 a gallon.

Geopolitical events need not be shooting wars to attract attention. Analysts say general resource nationalism since 2004 is partly responsible for high oil prices.

In the past few years, Iran's Mahmoud Ahmadinejad, Russia's Vladimir Putin and Venezuela's Hugo Chavez have all become more bellicose on the world stage - in some cases, seeking a bigger share of the profit from foreign oil firms or threatening to cut off oil supplies if attacked.

Some say the Bush administration's provocation of Iran and Venezuela, coupled with a botched occupation of oil-exporting Iraq, has contributed to the geopolitical tension. But defenders say that, in the long run, the administration's actions will eventually lead to a more democratic - and thus stable - global supply.

2007: Tight supplies

New supplies of oil from non-OPEC countries were supposed to come online in 2007 and ease some of these supply bottlenecks. But problems in Kazakhstan and Russia - as well as sweeping drilling bans in the United States - mean global consumption is growing twice as fast as non-OPEC production.

Analysts say OPEC, which hold two-thirds of the world's oil reserves but sees a global economy humming along despite $130 oil, has little incentive to increase production.

2008: Speculators swarm

Strong demand, tight supplies and a volatile marketplace have attracted the interest of investors - the last main contributor to high prices.

"The speculator has seized upon this opportunity," said Schork. "They have recognized there is something fundamentally flawed in this market."

Since 2003, the number of oil contracts exchanged on the NYMEX has more than doubled, said Schork.

Money flowing into oil - and commodities in general - has been especially sharp over the last 6 months as investors look for good returns amid falling stock prices and an inflation hedge against a falling dollar.

That's helped push oil prices to nearly $130 a barrel and gasoline to an average of nearly $3.80 a gallon - smashing previous records even when adjusting for inflation.

Why do you think gas prices are so high? Post a comment.

Whether this investor influx into the oil market is justified is matter of debate. Some see high oil prices as necessary to boost supply and limit demand.

"You can't just point the finger at speculators," Michael Haigh, head of U.S. commodities research at the investment bank Société Générale, recently told CNNMoney.com "Fundamentally, the markets are where they are supposed to be."

Others are less certain.

"The fundamental picture to us doesn't justify the price," said Lehman's Crandell. "It's kind of suggestive of a bubble."

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