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Former NFL linebacker Nick Barnett is an automotive enthusiast, who regularly posts photos of his tricked-out vehicles on social media sites. His latest is a custom camouflage Ford F-650 with a 145-gallon-capacity tank. At the national average price of $3.70 per gallon (as of March 11), that’s more than $500 per fill-up.
Despite an injury-plagued 10-year career, Barnett made a reported $50 million with the Green Bay Packers and Buffalo Bills, so he can afford it. But the rest of us are wondering: What is causing the spike in gas prices, how high will prices go, and how long will the spike last?
The cause is certainly not scarcity. The global supply is strong, and the United States is in the midst of an energy boom, aided in part by hydraulic fracturing (“fracking”) and other new technologies for extracting gas and oil.
Refining capacity is the bottleneck. Because of a mild winter, some refineries “are switching over from winter to summer fuel, which is more expensive to produce,” says Jacqueline Leo of The Fiscal Times. A Hess refinery in New Jersey closed down this month, adding to the list of older refinery closings. Because of environmental regulations and the $3 billion to $10 billion needed to bring a new refinery on line, not one new refinery has been built in the United States since 1976.
Another likely culprit is U.S. monetary policy. Fed Chairman Ben Bernanke’s Quantitative Easing program has eroded confidence in the dollar. The International Monetary Fund’s Commodities Price Index has more than doubled since 2009. Crude oil prices are up nearly 15 percent since December.
The good news is that another reason for the price rise is increased demand. Demand rises when economic activity grows—and that’s a good thing. For 2013, aggregate global oil demand is forecast to average 89.7 million barrels per day, an increase of about 1 percent over 2012 levels.
When refinery maintenance and switch-over are complete, supply will go up. But the summer driving season typically increases demand. So prices will probably not go much above current levels, but we’ll likely stay near where we are now until at least Labor Day.
That means Nick Barnett had better get used to his $500 fill-ups.
Merging and acquiring
One reason for the slowness of the economic recovery has been the reluctance of corporate leaders to invest the estimated $2 trillion to $4 trillion on their balance sheets.
Warren Buffett’s Berkshire Hathaway broke the thaw on Feb. 14 when it said it will buy food company Heinz for $28 billion. But the merger that received the most attention was the one between US Airways and American Airlines. US Air’s CEO Doug Parker will lead the combined entity, which will be the world’s largest airline and will retain the American name. The airline merger is worth about $11 billion.
These deals indicate capital is moving off the sidelines and back into the game. The retail industry, for example, saw $324.6 billion in global mergers and acquisitions (M&A) activity in 2012, up 33 percent over 2011, according to research firm Dealogic. This year looks to be even bigger.
“In terms of overall M&A transactions, we’ve seen the fastest start to the year since 2005, and retail looks to be a bright spot for deal-making this year,” said Stephen Wyss, partner in the Retail and Consumer Products practice at BDO USA, LLP. “Steadier markets, renewed interest in international growth and the desire for omni-channel capabilities are fueling the investment rebound in retail and consumer businesses.”—W.C.S