Middle East Unrest, Sputtering Economies to Keep Fuel Prices Unstable

For the 31st consecutive year, The University of Alabama’s Office of Media Relations offers predictions from faculty experts for the coming year.

Fuel prices will remain unstable in 2012 as pressure from all sides influence the cost of crude oil, according to a University of Alabama engineering professor who follows the petroleum markets.

A decrease in demand the last month or so of 2011 slightly reversed jumps in gasoline prices in the United States, but there is too much political uncertainty ahead to believe that should continue, says Dr. Peter Clark, professor of chemical engineering. If anything, demand in the U.S. should increase with the slow-recovering economy and the annual price spike from the summer thirst for fuel.

“Volatility in the oil market translates to volatility in gasoline prices,” Clark says.

Continued unrest in the Middle East and instability among European economies, combined with a recovering economy at home, could mean higher prices at the fuel pump in 2012, he says.

In 2011, political turmoil in the Middle East cramped supply and spooked traders, and the price of oil jumped. In 2012, continued instability in the Middle East and global political unrest with Iran could keep oil traders nervous, Clark says. Many European governments are mulling boycotting Iranian oil in the wake of continued concern of a possible nuclear weapons program, and Iranian leaders warned in December a boycott would mean much higher oil prices, according to published reports.

Clark, though, says there should be an adequate supply of crude oil for the world even without Iran.

Still, oil traders could get nervous and run up the price of oil if Iran is cut off from much of the world, and continued waffling in the European economy could also make traders nervous, he says.

Helping with the supply, though, is increased in production in the U.S., Clark says. Oil production here increased for the first time in several years because methods of extracting oil from underground rock formations, or hydraulic fracturing, opened untapped oil reserves, and drilling for oil in the Gulf of Mexico restarted in 2011 after the massive oil leak off the Gulf coast in 2010, Clark says.

However, if the economy continues its slow improvement, demand for gas should rise, and the price at the pump would rise with demand, according to Clark. Prices are assured to rise in the spring as demand increases, refineries close for seasonal maintenance and switch to costlier summer gasoline formulations used to help air quality, he says.

As for natural gas, hydraulic fracturing of underground formations, coupled with new sources of supply, should keep prices relatively low, home heating costs down and electric prices stable in areas where there are gas-fired power plants.