Gas prices soar past $3.50 per gallon: Are Middle Eastern uprisings to blame?

Gas prices have been only modestly affected by fighting in Libya, but a 'fear factor' is driving up oil futures, which in turn drive gas prices.

Americans are paying an average of $3.51 per gallon to fill up their gas tanks, a number that for many is synonymous with "Ouch!" Gasoline pump prices are up 13 percent in the past month, and 4 percent in just the past week, according to AAA's Fuel Gauge Report.

The rapid run-up is unusual, and some economists worry it could throw sand into the gears of an economic recovery – just as much-needed new jobs are starting to arrive.

What's going on here? Is the price spike justified by populist uprisings in Libya and other oil-producing nations?

The answer is complex, although one thing is fairly clear: The jump at the gas pump hasn't outpaced the rising price of the key ingredient – crude oil. No need to go looking for conspiracy theories involving gas-station managers.

Oil traded at about $105 per barrel Monday, as investors fretted about the possibility of a protracted civil war in Libya. Global oil prices have risen about 36 percent over the past year, during which time the average US retail price for gasoline rose about 28 percent.

Whether you measure over a month or a year, gas prices are rising at about the expected rate, say industry analysts, given that oil accounts for roughly two-thirds of the price of gasoline. (Other key factors behind gas prices are the costs of refining, distribution, and taxes.)

As for the price of oil itself, industry analysts differ over whether the $105 range is justified. Much of the recent run-up reflects fears of what could go wrong with oil supplies, rather than with actual disruptions, they say. At the same time, fear and speculation are a normal part of oil-market prices, as traders weigh the expected value of future deliveries.

"There is a strong fundamental case underpinning the oil price rise" when viewed in that context, says Richard Swann, who tracks the oil market at Platts, a leading information provider on the energy industry.

He notes that, amid the economic recovery from recession, global oil demand was overshooting supply by about 1 million barrels per day even late last year, by some estimates.

Thus, even before the wave of unrest in the Arab world, industry inventories were falling, although they aren't yet unusually low.

Now the flow of oil from Libya, one important producer, has been disrupted. Saudi Arabia has pledged that it stands ready to cover any resulting shortfall in global supply.

"It's not a supply crisis," says Platts's Mr. Swann, managing editor of oil news for Europe, the Middle East, and Africa.

At least, the raw volume of oil production appears adequate for now, Swann adds.

The price rise does reflect a real uncertainty about future supplies, however. If it's Libya today, could it be someone else tomorrow? "Saudi Arabia can't cover everybody," Swann says.

Another factor, some analysts say, is concern about the type of oil that Libya produces. Not all crude oil is created equal, and key refineries in Southern Europe are designed to rely on Libya's high-quality product, says Sarah Emerson, president of Energy Security Analysis Inc., a consulting firm in Wakefield, Mass.

"Saudi crude is not a good alternative to the Libyan crude," Ms. Emerson says. At least temporarily, that introduces some marketplace disruption, since those refineries must look for other sources of so-called sweet crude.

Given the upward trend in oil prices, she says there's nothing surprising about the rise in US gas prices over the past couple of weeks.

Still, this kind of surge in both oil and gas prices doesn't happen every day. One week in February marked the biggest seven-day jump in gasoline prices since the US Energy Information Administration began tracking weekly numbers in 1990 – with the exception of a week right after Hurricane Katrina in 2005.

According to the EIA, a $10 per barrel rise oil prices typically translates into a jump of about 24 cents per gallon in the retail price of gasoline. The shift usually occurs within about two months, with about half of the price change occurring in first two weeks of the change in oil prices.

Since the beginning of this year, a gallon of gas has gained 44 cents in price – stunning, but not out of line considering that crude oil's price has gained about $20 per barrel since early December.

The question on everyone's lips: Where will oil prices head next? They could fall, if the situation in Libya and the surrounding region appears to move towards stability.

On the other hand, prices could surge much further on any sign that unrest might spread to Saudi Arabia.

An analysis by the credit rating agency Standard & Poor's labeled that "unlikely" last week.

"We believe that the recent announcement of a sizable package of extra social spending, wage increases, and additional public sector jobs underlines that the Saudi government is mindful of potential risks, and is trying to assuage social pressures by tapping its sizable fiscal reserves," the S&P report said.

Some Saudi citizens have called for a day of protest against their government on March 11.