Monday, April 2, 2012

Why Are Gasoline Prices So High? The Japanese Nuke Shut Down Is A Contributing Factor

The high price of gasoline in the U.S. is primarily due to the high cost of oil. While there are many causes for the high cost of oil, a key factor is oil traders requiring a premium price for orders for oil in a market that is experiencing increasing demand amid concerns about supply disruptions. 

The demand for oil has been increasing in Asia as economies grow and car ownership becomes more commonplace. China has already surpassed the U.S. as the world's largest car market. The market for new car sales in India has also grown, to the point where it now is over a quarter the size of the U.S. market.

However, in addition to steady growing demand for oil throughout Asia, there has been a sharp spike in demand for oil from Japan due to shutting down nuclear power plants. Since the March 11, 2011 earthquake and tsunami that wrecked three reactors at the Fukushima plant northeast of Tokyo, Japan has shut down all but one of its 54 nuclear power plants. The country relied on nuclear sources for almost 30 percent of its electricity before the disaster. Japan has increased its oil imports for power generation by about 275,000 barrels a day .

It would be an overstatement to conclude that incremental demand from Japan of 275,000 barrels a day of oil was a primary cause of the increase in oil prices. This incremental demand only represents a fraction of the 90,000,000 billion barrels a day consumed world wide. However, it is a contributing factor to the tight supply of oil.

The Japanese economy was struggling before the tsunami hit north of Tokyo. The extra cost of importing 275,000 barrel of oil per day is one of the factors the converted the country from being an exporting powerhouse into a net importer during January, 2012. Time will tell whether Japan decides to restart its nuclear plants, but if they do so, it may offer a bit of a relief from today's high gasoline prices.

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