Gas increase price why

Few around the globe have shed tears for Americans anguished by rising gas prices. Not when U.S. sales of gas-hungry SUVs rose smartly last month and record numbers of motorists hit the July 4 holiday-weekend highways.

Still, the guzzlers caught a break last week. Saudi Arabia, backed by the few other oil-producing nations with excess capacity on hand, announced it would add an additional 500,000 barrels a day to the world oil supply.

The Saudis aren't trying to push oil prices south of $30 a barrel to ease the pain of U.S. motorists--who still enjoy gas prices far below those in most industrialized countries. But the kingdom doesn't want prices to rise so high they risk re-triggering the Asian economic collapse that caused oil prices to plummet in 1997 and 1998. Nor do the Saudis wish to become a handy target for candidates in America's fall elections. "They clearly are concerned the current price is too high in both economic and political terms," says Daniel Yergin, chairman of Cambridge Energy Research Associates.

But the boost in production may not stanch the flow of money from U.S. wallets. Most Saudi crude oil is high in sulfur, whereas U.S. gasoline is derived primarily from "light, sweet" crude, so much of the new oil won't make it to the pump. "The Saudis are offering chocolate ice cream, and we need strawberry," says energy expert Philip K. Verleger Jr., of the Brattle Group. And U.S. refineries, operating near capacity, can't easily handle the new crude.

Heating bills. But even if gas prices dip, consumers may face a nastier shock when the time comes to cut off the air conditioner and fire up the furnace. Not only is heating oil in short supply, but inventories of natural gas--now America's primary home-heating fuel as well as a major source of power for electricity generation--are unusually low. Why the shortfall? Supplies are down because low oil prices in 1998 clobbered the oil and gas industry, resulting in cutbacks in exploration and development. Meanwhile, demand is way up. Electric utilities increasingly rely on cleaner natural gas rather than coal or oil. Summertime air-conditioning and electronic devices are gobbling up ever more kilowatts. "Drilling capacity has recently expanded to its highest level in 12 years," says the American Petroleum Institute's Edward Porter. "But demand grows even faster."

Porter also has an eye out for possible troublemaking by Iraq. Baghdad claims it could double oil production in five years absent U.N. sanctions that restrict its output. But Verleger thinks Saddam Hussein, who has threatened to stop production in the fall if the sanctions aren't lifted, might counter increases in Saudi production by offsetting cuts. In an energy market as tight as this one, says Verleger, Iraq could be in a position to "dictate the terms of peace with the rest of the world." Or at least the price of comfort for many people next winter.