BUSINESS

Gas Prices Unlikely To Change After Modest Saudi Increase

07/01/2008 05:12 am ET | Updated May 25, 2011

Saudi Arabia announced a modest increase in oil production this week. However, gas prices are unlikely to change much as a result. Indeed the price of oil went up because the Saudi increase was so small:

Oil prices rose Monday on disappointment over Saudi Arabia's modest production increase and concerns that output from Nigeria will decline. Retail gas prices, meanwhile, inched lower overnight, but appear unlikely to change much as long as oil prices stay in a trading range.

Saudi Arabia said Sunday at a meeting of oil producing and consuming nations that it would turn out more crude oil this year if the market needs it. The kingdom said it would add 200,000 barrels per day in July to a 300,000 barrel per day production increase it first announced in May, raising total daily output to 9.7 million barrels.

But that pledge at the meeting held in the Saudi city of Jeddah fell far short of U.S. hopes for a larger increase. The United States and other nations argue that oil production has not kept up with increasing demand, especially from China, India and the Middle East. Saudi Arabia and other OPEC countries say there is no shortage of oil and instead blame financial speculation and the falling U.S. dollar.

The Fed is unlikely to lower interest rates to boost the economy due to the threat of inflation from, among other things, rising energy prices:

Fed Chairman Ben Bernanke and his colleagues, who open a two-day meeting Tuesday, are in a tricky spot: they are faced with stuck-in-a-rut economic growth along with inflation threats from rising prices for energy, food and other commodities. Fed officials have made clear that because of concern about inflation, they're not inclined to cut rates further. At the same time, they have recognized that pushing rates up too soon could undermine an economy buffeted by housing, credit and financial woes.

Against that backdrop, the Fed is almost certain to hold its key interest rate steady at 2 percent when it wraps up its session on Wednesday. If that's the case, the prime lending rate for millions of consumers and businesses would stay at 5 percent. The prime rate applies to certain credit cards, home equity lines of credit and other loans.

Suggest a correction