Summer's nightmare: Gasoline may touch $3 a gallon : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

Summer's nightmare: Gasoline may touch $3 a gallon U.S. gasoline prices could touch $3 a gallon

By Myra P. Saefong, Last Update: 6:01 AM ET Apr 7, 2001

WASHINGTON (CBS.MW) -- In a nightmare summer driving scenario, energy analysts say U.S. gasoline prices could hit $3 a gallon.

Even if supply problems fail to touch that peak, oil experts say, $2 a gallon is likely.

The national price for regular unleaded gasoline was $1.44 as of April 2, according to the Energy Department, but if domestic gasoline supplies continue to fall, John Kilduff, senior vice president of energy risk management at Fimat USA, predicts that the national average price could peak at around $1.90 or $2 during the June through August summer traveling season.

He did note, however, that there is a 25 percent chance prices could reach $3 a gallon this year.

If it did, it could cost almost $100 just to fill up the tank of a Ford Expedition.

A report from the Energy Department released Friday shows that the government expects retail gasoline prices to average $1.49 a gallon this summer.

However, the agency admits that low inventories and high refinery capacity utilization could lead to more "price events," such as last summer's Midwest gasoline price spike. See full story.

Average drivers bought 522 gallons of gasoline and, using the average price of $1.48 a gallon for last year, paid about $820 to fill-up their passenger vehicles last year, said Ron Planting, manager of information and analysis at the American Petroleum Institute. That figure hit $1,040 for those who drive the larger sport utility vehicles and vans that guzzle about 700 gallons a year.

Average gasoline prices could "very likely" reach $3 a gallon in the early summer, affirmed Kevin Kerr, an energy market analyst at Lind-Waldock in Chicago. But the earlier it does, the more time the government will have to take measures to push prices back down.

If prices hit that mark in June, however, consumers could suffer the price strain for most of the summer, he said.

Last September, futures prices for October crude topped $37 a barrel and sent the cost of gas rocketing. Oil futures are now trading around $27 a barrel, so another price spike combined with shortages could be a formula for $3 gallons.

The higher price for fuel could have wide-ranging effects, according to Kilduff. "Two- or three-dollar gasoline really is a problem not only for people in general," he said, "but for the economy overall because this is a sort of a redirection of consumer spending into a myopic portion of the economy, which is energy." Hear the full interview.

It doesn't leave any room for "folks to spend money on the fun stuff," he said.

Besides socking drivers, inflated fuel prices would ripple through the transportation sector, lifting expenses such as air travel, which already is seeing extra charges for airline fuel.

Supply factor

Consider the fact that domestic gasoline supplies of 192.2 million barrels, according to the American Petroleum Institute, are 10 million barrels below last year's already tight inventories.

When consumers gassed up their tanks last year, it cost them an average $1.48 a gallon -- that's up 30 percent from 1999, according to Planting, much of it due to a lack of supplies.

Supplies are even lower now and, in fact, the U.S. is "at a level it typically associates with the end of the driving season," Kilduff said, "not the beginning of it and certainly not the precursor to it."

"The levels we're experiencing right now are the kind of levels that people started pushing the panic button about last year at this time," he said.

If supplies continue to tighten, consumers can expect to "see a dramatic rise in prices fairly quickly as end users stock up on supplies ahead of any price spike," Kerr said.

Volatility in crude oil prices, which comprise about 70 percent of the pretax cost of gasoline, Planting said, have also contributed to the rising prices of gasoline.

"The price of crude oil over the last two years has gone from the lowest inflation prices since the Great Depression to the highest since the Persian Gulf crisis," he said, and gasoline prices have made similar swings.

Futures prices for gasoline are at over 96 cents gallon, and "that's barge quantity wholesale," Kilduff said. That figure comes before adding any transportation costs or any other kind of federal or state or local taxes or even a profit margin for the resellers, he said.

Refinery capacity

Exacerbating the supply issue: refineries have been running at near full capacity since last year, Kerr said, so significant maintenance problems or shut downs could grow, causing a further tightening in supplies and prices.

In the latest week, refinery capacity rates dropped to 88.6 percent from the prior week's 89.5 percent, according to the API.

"The potential for a breakdown is there," Kerr said, because a lot of these facilities haven't been maintained as they normally would, because of strong demand for distillates.

Spring and autumn are typically the most opportune times for refinery maintenance, Planting said.

Still, "there's every incentive to produce every last gallon of gasoline right now," Kilduff said. The profit of turning crude into gas is "substantial," he said, at $12 a barrel under present pricing.

"Never underestimate the ability of the U.S. refining industry to come to the rescue in terms of supply," he said, emphasizing that it may be a little bit too late, but at least it gives consumers a shot at dodging $3 a gallon gasoline.

Consumer sacrifice

The higher prices could spoil summer plans for many vacationers this year, analysts said, but the effects on demand for gasoline can be argued.

In the past, consumers have reacted to higher prices by becoming more frugal in their driving patterns, Kilduff noted.

However, with the robust economic times of the past several years, many Americans took to the skies to take more exotic vacations, instead of just hitting the road, he said.

So in some ways, the higher prices and recent economic slowdown could keep consumers closer to home and actually increase driving activities and demand for fuel.

"It's really basic Economics 101 in terms of supply and demand," he said. "Even with the slowing economy, we feel that's going to push folks into more traditional type vacation travel patterns -- less foreign air travel and more local Six Flags type travel, which should help support and keep gasoline demand strong."

Whether the high gasoline prices deter drivers from taking long trips or not, consumers won't likely give up the fight against what some see as windfall profits.

"Given where we're at, it's somewhat deserved for the shackles to start to be raised and to inquire as to why these inventories aren't building and what the story is with the refinery utilization rates being so low," commented Kilduff.

As a country and as a market, he said, we seem to be experiencing "energy crisis fatigue," rolling from one crisis to the next over the past year or so.

It began with high gasoline prices last year, moved to heating oil prices over the winter season, then to a focus on the electricity problem in California.

"This gasoline situation will be just another thorn in the consumer's side and it's a horrific cost to consumers as well," he concluded.

Myra P. Saefong is a reporter for in San Francisco.{CB809F57-9C74-4FED-92D2-F7D6F9373AD4}

-- Martin Thompson (, April 07, 2001

Moderation questions? read the FAQ