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BlogStocks: $4 gasoline? We'll be lucky if price peaks at 'only' $4 this summer

Posted Apr 18th 2008 3:11PM by Joseph Lazzaro
Filed under: International markets, Commodities, Oil

In this case, the official, 'worst-case' scenario may not represent the actual worst-case scenario.

The U.S. Department of Energy, through its Energy Information Administration unit, has already released its projection for U.S. summer gasoline prices, and it expects the average U.S. price to peak at $3.60 per gallon by late spring/early summer. The current average is about $3.35-$3.38 per gallon.

Meanwhile, oil Friday flirted with yet another all-time high. Oil rose 73 cents to $115.59 per barrel, while wholesale unleaded gasoline gained 1 cent to $2.95 per gallon. On Thursday billionaire investor and oil industry guru T. Boone Pickens told Bloomberg News oil is headed for $125 per barrel.

The EIA does not expect much of a price rise beyond the $3.60 level because it expects U.S. consumers to cutback consumption to contain their transportation fuel bills amid the record-high prices. And, in fact, there's considerable evidence to support the EIA's demand projection: for the first time in more than a decade, weekly U.S. gasoline sales have declined on a year-over-year basis for more than two months.

Another factor: the unexpected

However, as independent energy trader Jim Dietz pointed out, the EIA's estimates are overlooking a variable that's all-too-often played a role in soaring gasoline prices during recent summer driving seasons: the unexpected.

A natural disaster such as a hurricane or even a tropical storm can markedly reduce gasoline flows across the nation, Dietz said. Further, an outage at a refinery, due to breakdown or a fire, would also force prices significantly higher, due to the U.S.'s barely-adequate refinery system.

"Ten or 15 years ago, an outage at a major refinery didn't move the gasoline market that much. But because gasoline supplies are so tight because we haven't increased refinery capacity that much over a decade, a fire or extensive repairs can cause a 20- or 30-cent increase in gasoline prices," Dietz said. "Add the hedge fund factor and you can see how an outage can really move prices."

Then there is the United States' quilt-like pattern of gasoline formulations. Dietz said, due to different environment requirements, states require different gasoline formulations for summer. The result is cleaner air, he said, but also a complex distribution system that requires different gasoline for California, than it does for, say, Kansas, he said. Producing different gasoline formulas increases refiners' costs, which adds to gasoline's price.

The bottom line regarding this summer's DOE $3.60 per gallon gasoline ceiling? Think of it as "a best guess," Dietz said.

Tags: Energy Information Administration, gasoline, gasoline prices, inthenews, oil, oil prices, travel

http://www.bloggingstocks.com/2008/04/18/4-gasoline-well-will-be-lucky-if-price-peaks-at-only-4-thi/