Gasoline at $4 Coming to a Pump Near You, Unfazed by Rising Tab

[Donger]

http://www.bloomberg.com/apps/news?p...d=afOlUzd30YOo

Pretty alarmist, IMO, but possible.

Spoiler!

April 23 (Bloomberg) -- Whether it's $50 to fill up your Prius or $130 for the Ford Expedition, $4-a-gallon gasoline is coming to a pump near you.

Fuel prices are rising at a pace not seen since Hurricanes Katrina and Rita knocked out a third of the U.S. oil refining industry in 2005. Gasoline consumption is climbing twice as fast as last year and will accelerate when summer travel begins late next month.

``What we're surprised by is the increased demand,'' said James Mulva, chief executive officer at ConocoPhillips, whose refineries from California to New Jersey produce 56 million gallons of gas a day, enough to meet 14 percent of the country's needs. ``Even though the price of gasoline is up, the demand is up,'' he said in an April 12 interview in Houston.

Population gains and U.S. economic growth are causing an increase in fuel purchases, according to Orlando, Florida-based AAA, the nation's largest organization for motorists. The U.S. economy will expand at a 2.4 percent annual pace in the second quarter, up from 1.8 percent in the first three months, according to the median estimate of 74 economists surveyed by Bloomberg. Gasoline use is rising almost 5 percent above the five-year average.

Americans are resigned to higher prices, says David Pursell, a principal with Pickering Energy Partners, a consulting firm in Houston.

``Last year, we had pump prices well over $3 for the summer and gasoline demand was up,'' Pursell said in an interview. ``Would $4 gasoline cause demand contraction? I think it will, but I also thought $3 gasoline would.''

Pump Prices

Gasoline inventories, measured by the days of demand they will cover, are at the lowest level in two decades for this time of year because of refinery fires, power failures and maintenance work oil companies failed to complete in 2006. No new U.S. refinery has been built in three decades, increasing the strain on existing plants.

Pump prices in the U.S. may increase to $4 a gallon from a nationwide average of $2.87 today, especially if hurricanes threaten Gulf of Mexico refineries, says Peter Beutel, an analyst at Cameron Hanover Inc. in Stamford, Connecticut, who helps industrial consumers manage energy costs.

``Hurricanes are always the huge wild card,'' said Beutel. ``We're all praying for a year like 2006 rather than 2005.''

The June-to-November Atlantic Ocean hurricane season may produce 17 tropical storms, with nine reaching hurricane force and four becoming major hurricanes whose winds exceed 111 miles per hour (179 kilometers per hour), London-based forecasters at Tropical Storm Risk said. Some of the storms will strike the Gulf Coast this year after a benign 2006, AccuWeather.com predicted.

Inflation Risk

Higher pump prices will make winners of refinery owners such as ConocoPhillips, San Antonio-based Valero Energy Corp. and Royal Dutch Shell Plc of The Hague. Shares of Valero and Sunoco Inc., whose only business is refining, are rebounding after a decline at the end of last summer.

The increase in fuel costs threatens to quicken inflation and restrain consumer spending in the U.S. An appreciation to $4 a gallon would add more than $10 for a driver who fills the 12- gallon tank of a Toyota Motor Corp. Prius. The owner of an Expedition, a Ford Motor Co. sport-utility vehicle with a 34- gallon capacity, faces an increase of almost $40.

Many Americans have no choice but to drive more, says Christopher Knittel, an economist who studies fuel consumption at the University of California in Davis.

More Commuters

``We live farther from our jobs than we did in the 1970s, and with the rise of dual-income households, we now have two people who drive those distances every day,'' Knittel said.

Consumers also do more driving for things such as taking children to soccer practice, which they are unlikely to quit, he said. The U.S. population has increased 1 percent a year in the past decade to 301 million in 2007, adding to demand for gasoline, economists said.

Rising fuel prices make it less likely that Federal Reserve policy makers, who have cited inflation risks for the past year, will cut interest rates to spur economic growth. Before the hurricane-induced peak in 2005, U.S. gasoline topped out at $1.42 a gallon in March 1981, or $3.21 when adjusted for inflation, according to the Energy Department.

Economies in Europe and Asia are less likely to be hurt by gasoline prices because fuel already is subject to high taxes designed to encourage conservation. A gallon of unleaded costs about 3.25 pounds a gallon ($6.49) in the U.K., and in Japan it's 130.3 yen per liter ($4.16 a gallon).

$4 Barrier

U.S. consumers will get little relief on gasoline prices from Europe this year, unlike 2005, when oil companies shipped more across the Atlantic after the hurricanes. Europe's gasoline inventories in February were 114.2 million barrels, down 11 percent from two years earlier, according to the International Energy Agency in Paris. The drop in Europe was almost twice the 5.7 percent decline in U.S. supplies in that time.

``Just as we used to think $3 a gallon was an impenetrable barrier, now it's $4,'' said Peter Morici, a professor at the University of Maryland School of Business in College Park and former chief economist for the U.S. International Trade Commission. Gasoline at $3.50 is likely, Morici said, and a conflict with Iran or any event that disrupts crude supplies may push it to $4.

Pump prices rose 33 percent in the past 11 weeks, the fastest rate of gain since a six-week, 34 percent rally to the record $3.069 in September 2005, Energy Department data show.

Bodman's `Worry'

U.S. Energy Secretary Samuel Bodman in an interview last week said the national average pump price could break the record this summer. While his agency's official forecast is for gasoline to peak next month at about where it is today, hurricanes, refinery closures or crude oil supply cuts may send prices higher, he said.

Higher prices are ``a legitimate worry,'' Bodman said. ``We have trouble spots all over the world'' that could boost crude oil prices. ``We're in a very tight situation.''

Spending on fuel in the U.S. consumes half as much household income as in the early 1980s, which means gasoline would need to reach almost $6 a gallon to have the same effect on the economy as in 1981, according to the Federal Reserve Bank of Dallas.

Storage tanks at U.S. refineries, terminals and ports hold enough gasoline to cover almost 22 days of domestic demand, 8.2 percent less than the five-year average and the lowest for this time of year since the 1980s, Energy Department figures show.

Shortages

Valero-owned filling stations in Denver and Colorado Springs, Colorado, ran dry after a Feb. 16 explosion and fire shut the company's McKee refinery in Sunray, Texas. A day earlier, a blaze at an Exxon Mobil Corp. plant in Nanticoke, Ontario, slashed output, resulting in shortages and higher prices across eastern Canada.

The McKee shutdown strained supplies so much that ConocoPhillips postponed maintenance at its Borger, Texas, refinery north of Amarillo to prevent shortages in the region.

``Refineries are becoming more complex,'' Mulva said in the Houston interview. ``What we're finding is it's more difficult keeping reliability up with more sophisticated pieces of equipment that are highly integrated.''

Tesoro Corp. of San Antonio, the second-largest refiner in the western U.S., said first-quarter refinery use dropped because oil companies delayed until this year maintenance that could have been done in 2006. The portion of U.S. refining capacity that was in operation in the first quarter declined to 87.3 percent from 88.9 percent a year earlier, according to Energy Department data.

`Refineries Blow Up'

``Prices will depend entirely on whether we have a couple of refineries blow up,'' said Philip K. Verleger, an economist who runs a consulting firm in Newport Beach, California. ``It's almost impossible we'll get to $4 a gallon if all the refineries run well this summer. But if something happens and there are problems, then anything's possible.''

The average share gain for Valero, Tesoro and six other oil-refining companies is 26 percent this year, outperforming the 4.1 percent gain for Exxon Mobil and a 4.7 percent increase for the Standard & Poor's 500 index.

The shares will continue to rally, said Paul Carlson, who helps manage $3 billion at HGK Asset Management in Jersey City, New Jersey.

``Refiners are doing very well these days,'' said Carlson, whose holdings include ConocoPhillips, the second-biggest U.S. refiner. ``There will be lots of demand for any new refining stocks.''

`Back in Favor'

As recently as August, investors were selling oil refiners on concern an economic slowdown would slash fuel demand in the U.S., the world's largest energy market. During seven weeks last August and September, Valero shares fell 29 percent, wiping out $12 billion in market value.

``Refining is very much back in favor,'' said Douglas Ober, who helps oversee $2.3 billion at Baltimore-based Adams Express Co. ``Even with higher prices, we haven't seen any substantial cutback in demand. They're cranking out as much of this stuff as they can, and we're throwing it in our tanks as fast as we can.''

The margin earned from processing crude oil into fuels rose to $24.68 a barrel on April 11, the highest since right after the hurricanes in September 2005. The margin has since retreated to $22.12 a barrel, still about double the five-year average.

``It'll be a fairly tight gasoline market all through the summer,'' said Robert Hinckley, an analyst at Rochdale Securities in New York.

[Buehler445]

Originally Posted by BigMeatballDave

2008/2009 Economy went to shit. Massive layoffs.

The dive was a liquidity shortage. The recession wasn't because of the oil price.

Originally Posted by Donger

True, but this is a very different scenario being played out. Our massive production increase is the major reason crude is falling now, not a global recession. I don't see it going anywhere near what happened in late 2008, when crude got to what, $40?, but who knows. I still think that OPEC is not cutting their production to kill new shale E&P. They are thinking years out, not now.

That's what I've read.

[Mojo Rising]

Originally Posted by Donger

That doesn't make much sense. If OPEC increases production, yes, crude will drop even more. To the point where new Gulf E&P and shale production stops. If they then lower production and raise prices, those two will start back up.

Now, if they increase production and leave it there...

I still think that they are trying to slow down our production. New oil leases are down 40%.

[Donger]

Wow. Of course, it's a government prediction, but...

The Energy Department again slashed its prediction for next year's average price of gasoline across the U.S., this time to $2.60 a gallon. That would be 23 percent below this year's projected average and the lowest full-year average since 2009.

If that comes to pass, the price drop will save U.S. drivers $100 billion over the course of the year based on current consumption levels. That will boost the overall economy by reducing shipping and transportation costs, and leaving consumers more money to spend on other things.

In its most recent short-term energy outlook, released Tuesday, the Energy Department's Energy Information Administration cut its gasoline price forecast for 2015 by 35 cents a gallon. It was the second time in two months that the EIA cut the forecast by more than 30 cents a gallon.

The average national price of gasoline to $2.66 a gallon on Tuesday according to AAA, 61 cents less than last year at this time. The national average has fallen every day since September 26.

The steep drop in gasoline prices is a result of a drop in crude oil supplies. Global crude prices have fallen to around $66 per barrel from a June high of $115 per barrel. Global supplies are high thanks in part to rising production in the U.S., while global demand is relatively weak because of slowing economic growth in Europe and Asia.

The lower crude prices are forcing oil companies to scale back drilling plans for next year. As a result, the EIA trimmed its forecast for U.S. production growth. U.S. crude oil output is expected to rise by 300,000 barrels per day to 9.3 million barrels a day. The EIA had previously expected production to rise by 400,000 barrels per day.

Despite a colder than normal November, the EIA expects home heating costs to fall this winter compared to last year. Weather forecasters do not expect a repeat of last year's consistently low temperatures, and prices for propane and heating oil are much lower than last year.

[007]

Thanks to a buck off with Kroger fuel points, I filled up for 1.33 per gallon today. My son was in shock when he saw the per gallon price. Filled up three cars on that one trip.

[DaneMcCloud]

Originally Posted by Guru

Thanks to a buck off with Kroger fuel points, I filled up for 1.33 per gallon today. My son was in shock when he saw the per gallon price. Filled up three cars on that one trip.

Outstanding!

[007]

Originally Posted by DaneMcCloud

Outstanding!

When we got to 10 gallons and hadn't hit 20 bucks yet I had to do a doubletake.

[DaneMcCloud]

Originally Posted by Guru

When we got to 10 gallons and hadn't hit 20 bucks yet I had to do a doubletake.

That's awesome. I was stoked at $2.67 last week. A buck less would be insane.

[Kaepernick]

Originally Posted by BigMeatballDave

2008/2009 Economy went to shit. Massive layoffs.

2008 was a liquidity crisis/financial deleveraging.

The only time in my lifetime that oil really devalued was in 1986 under Reagan. I forget how Reagan broke OPEC, but in 1986, we actually experienced DEFLATION because of the plunge in oil prices. The net result was massive growth in the US economy in 1987 and 1988. Cheap energy led to a huge US economic expansion.

It was a WONDERFUL thing for our economy. Unless you lived in Texas. Texas went into a strong economic depression due to the oil price collapse. For the rest of America, it was a huge economic boon to have cheap energy and reduced costs.

I also think it is no coincidence that the collapse of oil prices assisted the rise of the family SUV as a staple. Before that, it was too expensive to fill the tank. Now people are hooked on their SUVs and willing to spend $120 a tank at $4.00/gallon, but they would never have stood for that in 1982.

Originally Posted by eia.gov

Crude Oil Price Collapse of 1986

Description:

Faced with declining world oil demand and increasing non-OPEC production, OPEC cut output significantly in the first half of the 1980s to defend its official price. Saudi Arabia, which played the role of swing producer in the cartel, bore most of the production cuts. Saudi Arabia crude oil product, which peaked at over 10 million barrels per day for the period October 1980 through August 1981, fell to just 2.3 million barrels per day by August 1985. In late 1985, Saudi Arabia abandoned its swing-producer role, increased production, and aggressively moved to increase market share. Saudi Arabia tried a netback-pricing concept, which tied crude oil prices to the value of refined petroleum products. This reversed traditional economic relationships by guaranteeing specific margins to refiners, thereby transferring risk from the crude oil purchaser to the producer.

In response, other OPEC members also increased production and offered netback-pricing arrangements to maintain market share and to offset declining revenues. These actions resulted in a glut of crude oil in world markets, and crude oil prices fell sharply in early 1986.

Industry Action/Reaction:

By July 1986, the average per-barrel free on board (F.O.B) price for OPEC crude oil had dropped from $23.29 in December 1985 to $9.85, and prices for crude oil from non-OPEC countries were following a similar path.

The collapse of crude oil prices in 1986 reversed the upward trend in U.S. production of the first half of the decade. Many high-cost wells, which became productive after the oil crisis of 1978-1980, became unprofitable in 1986 and were shut in. Domestic crude oil production began dropping in early 1986. After the world price fell more than 50 percent between January and March 1986, drilling plummeted. Since then, domestic drilling and production have gradually declined.

The net effect of the decline in domestic production beginning in 1986 was an increase in crude oil imports, which climbed from 3.2 million barrels per day in 1985 to 9.1 million barrels per day in 2000. Most of this increase was met by OPEC, whose share of total U.S. crude oil imports rose from 41 percent in 1985 to 60 percent in 1990, before dropping to 46 percent in 1995-1997. Since 1998, the share has gradually increased, reaching 51 percent in 2000.

Oil company investments began shifting to foreign oil exploration and production after the 1986 price drop.(28) Foreign fields are generally much larger than in the United States and average production costs are lower. Changes in policy in the former Soviet Union since 1991 have increased U.S. production investment there, (29) and recent moves toward foreign investments in Mexico have attracted American exploration and production companies. (30)

Results:

The sharp drop in crude oil prices pushed U.S. petroleum demand steadily higher in the second half of the decade. From 1985 to 2000, demand climbed from 15.7 million barrels per day to 19.5 million barrels per day.

Until 1986, the value of U.S. petroleum imports comprised between 15 percent and 32 percent of all imported goods. The steep decline in petroleum prices in 1986 reduced petroleum's portion of the U.S. trade deficit.

The economy expanded at a faster pace in 1987 and 1988. Low petroleum prices stimulated growth in industrial production, employment increased,(31) and travel picked up. Temporary conservation measures that had been instituted during earlier oil price escalations were discontinued. The overall energy intensity of the economy (measured by the ratio of total energy consumption to the constant dollar level of the Gross Domestic Product), a reflection of energy conservation,(32) did not increase between 1986 and 1988.

[BigMeatballDave]

Thank you, everyone for piling on my ignorance.

[Jimmya]

Love driving the SUV's.

[scho63]

Oil on it's way into the $50's.

[Donger]

I'm starting to think that we could be on the way to $50.00 crude. Now at $62.12.

[scho63]

OIL READY TO CRASH THROUGH $61 A BARREL!!!! WAS DOWN NEARLY $3 A BARREL

IT'S A BLOODBATH AT THE ENERGY PITS FOR OIL TRADERS

[Discuss Thrower]

So how do I make money on knowing oil is going to spike back up to $90+/barrel in the next year or so?

[scho63]

Originally Posted by Discuss Thrower

So how do I make money on knowing oil is going to spike back up to $90+/barrel in the next year or so?

It will not.......save your money. This is not a short term trend.

You could buy oil drilling or refinery stocks or an oil MLP. If you really want to lose all your money buy or trade CALL options on Oil Futures. Unless you have a net worth of $1,000,000 and tons of experience, you better not play the futures because you can lose a lot MORE than just your original investment!