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.

[Skip Towne]

$2.15 here

[BigMeatballDave]

2.65

[Frosty]

This is bizarre. We are at $2.74 a gallon for gas but diesel is $2.69/gallon. Last year, when the gas prices were around $4, diesel was consistently a dollar a gallon higher. This is the first time in years that it's been lower than gas.

[Donger]

Heh. The Kingdom wants $75 to $80/barrel.

[Donger]

Originally Posted by arc

This is bizarre. We are at $2.74 a gallon for gas but diesel is $2.69/gallon. Last year, when the gas prices were around $4, diesel was consistently a dollar a gallon higher. This is the first time in years that it's been lower than gas.

Here:

Released on May 20, 2009
(Next Release on May 28, 2009)
Springtime Transitions

May is a time of transition as days get warmer, swimming pools open, and new graduates get ready to head out into the world. It is also a time of transition for U.S. fuel markets, as gasoline suppliers prepare for summer driving. This year, May has already brought back the traditional—but lapsed—spring transition in which the average price of regular gasoline in the United States rises above the price of diesel fuel.

U.S. Retail Gasoline and Diesel Fuel Prices

On May 11, the U.S. average retail price for regular gasoline reached $2.24 per gallon, surpassing the average diesel fuel price of $2.22. The crossing of the price paths for gasoline and diesel was once a regular rite of spring: gasoline prices rising for the high-demand summer driving season, while distillate fuel prices, including diesel and heating oil, falling from their highs in the cold of winter. This pattern had begun to break down in 2005, when diesel prices exceeded gasoline prices nearly the entire year (with the exception of a few weeks surrounding Hurricane Katrina). In 2006, gasoline and diesel prices remained essentially at parity for most of April through July, after which diesel commanded a notable premium. In 2007, the pattern returned, with gasoline rising strongly above diesel from late April to late July. Last year, diesel climbed to much higher levels than gasoline, despite gasoline breaking $4 per gallon. May 11 of this year marks the first time since July 23, 2007 that regular gasoline has cost more at the pump, on average, than diesel fuel.

Over the past few years, strong growth in distillate demand globally broke the traditional pattern of diesel and gasoline prices. Distillate demand growth over the last 5 years was boosted by two factors. A strong world economy put more upward pressure on distillate demand than on gasoline, and Europe’s policy-driven shift away from gasoline to distillate fuel in its light duty vehicles increased demand for diesel while reducing gasoline.

Shorter-term factors also affect the price relationship between gasoline and diesel. As the economy weakened, the current economic slowdown affected distillates more than gasoline, because distillate demand is largely made up of diesel fuel for trucks, trains, and ships to move goods and materials, while gasoline demand is used mainly in light duty personal cars and trucks. In fact, U.S. distillate demand fell by 6.1 percent in 2008, while gasoline dropped by 3.5 percent.

Diesel and gasoline prices have been converging throughout the first part of 2009. At the end of December 2008, gasoline prices bottomed at $1.61, the lowest price in nearly 5 years. By the first week in May, they had risen 47 cents to $2.08 per gallon. Crude oil prices explain some of this increase: between the end of 2008 and the first week in May, crude oil prices rose about $16 per barrel, or 38 cents per gallon. Since wholesale gasoline prices were near or even below the price of some crude oils at the end of 2008, gasoline prices were expected to increase more than crude oil prices.

More recently, gasoline price increases have been driven by the more traditional spring transition leading up to the Memorial Day weekend, the traditional start of the peak summer driving season. The average U.S. price for regular gasoline rose another 23 cents over the past two weeks, reaching $2.31 per gallon on May 18. Crude oil prices have contributed in some measure to this increase as well: from May 1 through May 15, crude prices increased $7 per barrel, or 18 cents per gallon.

Although crude oil prices are likely to remain a major influence over gasoline prices this summer, the seasonal increase in gasoline demand during the peak driving season, on top of potential underlying demand recovery, appears to be influencing the price at the pump. At the same time, strong supply availability from refiners now running at low utilizations in both Europe and the U.S. is likely to moderate gasoline price increases this summer. In any case, both gasoline and diesel fuel prices will likely stay well below their summer 2008 levels, making this year’s spring transition less dramatic than the last.

[Frosty]

Thanks Donger

[BigMeatballDave]

Originally Posted by Donger

Heh. The Kingdom wants $75 to $80/barrel.

Of course they do, they are going broke...

[Donger]

Originally Posted by BigChiefDave

Of course they do, they are going broke...

Not really. I think it costs them about $10/barrel to drill, so they weren't exactly hurting when crude was $35.

[BigMeatballDave]

Originally Posted by Donger

Not really. I think it costs them about $10/barrel to drill, so they weren't exactly hurting when crude was $35.

Yeah, I was being facetious...

[Donger]

Crude trading at +$66.00 today.

[Bugeater]

It's up to $2.49 here, looks like my prediction of $3/gal gas by Independence Day is well on its way to coming true.

[Mr. Flopnuts]

Originally Posted by Bugeater

It's up to $2.49 here, looks like my prediction of $3/gal gas by Independence Day is well on its way to coming true.

Wow. I live in one of, if not THE highest taxed states in the union when it comes to petrol and I paid 2.41 today.

[007]

We are anywhere from 2.39 to 2.49. Just in time for our vacation.

[Frazod]

It's in the $2.60-$2.70 range around here, which probably means it's pushing $3.00 in Chicago.

[Skip Towne]

$2.15 here. We have refineries every 50 miles.