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5/22/2008 12:47:00 PM
US Gasoline Pump Prices Poised To Catch Up With Crude Boom
NEW YORK (Dow Jones)–Signs for gasoline stations tower over U.S. highways, but the prices on the boards are dwarfed by the prospect of surging crude oil trickling down to the pump.
While the gap between the pace of growth of gasoline and oil futures has vanished, U.S. retail gasoline prices still lag. Since the beginning of the year, benchmark oil and gasoline futures on the New York Mercantile Exchange have both increased by more than a third, but the average retail gasoline price in the U.S. has risen by only 22%.
So far, oil refiners and petroleum product distributors have absorbed much of the increase but their ability to continue to swallow losses and operate at razor-thin margins is limited. Many analysts consider $4-a-gallon retail gasoline across the U.S. a foregone conclusion this summer driving season, a period of typically peak demand, but those estimates only take current record-high oil prices into account. On Thursday, light, sweet crude futures breached $135 a barrel, more than double the price a year ago.
If oil hits $200 a barrel, the upper end of Goldman Sach’s prediction for prices over the next six months to two years, the gasoline picture changes quite dramatically. At $200 a barrel, crude alone would cost $4.76 a gallon. Add in the costs of refining and distributing as well as taxes, and pump prices could rise well within the range of $6-7 a gallon, according to analyst estimates, a level that’s unfathomable for most Americans. In some states, where gasoline tax is a percentage of the per-gallon cost, rather than a flat tax, prices could be even higher.
U.S. drivers haven’t yet radically changed their behavior and it’s unclear at what price it becomes unprofitable for Americans to go about their usual day-to-day activities, said Eric DeGesero, executive vice president of the Fuel Merchants Association of New Jersey.
“Maybe at $6 or $7 a gallon, it becomes less attractive to go to work,” said DeGesero. “We haven’t hit that point yet but we might soon.”
Critics of the U.S. lifestyle and dependence on fossil fuels – the U.S. is the world’s largest oil consumer – often point out that Europe is able to sustain growth with motor fuel prices that are much higher at the pump due to significant taxes built in. But even Europe’s popular and economic resilience is showing some cracks as gasoline, known as “petrol” in the region, broke through 1.50 euros a liter, or roughly $9 a gallon, earlier this month.
Fishermen in France and truckers in Bulgaria and the U.K. are protesting against high gasoline and diesel prices, demanding that European policymakers cut taxes to soften prices. Italy’s new government on Thursday unveiled policies to cut fuel taxes and return to nuclear power.
The Pumping Point
Retail gasoline prices have topped $4 a gallon in Alaska, California, Connecticut, Illinois and New York ahead of the Memorial Day holiday weekend, according to the AAA Daily Fuel Gauge Report. Nationwide, gasoline averages $3.831 a gallon.
Consumers have already taken note, with U.S. gasoline demand down 0.6% so far this year compared with the same period in 2007, according to the U.S. Department of Energy. Some industry watchers have cited an even larger demand decline, up to 1.5%.
Anecdotally, there’s evidence that fears of higher pump prices are moving beyond water cooler chat as a focus of consumer fears, feeding into general concerns about the outlook for the economy. The most recent gauge of U.S. consumer confidence from the Conference Board posted the fourth straight month of declines.
“Not only are lackluster business and job conditions eroding confidence, but rising gasoline prices are undoubtedly heightening concerns,” said Lynn Franco, director of the Conference Board’s Consumer Research Center.
The erosion in demand is likely to accelerate if gasoline prices shoot above $6, but a radical cutback in consumption will only occur if high gasoline prices weaken the U.S. economy further and contribute to increased unemployment.
At $6 a gallon, it would cost the owner of a 2008 Chevrolet Suburban $186 to fill the tank. The driver of a Toyota Corolla, which has a much smaller tank, would spend about $80.
During past recessions, unemployment rates had to breach 7% before Americans significantly scaled back on their driving. On Wednesday, the Federal Reserve revised upward its 2008 jobless rate forecast to 5.5%-5.7%.
In regions of the U.S. that have been particularly hard-hit by weakness in the housing market and economic instability, the fall in gasoline demand has already outpaced the national average, said Ann Kohler, an energy analyst with New York investment bank Caris & Co.
“There would still be additional hurt if there was further escalation in gasoline pricing, because other parts of the country would become involved,” Kohler said.
A Refiner’s View Of Crude Prices
Oil refiners and industry analysts aren’t so bullish on crude-oil prices because they consider $200-a-barrel levels to be untenable for most companies. During the first quarter, high oil prices pinched the profits of refiners, who are the leading users of crude oil.
If oil hits $200, refiners would be among the first businesses to feel the impact, and would cut back production in anticipation of even weaker demand if recent history is any guide. Most are optimistic that prices won’t get that high. Bill Klesse, chief executive of Valero Energy Corp. (VLO), the largest independent refiner in the U.S., back in March forecast that the national average price of gasoline won’t reach $4 this summer, let alone $6.
This year, Valero has already switched some of its capacity to diesel from gasoline and had shut or reduced rates of key gasoline-producing units due to margins made thin by surging crude prices.
Sustained prices at $6-$7 a gallon would have a dramatic economic impact, said Lynn Westfall, chief economist for Tesoro Corp. (TSO), an independent refiner based in San Antonio, Texas.
“If it sustains that for any amount of time, it will throw us into a recession, if we’re not already in one,” Westfall said. The first change will come from drivers who have the ability to switch to public transportation, he added.
Demand won’t plummet just in large metropolitan areas with comprehensive mass transit networks. Drivers have shown that they can cut back even in states such as California, the largest gasoline consumer in the U.S. and the third-largest gasoline market in the world. California, home to many areas suffering from the housing slowdown, has seen demand fall each quarter for the past two years. Apart from Hawaii and Alaska, California has the highest gasoline prices in the nation due to its stringent environmental standards.
Even if the U.S. refining hubs and production infrastructure along the Gulf of Mexico are damaged in a hurricane as destructive as the 2005 storms Rita and Katrina, crude oil may spike to $150 a barrel, but it won’t go much further, Westfall said. He’s long maintained that the fundamentals of the market don’t support current high oil prices. But given the market’s tendency to react to small changes, any news of significant supply concerns could send oil soaring to the higher projections, he added.
“If there’s a perception that there will be continued demand growth in parts of the world that aren’t supported by our ability to find resources, then that’s the basis for the super-spike,” Westfall said.
Source: Anna Raff, Dow Jones Newswires; 201-938-4426; anna.raff@dowjones.com
Tags: crude, gas crunch, gas prices, increasing gas prices, oil, oil consumption, peak oil, summer
