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Record gas prices by spring | Oil Watchdog

Record gas prices by spring

Wed, Feb 13, 2008 at 2:01 pm

    Record gas prices by spring

    Gasoline prices, already up 72 cents a gallon over a year ago, are poised to go higher — possibly shattering records.

    The federal Energy Information Administration on Tuesday projected the price of regular gasoline, now averaging $2.96 a gallon nationwide, will hit a monthly average near $3.40 by spring.

    The prediction of higher prices comes even as the economy is slowing, which could weaken energy demand and cause prices to soften. But the federal agency is predicting that petroleum supplies will be tight enough to push the national average gas price past the record, which AAA says was $3.23 a gallon, set last May.

    Moreover, an unusually high number of refinery outages or other disruptions could push prices even higher.

    "Volatility is part of the picture," said Neil Gamson, an analyst for the Energy Information Administration.

    Prices could ease somewhat after the spring surge, but they’re still expected to average about 26 cents a gallon more this year than the $2.81 average during 2007.

    The federal energy agency’s longer-term forecast is for gas prices to average $3.08 a gallon in 2009.

    Higher crude oil prices have kept gasoline prices up over the winter, when they normally decline. A year ago, a barrel of West Texas Intermediate crude was selling for $57.81. On Tuesday, a barrel cost $93.16.

    A lesson in the volatility of the oil market came in recent days, when Venezuelan President Hugo Chavez threatened to stop oil shipments to the U.S. Though observers don’t expect him to entirely cut off the U.S., on Tuesday Chavez said he would suspend sales to Exxon Mobil.

    "Chavez was able to raise oil prices enough that it could cause gas prices to rise 10 cents a gallon," said James Williams, an economist for WTRG Economics, which tracks energy prices.

    With crude oil prices around $90 the last few months, it could have been worse at the pump for consumers. But the rise in oil prices roughly coincided with a collapse in refinery margins, which is the difference between the price of West Texas Intermediate crude and wholesale gasoline.

    At one point last spring, the refineries’ take was more than $1 a gallon. This winter, the refinery margins have been below 10 cents a gallon, in part because of the season’s lower demand for gasoline.

    But if oil prices remain high when refinery margins rise again, higher gasoline pump prices are assured. That’s what federal energy officials believe will unfold over the next few months.

    That outlook is not embraced by everyone.

    A recession, if it happens, would weaken demand for gasoline — demand that is already flat in the U.S. A recent government report showing rising inventories led Societe Generale, a French investment banking firm, to say that it could trigger a "breakout to the downside."

    Lewis Adam, president of Admo Energy in Kansas City, which helps companies manage their energy price risks, said he believed gas prices were set to rise — but there is no guarantee.

    "I just don’t think it’s a certainty," he said.

    But some consumer groups are convinced prices are set to spike – and that Big Oil will do whatever it takes to curtail supplies to ensure higher prices.

    Such fears were stoked recently when Tesoro Corp., which has refineries in the western U.S., said it was scaling back production because of weak refinery margins.

    "It’s almost impossible that prices wouldn’t go up," said Judy Dugan, research director for the Foundation for Taxpayer and Consumer Rights in Santa Monica, Calif.

    Bill Klesse, chief executive officer of Valero Energy Corp., the nation’s biggest refiner, believes those margins will go up simply because of natural market conditions.

    Despite mounting fears of recession in the U.S., worldwide demand for fuel will be up, Klesse said, noting that some other countries are increasing their imports of gasoline. The amount of time that refineries will be down for maintenance also is likely to be more than is expected. And the inventories will decline as that maintenance continues over the next few months.

    The result, he recently told analysts and investors gathered for an industry conference in Vail, Colo., is a market not unlike what it was a year ago, when gasoline refinery margins began to rise.

    "We just see the fundamentals as still good," Klesse said.

    For companies like Valero, refining margins can be even higher than they appear. Valero and many other companies have upgraded their refineries so they can handle heavier, "sour" grades of oil, which cost less than better grades such as West Texas Intermediate. Gasoline refined from the cheaper crude sells for just as much wholesale, though, leaving fatter margins for the refiners who can use cheaper crude.

    In fact, a majority of oil used by U.S. refineries now is the cheaper, heavy-sour grade.

    James Gibbs, the head of Frontier Oil Corp., which owns refineries in Kansas and Wyoming, said in a recent conference call with analysts that the company had bought Canadian oil in January that was less than half the cost of West Texas  Intermediate.

    "We’re going to make money because we’re going to run every barrel of Canadian crude we can get our hands on," he said.

    To reach Steve Everly, call 816-234-4455 or send e-mail to severly@kcstar.com

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