Less Fuel for Costlier Gasoline

Key conditions that created the recent refining nirvana are already changing. So the next move may more likely be lower than higher

Will it ever end? The American Automobile Assn. reports that the average price of regular gasoline hit yet another all-time high of $1.77 a gallon on Apr. 6. Some analysts are predicting an additional 10-cent increase in some areas of the country over the next couple of weeks. That has people talking about summertime prices of $3 a gallon or more. Brutal on the billfold? If it really happens, you bet. But relief may be on the way.

Although pump prices continue to climb, the cost of gasoline is largely influenced by the cost of crude oil. And crude has fallen from $38 a barrel in mid-March to just under $35 a barrel on Apr. 6. Indeed, prices have fallen even after OPEC's recent announcement that it was going ahead with a cut of 1 million barrels a day in its official production quotas.

The truth is that at $38 a barrel, oil was too costly. Traders, sensing that prices had gotten ahead of themselves, began selling. "This market has just had an incredible run," says Phil Flynn, an energy analyst at Alaron Trading in Chicago.


  For gasoline producers, the past few months have been what A.G. Edwards oil analyst L. Bruce Lanni calls "refining nirvana." Stocks of gasoline ran low in January and February, as refiners focused on making heating oil for the unexpectedly cold winter. Gasoline imports, a big source of supply in years past, also declined, due to production difficulties in Venezuela and stronger demand in Asia.

The latest Energy Dept. data, however, have been bearish for refiners, notes Friedman Billings Ramsey analyst Jacques Rousseau. Gasoline inventories rose by 1.4 million barrels in early April vs. the 100,000-barrel decline analysts were expecting. And the Environmental Protection Agency is considering temporarily waiving requirements that refiners must produce cleaner-burning fuels for New York, California, and Connecticut. That's expected to relieve some of the pressure on gas prices in those states.

Cheaper oil has already begun to flow through to the wholesale gasoline market. Prices there are now about $1.07 a gallon, down from over $1.15. That decrease should show up at the pump in coming weeks, penny for penny. As for the summer, on the New York Mercantile Exchange wholesale gasoline for August delivery is actually a nickel cheaper than gasoline for delivery this spring. That's not a guarantee that pump prices will be lower this summer, but it's a good hint.


  Meanwhile, most Americans seem to be absorbing the high gas prices. Sales of big trucks and sport-utility vehicles continue as if gasoline were being given away. And hotel operators say bookings are up for the summer travel season.

PricewaterhouseCoopers calculates that the average summer trip is 500 miles and the average car gets 20 miles per gallon. Even if gas prices are 30 cents a gallon higher this year, that would equate to just $7.50 more to take the family away. Chances are the hike will be less come Memorial Day.

By Peter Coy in New York and Chris Palmeri in Los Angeles