$93 Oil: Coming to a Gas Pump Near You
Oil prices can't seem to find a ceiling. On Oct. 29, light sweet crude—fueled by inclement weather in the Gulf that prompted Mexican authorities to shut off 20% of the country's daily crude production—rose 1.8% to settle at $93.53. The rise marked yet another record high for a barrel of West Texas Intermediate crude on the New York Mercantile Exchange. Since January, oil has surged 54%.
Still, gasoline prices haven't risen in tandem in recent months. After hitting a high of $3.23 per gallon on May 24, national average prices for gasoline declined and remained steady between $2.75 and $3 for much of this year. Imports have increased and refineries have boosted production, better aligning supply and demand.
But the days of steady prices are set to change, analysts say. As crude oil continues a relentless upward march, gasoline prices are beginning to follow suit. On Oct. 29, the nationwide average price for gasoline was $2.92, up 10¢ from three weeks ago.
"The good times are behind us, the O.K. times are here, and the dreadful times are in front of us," says Peter Beutel, president of the energy risk management firm Cameron Hanover in New Canaan, Conn. "Any minute now, we'll see a 25¢ to 30¢ increase across the board. The closer we get to May, the worse it'll be for consumers."
Seasons, Supply, and Demand
Rises in crude oil prices don't always produce higher prices at the pump. In heavy driving season—especially the spring and summer months—gasoline prices are most influenced by supply and demand of the refined product. But as demand tapers each autumn and refineries undergo annual maintenance, gasoline prices are more vulnerable to the price of crude oil.
All else being equal, retail gas prices increase up to 25¢ for every $10 increase in crude oil prices, says Doug MacIntyre, an analyst for the Energy Information Administration of the U.S. Energy Dept. "Crude oil and [retail] gasoline are two different markets that interact with each other," says MacIntyre. "Until recently, weak demand has kept prices steady, but crude prices are becoming more of a factor."
This year retail gas prices began a steady move upward on Oct. 8, and analysts say it's only the beginning. That's because demand will rise heading into the holiday season, which will further strain a refining system that has never fully recovered production (BusinessWeek, 5/3/07) since the 2005 hurricane season. To meet consumers' needs, the U.S. will import more gasoline at a higher cost.
"It all comes down to demand," says Stephen Schork, an energy consultant in Villanova, Pa., and editor of The Schork Report, a daily energy newsletter. "In a few weeks, we'll have Thanksgiving and then the rush to the malls for holiday shopping. The refinery system is exhausted, so we'll import more with a cheap dollar—not a fun scenario."
$4 Per Gallon?
Schork expects that in the coming months, consumers can expect to see gas prices above the May, 2007, record of $3.23, and that some markets will reach $4 a gallon in 2008. "The writing is on the wall—it's unavoidable," he says.
Other analysts don't see such sharp spikes, but warn that crude oil prices could shift the landscape (BusinessWeek, 10/26/07). "In the next few weeks, gas prices will go up, but I don't think we'll top $2.90 [per gallon national average]," says MacIntyre. "But if crude continues this climb, we'll reevaluate."