Will Gas Prices Hit Last Summer's High?

With crude oil prices rallying above $71 a barrel in recent days, should Americans fear a repeat of the summer of 2008, when $4 gasoline jolted the nation?

The national average on June 10 for a gallon of regular unleaded was $2.627, according to the Oil Price Information Service's American Automobile Assn. daily Fuel Gauge Report. That's up 40¢ from a month ago but significantly lower than last June, when the average price was $4.04 and well on its way to a July record high of $4.11 per gallon.

Several analysts say it's not yet time to ring economic alarm bells. While they concede some similarities to the fierce energy spike of a year ago, don't expect to see crude oil and gasoline prices continue rising as steadily as they have in recent months, analysts say.

"I'd be surprised if the high we have is more than a nickel or dime higher than what we're seeing right now," says Peter Beutel, president of energy risk management firm Cameron Hanover in New Canaan, Conn., who predicts a price peak in the next few days. After that, Beutel expects a 10% to 25% sell-off followed by prices rising back to current levels by October.

plenty of spare capacity

The current trend is partly seasonal, Beutel says, coming ahead of the traditional summer driving season. "This is the 24th out of 25 years that prices have risen from March to May." He attributes the recent spike in prices to traders using the oil market as a surrogate for currency markets to hedge against a weak U.S. dollar.

Consumers have saved $79 billion over the first five months of 2009 compared with the same period in 2008, according to Beutel. If prices had remained where they were last December, however—when a gallon sold for less than $2—consumers would be $66 billion richer, he says. "The good news is that the higher price means that production is going to have a mini-rebound, which is good for future supplies," he said. "But for consumers, the past five months represent a lost opportunity to save."

Douglas MacIntyre, a senior oil market analyst for the Energy Information Administration at the U.S. Energy Dept., agrees that consumers need not worry about a sequel to the 2008 summer gas-price horror flick. "Prices were driven up last year by people asking, 'What if the economy kept improving? What if demand kept rising?' " he says. "People were outbidding each other for what they thought was the last available oil." In the past 12 months, "OPEC has cut back production and demand is much lower, so we have a lot of spare capacity built into the system. The market knows the reserves are there."

prices expected to peak in July

MacIntyre expects prices to peak sometime in July, citing a June 9 Energy Dept. forecast that predicted a gasoline high of $2.70 a gallon and an average $67 per barrel price for West Texas Intermediate crude oil for the second half of 2009—up $16 from the first half. "We don't envision gas averages to reach $3 a gallon, let alone $4."

Ultimately, how consumers feel about current prices relative to those in the recent past will determine their spending levels and sense of economic well-being. "Are they going to look at $2.75 and say that's a dollar more than December? Or a lot less than I paid a year ago?" MacIntyre asked.

Not all analysts are as optimistic. "At this point, gas prices have decoupled from fundamentals," says Stephen Schork, an energy consultant and editor of The Schork Report, a daily energy newsletter. "Bullish enthusiasm with regard to the stock market and growing confidence that we're getting out of this recession has fueled this speculation."

The economies in the U.S., Europe, and China cannot support oil prices much higher than current levels, Schork says, but "the market is what it is, and prices can go ridiculously high."

Before it's here, it's on the Bloomberg Terminal.