THE WALL STREET JOURNAL: Why Gasoline Prices May Rise

Record-High Crude Oil,
Supply Snags Could Lead
To New Round of Increases
By ANA CAMPOY
September 21, 2007

Prices at the pump so far aren’t matching the exuberant new highs of crude oil, but consumers have reason to worry.
 
Crude-oil prices, which yesterday rose to their fourth record close in as many days, have combined with tight gasoline supplies to set the stage for a potential surge in gasoline prices. Refinery snags, a Gulf of Mexico storm or other disruptions could ripple quickly through the supply chain, taxing consumers and adding another burden to the economy.

Oil yesterday finished at $83.32 on the New York Mercantile Exchange, up 36% this year, though it trails the inflation-adjusted high of about $101 a barrel reached in April 1980.

Gasoline, which is refined from crude, generally follows oil up the pricing scale. Pump prices have remained fairly stable thanks to softening demand in the postsummer driving season. “As crude goes high and stays high, it will drag gasoline along with it,” said Geoff Sundstrom, a spokesman for AAA, formerly the American Automobile Association, which tracks fuel prices. “But we don’t see us reaching a new record high such as we did earlier this year.”

Leading up to peak summer demand, gasoline prices skyrocketed to a record $3.23 a gallon, on average, in late May, even as oil prices hovered between $60 and $70 a barrel. An unusually high rate of refinery downtime bled gasoline inventories, and imports slowed because of tight supplies in Europe. Gasoline prices fell back in the following months as imports picked up and refinery problems eased.

Now that demand is lighter and imports remain at healthy levels, refiners haven’t yet been able to pass on the steep rise in oil prices to drivers. At the pump, the national average for regular gasoline went up a couple of cents to $2.79 in the past month, according to AAA. During the same period, oil was up about 17%.

As a result, refining margins, or the difference between the price refiners pay for crude and the selling price of products they make with it, have collapsed in recent months.

Weaker demand is usual for this time of year. This year, the postsummer decline has been uninterrupted by the sort of big events that in past years sent demand seesawing, says Michael McNamara, vice president of research and analysis at MasterCard Advisors LLC, the research arm of MasterCard Inc. Demand for gasoline has fallen for the past four consecutive weeks, according to its MasterCard Spending Pulse, a compilation of data on how much U.S. citizens spend on gasoline.

“Typically, you’ll see a hurricane or some kind of event that will cause a price spike,” Mr. McNamara says. “We haven’t had those types of events so far this year.”

Another reason for steady gasoline prices: the use of ethanol as an additive to gasoline is on the rise. While crude prices have soared, ethanol prices have dropped as much as 30% in recent months and are likely to drop more, Eitan Bernstein, an analyst with Friedman, Billings, Ramsey & Co., said in a report yesterday. Ethanol costs more than 60 cents a gallon less than gasoline, and gasoline suppliers can offset some of the rise in crude-oil prices by blending their gasoline with small amounts of the cheaper fuel.

All that has helped slow the pull of surging oil prices on gasoline, but it is a delicate balance. Supplies of gasoline are below the historic average, according to the Energy Information Administration. Hurricane season remains in full force, and refineries are set to enter a round of scheduled maintenance as they prepare to switch production to the winter fuel season.

“There’s no safety cushion in gasoline,” says Antoine Halff, head of energy research at Fimat USA LLC, a brokerage firm owned by Société Générale SA. “If we have any disruption, we could have another spike.”

Even without an event that curtails supplies, if oil prices remain high, gasoline prices will inevitably begin to follow. Though prices have eased considerably since May’s highs, a gallon of regular gasoline is still costing consumers nearly 32 cents more than it did this time last year, according to AAA’s fuel surveys.

And if lowered interest rates succeed in strengthening the economy, then that should help demand remain strong, putting more pressure on gasoline inventories, which analysts expect to remain tight as refineries shift emphasis from gasoline production to building winter heating-oil supplies.

Write to Ana Campoy at [email protected]

 

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