Friday, February 01, 2008

Record Gasoline Prices Ahead?

Average retail gasoline prices have eased a little, recently. Weaker winter demand, perhaps further depressed be a slowing economy, has been reflected in steadily rising gasoline inventories, which are now above even their seasonal norms. Regular unleaded is back under $3.00/gallon across much of the country, but before we get complacent about that, it's worth recalling that street prices were closer to $2 than $3 at this time last year, when crude oil was in the mid-$50s, rather than the $92/barrel that West Texas Intermediate has averaged for the last two months. Unless the economy derails all of the normal seasonal patterns, or oil prices suddenly head south, we stand a very good chance of breaking last year's all-time record weekly average price of $3.22/gallon, set last May. That could make gas prices even more of a political football than they already are, as the presidential nominating process culminates this summer.

Although its patterns are often obscured by the volatility of crude oil prices, gasoline has historically been a seasonally-influenced commodity. Its price typically dips after Labor Day, as driving slows, then recovers in the spring, as annual refinery maintenance on the big cracking and reforming process units shrink the inventories that have accumulated during winter (see chart below.) By the time the summer driving season gets into full swing after the Fourth of July, gasoline prices have often already peaked for the year, barring some surprise affecting oil prices or refinery operations.

From "This Week in Petroleum," January 30, 2008, Energy Information Agency, US DOE.

The price difference between gasoline and crude oil on the futures exchange--the so-called "crack spread"--is right where it was for the last three Januaries, at around $6-7 per barrel. However, over the last three years that same relationship has averaged $21/bbl. in the second quarter. If 2008 followed a similar pattern, gas prices could pick up another 35 cents per gallon from current levels, and we'd break $3.30/gal. nationally, with many places over $3.50/gal. for unleaded regular. This is all speculative, of course, but it's worth recalling that the long-time record of $1.35/gal. from early 1981 was broken, in inflation-adjusted terms, following Hurricanes Katrina and Rita in 2005, when prices spiked to $3.07/gal. And I wouldn't look to ethanol for any relief, this year, as corn prices continue to rise and refiners bid up supplies in the scramble to meet the higher Renewable Fuel Standard that just went into effect.

With crude oil again at levels comparable to what we experienced at the peak of the first energy crisis, and the US having outstripped its domestic refining capacity to the tune of over a million barrels per day of gasoline, it would be more surprising if we didn't continue setting new price records for gasoline, year after year, until we finally get a handle on our consumption. Persistent $3 gasoline has had a noticeable affect on demand growth. Unfortunately for consumers, we might get an opportunity to find out what $3.50 will do.

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