• E-mail
• Print
• Comment
• Font Size
• Digg
• del.icio.us
• Discuss article

Consumers Could Face Price Spikes at Pump

Posted on: Tuesday, 25 October 2005, 00:00 CDT

By TAREK EL-TABLAWY

NEW YORK - While the most dire predictions have been largely dismissed as alarmist - gasoline prices in the U.S. of up to $6 a gallon and crude oil climbing to $105 a barrel in 2007 - analysts warn consumers could face new price spikes and won't soon be returning to pump prices that propelled the popularity of gas-guzzling SUVs.

The consensus is that the era of cheap oil for U.S. consumers, accustomed to some of the lowest prices in the industrialized world, is over, at least for the next few years.

"We have very little spare capacity internationally to provide enough crude oil to the system to tolerate any more of these types of disruptions," said Ken Miller, an analyst with the Houston-based consultancy Purvin & Gertz.

Price surges over the past couple of years were in part driven by headline-grabbing factors, ranging from the Iraq war, the rampaging insurgency in that country and unrest in Nigeria and other global hotspots central to international oil production.

But the impact of hurricanes Rita and Katrina brought into sharper focus the tenuous supply and demand balance in the United States and rekindled debate about how it would affect consumer driving patterns.

Preliminary indications are that U.S. consumer demand for gasoline cooled slightly in the face of high prices further inflated by the aftereffects of Rita and Katrina. Americans are simply not as used to high gasoline prices as are Europeans, for example, who have learned to conserve more as a result of hefty government taxes at the pumps.

The U.S. Energy Information Administration reported last week that compared to the same period in 2004, gasoline demand fell by 2.2 percent.

Traders and analysts, however, warn that many may be overestimating consumer reaction to high prices.

"There's a perception that this demand destruction is going to continue," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. "But I think that people are being a little bit overly optimistic."

The EIA, the Energy Department's statistics arm, said while global petroleum demand growth may have fallen from 3.2 percent in 2004, it is still projected to average 1.8 percent in 2005 and 2006, based largely on continued growth in Asian markets, tight refining capacity and a lack of new oil to match rising demand.

"I don't think anybody anticipated the huge growth in demand for 2004," said the EIA's Dave Costello. "That, of course, was part of the problem."

The other part of the problem was that a world accustomed to spare crude oil production capacity of 4 to 6 million barrels per day was suddenly left with a 1.5 million to 2 million barrel per day cushion.

"Markets that used to move by nickels and dimes, are now moving by a dollar," said Larry Goldstein, president of the Petroleum Industry Research Foundation in New York.

"The first line of defense used to be drawing on stocks, and the last was price," said Goldstein. "Today, there's not enough spare crude or refining capacity. So, there's only price that's left as the defense mechanism."

Katrina and Rita compounded the crunch and brought the problem into focus.

At least 80 percent of the U.S. Gulf Coast crude oil and natural gas production was temporarily shuttered and many refineries were crippled at a time when they would have been shifting away from gasoline in anticipation of growing distillate demand for heating oil.

This has set the stage for further price spikes, assuming a range of factors including: that global economic growth continues at a projected rate of 3 percent, and if some refiners are forced to take down their plants for maintenance that was deferred in the wake of the hurricanes, argues oil economist Philip K. Verleger.

While oil prices have fallen by 15 percent since peaking at $70.85 per barrel on Aug. 30, after Hurricane Katrina made landfall, the front-month crude contract has fallen by about $10 per barrel.

Some have pointed to the 2.9 million barrel build in gasoline stocks in the United States last week as indication that demand is declining. But that increase was also accompanied by a 1.9 million barrel drop in distillate inventories - a significant fall ahead of the winter heating oil boom.

Such declines have left many questioning whether U.S. refiners will be able to sufficiently build up gasoline inventories ahead of the upcoming driving season.

Verleger wrote in a September report that the projected U.S. GDP growth of over 3 percent, coupled with refinery outages, more hurricanes and other factors could push gasoline to a high of $6 per gallon without additional supply to match demand.

In an Oct. 17 report, he expressed concern that so many analysts and economists were confident that supply would be available.

"My question is, where will the supplies come from?" Verleger wrote. "Will the world import products from the moon?"

The EIA predicts that U.S. gasoline prices will average $2.45 per gallon, down from $2.73 per gallon currently.

Analysts and economists have indicated that high global energy prices could dampen demand in the coming year. But by dampen, they mean that demand will continue to grow by a robust average of 1.8 percent over the next couple of years, according to the EIA's Short Term Energy Outlook released this month.

Such growth predictions have fueled a slew of analyst reports projecting sustained crude oil prices in the mid-$60s for the next couple of years, declining to the $40s range by about 2010 when OPEC has pledged to add another 5 million barrels of day of crude.

In a September report, Goldman Sachs Group Inc. reiterated an earlier projection that a super-spike scenario is possible where crude prices would surge to a sustained high of $105 per barrel that would drive demand down long enough for a supply cushion to be recreated.

Fadel Gheit, an oil analyst with Oppenheimer & Co., says such projections are grossly inflated. But he concedes that prices are unlikely to decline in the near-term.

"I truly believe that oil prices have been artificially low for so long that we're now beginning to pay the real price," said Gheit. "But if gasoline hits $6 per gallon, I guarantee you'll car pool with your next door neighbor, even if he smells."

Source: Associated Press/AP Online

More News in this Category