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Don't Expect Gas Prices to Go Anywhere but Up This Year

Posted on: Monday, 6 February 2006, 15:00 CST

By Brad Foss THE ASSOCIATED PRESS

Question: What is the outlook for gasoline prices this year?

Answer: Unless something dramatic happens soon to lower oil prices -- say, a sharp economic slowdown -- analysts believe U.S. motorists could pay close to $3 a gallon for gasoline by the time summer rolls around.

Of course, any $3-a-gallon scenario is predicated on simultaneous supply chain problems, an outcome analysts fear but executives say is unlikely.

But concerns about everything from hurricanes to new clean-fuel specifications are, at the very least, going to keep the market on edge and retail prices elevated.

Also remember that demand remains strong. Over the past four weeks, average daily gasoline consumption in the U.S. was 1 percent higher than a year ago at 9.1 million barrels. Average prices, now $2.32 a gallon, are 27 percent higher than last year.

Motor fuels expert Tom Kloza of Wall, N.J.-based Oil Price Information Service said retail gasoline prices could rise by 50 cents over the first six months of the year and by an additional 25 cents if demand stays strong and any significant supply interruptions occur.

"I don't think the market's going to be short gasoline, or that we won't be able to find the stuff," Kloza said, "But we will pay a pretty penny for it."

Indeed, there is usually a run-up in gasoline prices before summer, the busiest demand season. But Kloza said this year he is not banking on the usual midsummer drop in prices because traders aren't likely to breathe easier about supplies until after the Gulf of Mexico hurricane season.

Last year's hurricanes Katrina and Rita caused extensive damage to oil platforms, pipelines and refineries, and the related supply disruptions briefly sent pump prices above $3 a gallon nationwide.

The market psychology heading into summer this year is also marked by concerns about a handful of fuel specification changes that the Energy Department recently warned would "stress the fuel supply system in 2006."

The two most significant changes, according to the agency, are a new federal standard for so-called ultra-low sulfur diesel, and the industry's decision to introduce ethanol as a substitute for methyl tertiary butyl ether, or MTBE, in summer blends of gasoline.

MTBE is used to reduce tailpipe emissions, but also has been found to contaminate drinking water supplies, exposing producers to costly lawsuits.

However, MTBE, which is derived from natural gas, accounts for about 11 percent of summer gasoline by volume and so the industry will be challenged to make up the difference.

One hurdle will be preventing gasoline blended with ethanol from contaminating other supplies flowing through the same pipelines.

A similar concern surrounds the transportation of ultra-low sulfur diesel, which -- if contaminated by fuels with higher sulfur contents -- would need to be sent back to a refinery for reprocessing.

There are also some trends in energy-futures trading that could influence prices at the pump.

Several years in a row of rising energy prices has led to an increasing flow of money into energy futures markets through hedge funds, commodity funds and other investment vehicles, according to commodity fund analysts and longtime energy traders.

These investors, particularly on the commodity fund side, are betting that oil and gasoline costs will keep rising, thereby fueling the market momentum they are following.

Source: Daily Breeze

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