Bumpy Ride Ahead: Gas Prices May Soon Hit $4 a Gallon

Gas to hit a level not seen since 2008.

February 13, 2012, 12:25 PM

Feb. 13, 2012 -- Gasoline prices could soon hit $4 a gallon, a threshold they haven't flirted with since last spring.

The average price paid by U.S. drivers for a gallon of regular now stands at $3.52, according to the U.S. Energy Information Administration, which released its latest figures this afternoon. That price represents an increase of 0.04 percent from a week ago and 0.38 percent from a year ago.

Experts expect prices to spike another 60 cents or more, with the $4 mark being touched—or exceeded—sometime this summer, probably by Memorial Day weekend, the peak of the summer driving season. The last time the U.S. saw $4 gasoline was back in the summer of 2008.

"I think it's going to be a chaotic spring," says Tom Kloza of the Oil Price Information Service. He expects average prices to peak at $4.05, though he and other industry trackers say prices could be sharply higher in some markets.

Historically, $4 a gallon has been the upper limit of what consumers have been willing to pay. Last April, national prices peaked at about $3.98 a gallon before receding. "It's going to be tough to sustain that level," thinks Brian Milne of energy tracker Televent DTN. "People will drive less."

Andrew Lipow, president of Lipow Oil Associates in Houston, says where prices will go long-term is anybody's guess. He has been following gas prices one way or another for more than 30 years. He distinguishes between those forces affecting prices that are predictable, and others that are not.

Chief among the unknowns is war in the Middle East--or if not war, increased tensions. It's such worries, he says, that are most responsible now for the run up in prices at the pump. Also boosting prices is the higher seasonal demand that comes with summer vacations, plus a federally mandated switch from winter gas formulations to costlier ones for summer. The summer ones, designed to reduce emissions, require further refining steps.

Where could gas be by year's end? "It depends if the Middle East blows up in a war or not," says Lipow. "That's really the big headline out there: Whether or not geopolitical events disrupt supply. We see that affect already."

U.S. inventories have been rising. Demand has fallen as U.S. consumers have adjusted to driving less. The reason prices aren't falling comes down to increased uncertainty.

Prices, he says, are being buoyed by home-grown uncertainties as well. The market is waiting to see if Sunoco will shut down its Philadelphia refinery, which, if it happens, would be the third refinery closure in Pennsylvania in the last six months. "If you're in the northeast," he says, "You need to be concerned, especially if you're in the Philadelphia region."

Sunoco, he says, has been closing its refining capacity in response to factors that include reduced demand, the displacement of gasoline by renewable fuels, and competition from cheaper imported gasoline. "Over the past two years, they've shut just over one-third of the Northeast's refining capacity. If they shut this next one, it will be half."

Once shuttered, refineries aren't easy to re-start. "They're not coming back," he says of Sunoco's. The company has announced it will decide by July 1 whether to sell or close its Philadelphia facility.

Refineries Key to Rising Gas Prices

Iraq announced on Sunday the opening of a new oil export terminal in the Persian Gulf, able to increase by some 200,000 to 300,000 barrels per day the amount of crude it pumps into holds of the world's tankers. The country's total oil exports currently stand at around 1.7 million barrels a day.

Does this increase mean good news at the pump for U.S. drivers?

No, says Lipow. World demand for oil is rising. So, Iraq's increase in exports means good news for oil-thirsty nations in Asia, Africa and South America. But in the U.S., where demand is falling, it will have no affect the retail gas prices.

What would lower U.S. gas prices, he says, is the ability to pipe crude from newly discovered fields in North Dakota to refineries on the Gulf of Mexico, home to 40 percent of U.S. refining capacity. That increase in domestic gasoline production would lessen U.S. dependency on more expensive imported fuel. By the end of this year, North Dakota will be producing more oil than Alaska. But the pipeline, for now, remains, he says, "a political football."

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