The case for $3 gas

Some experts say high demand could push pump prices past last year's highs. Others say relief is in sight.

By Steve Hargreaves, staff writer

NEW YORK ( -- Nearly everyone agrees gasoline prices are headed higher in the next few weeks as Americans start hitting the road ahead of summer driving season.

But whether motorists will again face $3 a gallon at the pump is a matter of some debate.

Fueled by high demand and problems with domestic supply, gasoline prices have already jumped 20 cents over the last two weeks and now average $2.55 a gallon, according to the nationwide Lundberg survey of about 7,000 gas stations.

A number of fires and other accidents at refineries, along with regularly scheduled maintenance and retooling to make cleaner-burning summer gasoline blends, have slowed gasoline production.

Major refiners in the U.S. include Valero (Charts), Exxon Mobil (Charts), Chevron (Charts), ConocoPhillips (Charts), and BP (Charts).

In addition, waterways used to transport ethanol, the gasoline additive that makes it cleaner burning, have been iced in due to cold weather in the Midwest.

But the real mover behind the bump in prices is demand.

"It's through the roof," said Steven Schork, head of the research and trading firm that bears his name.

Schork cited demand numbers over the last three months from the federal government's Energy Information Administration (EIA) that he said were running 5 percent above the average for the last five years.

"If you extrapolate that out into the summer months, your looking at record highs," said Nauman Barakat, an energy trader at Macquarie Futures, the trading arm of Macquarie investment bank. "That would translate into significantly higher prices than we see at present."

Barakat said prices could top the record of $3.06 a gallon hit in September 2005 following Hurricane Katrina. The figure, reported by the AAA motorist group, is not adjusted for inflation. Gas hit a high of $3.03 last summer, according to AAA.

Schork didn't think prices would quite reach that level, but pointed to demand and said "we'll certainly be paying close to it."

But despite the apparent rise in gasoline consumption, there are some reports indicating that higher gas prices are actually causing Americans to drive less.

According to a recent study from Cambridge Energy Research Associates, the number of miles the average American drove last year actually dipped to 13,657, the first decline in 25 years.

And sales of big gas-guzzling SUVs have been slowing, and cited as one of many of the problems afflicting Detroit automakers.

So what's causing EIA's demand numbers to be so high? Both Schork and Barakat blamed ethanol.

Barakat said adding the corn-based fuel to gasoline makes it 4 to 8 percent less efficient, thereby causing drivers to use more.

But one analyst questioned whether EIA's demand numbers painted an accurate picture of consumer demand.

Tom Kloza, chief oil analyst at the Oil Price Information Service, speculated that wholesalers were taking stocks from refiners, but then holding them to sell over the next few months, when gasoline prices will presumably move higher.

Kloza thought gas prices would rise in coming weeks but peak well before Labor Day - and well below last year's $3 level - as wholesalers release supply and consumer demand turns out to be less robust than people think.

He predicted prices would hit $2.50 to $2.70 a gallon early this spring everywhere except the West Coast, which will have higher prices due to a lack of refineries and more stringent environmental standards.

"We've already had the screaming this year," said Kloza. "There is just nothing to take it onward and upward."


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