[Vision2020] Why gasoline prices are rising while oil isn't

[Art Deco]

Why gasoline prices are rising while oil isn't
With crude prices down 25 percent from last summer, prices at the pump should be lower. Right?
By Jeff Cox, CNNMoney.com contributing writer
May 17 2007: 4:32 PM EDT
NEW YORK (CNNMoney.com) -- Last summer when oil traded at a record high near $79 a barrel, gas at the pump went for about $3.03 a gallon. Today, crude's about $65 a barrel and a gallon of regular unleaded costs $3.10

Doesn't seem right, does it? The price of a barrel of crude ought to be a better benchmark for what you pay at the gas pump.

In today's economy, though, that type of formula is out the window, a relic from the days when refineries kept crude stocks high during winter months and Americans didn't drive longer and longer distances to get to home, work and play.

Nowadays, pump prices are determined far more by supply and demand for gasoline than by how much traders buy and sell crude for on the open market.

"Forget everything you ever learned or ever read about the connection of crude oil prices to gasoline, because there is a disconnect today," said petroleum industry consultant Tim Hamilton. "All the price of oil does is establish a floor of what the price is going to be in the country."

Hamilton, who works with Oilwatch.org, a consumer group based in Santa Monica, Calif., advised that instead we should pay attention to the supply of gasoline for delivery to the marketplace, as well as the consumer habits that determine price.

"What's going to tell you the maximum price is going to be the supply of refined product," he said. "Supply of the finished product is short and the price is going up accordingly, and it's all profit for the refineries."

Over the last three months, gasoline stockpiles got drained more quickly than at any time in the history of record-keeping by the Energy Information Administration, the government's top energy forecaster. Couple that with continued high demand, which the EIA said rose about 1.0 percent from last year over that period, and that weighs heavily on the price of gas.

Other factors are at work. Geopolitical tensions, like the war in Iraq, political unrest in Nigeria and last year's nuclear tension in North Korea, also factor in. And this year's cold April caused a spike in demand, particularly in the Northeast, while seasonal changeover at refineries to meet reformulation requirements play a role as well.

The industry also has been hampered somewhat by a spate of outages at refineries, which are running at just 89.5 percent of capacity, rather than the 90-plus typical for this time of year. Finally, the main grade of U.S. crude, West Texas Intermediate, is trading below most other grades of oil worldwide, meaning U.S. refiners are effectively paying more on average for crude oil. 

In fact, some analysts see nothing particularly unusual about this year's spike in gasoline prices, at least in terms of recent trends, and expect prices to ease somewhat.

"Indeed, if you check a chart of past oil prices you'll see that last year the peak was around this time and prices fell later in the year," said Peter Grossman, an analyst at Butler University. "We should expect to see prices fall toward the end of summer. The futures market certainly expects it. Gasoline futures prices are falling even as pump prices rise."

Don't expect a steep fall, though. The EIA, whose previous per-gallon estimates have been shattered by continuously increasing prices, said in its latest report Wednesday afternoon that demand should keep prices around $3 through the summer.

In any event, if gas prices tumbled suddenly, that could spark a rush of buying that would force prices back up again - or at least put a floor under them.

Besides, judging by current demand levels, the driving public doesn't seem bothered enough to cut back much or even park their vehicles altogether. And it's that demand, after all, that goes a long way in determining which way prices will go.

"Once we got through a threshold high like last year and broke that $3-a-gallon barrier, the public gets accustomed to it and they go back to buying as normal," Hamilton said. "If it goes to $3.50 will they slow down? We don't know." 
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