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Will gas prices stay put for long?

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CHRIS KAHN
March 19, 2009
— Each year around this time gas prices begin to rise and continue to do so well into summer. While this is far from your typical year, that seasonal truism is unlikely to change.

A severe economic downturn has spoiled our appetite for gasoline, with millions of Americans no longer commuting to work or planning summer trips and gasoline prices dropped to levels not seen in


Yet prices will rise in coming weeks nonetheless.


Here are some things you might expect to see this summer at the gas pump.


Q: When are gas prices going to go up again?


A: Prices should pop up by 10 to 15 cents per gallon by summertime. Prices rise almost every year before the summer driving season, as refineries slow production.


Q: Why are refineries slowing production?


A: State and federal regulators require refineries to make gasoline that limits pollution and smog over the summer, when ozone levels are highest. Refineries take plants off-line as they prepare for these summer grades, and the drop in production can lead to a temporary supply shortage. It is also more expensive to produce.


This year, many refiners are churning out even less gasoline to match falling consumer demand. Motorists are driving much less now as companies slash millions of jobs and laid off workers stay home.


Charles T. Drevna, president of the National Petrochemical and Refiners Association, said that refiners are like any other manufacturer. When people consume less, producers need to cut back to keep from flooding the market and erasing profit margins.


"The demand for finished products, whether it's gasoline or cars, or washing machines, or flat screen TVs has plummeted," Drevna said.


Bill Day, a spokesman for refiner Valero Energy Corp., said gasoline demand is down about 6 percent to 7 percent from last year. In response, Valero's refineries are running at about 70 percent to 75 percent of capacity.


"There's plenty of inventory out there," Day said.


Q: Why are gas futures starting to rise even though summer isn't here yet?


A: Investors watch gasoline prices like any other stock on Wall Street, and they'll bid up gas futures when it seems the industry is headed for a supply shortage. That eventually leads to higher prices at the pump, said Phil Flynn, an analyst at Alaron Trading Corp.


Q: How did the price of gasoline fall from $4.11 in July, to $1.61 to end the year?


A: Predicting gas prices is a bit of a crap shoot, as anyone who bought crude stocks last summer will tell you.


In 2008, speculators believe oil producers could no longer keep up with global demand. In June 2008, for example, the chairman of one investment bank told reporters that oil was "dirt cheap at $140 a barrel" and predicted a barrel could quickly rise to $600.


About half of every barrel of oil is turned into gasoline and that's why you felt some of that pain at the pump.


As it turns out, the economy was much worse off than most people thought when gasoline prices peaked. We were already six months into a recession by then. By November, U.S. motorists had cut their driving by 12.9 billion miles, down 5.3 percent from the same month a year earlier, the largest such decline of any November since monthly data estimates began in 1971, according to the Federal Highway Administration.


"The market had blinders on," analyst and trader Stephen Schork said. "One year later, the market is crashing, and in the process all of that air in that bubble has been let out."


Q: Can gasoline prices rise even if the price of oil falls?


A: Yes they can. Refiners watch gasoline demand numbers carefully. If they make too much gasoline, they are not going to turn a profit. Not a good business model if you want to stay around long.


Q: So will gasoline rise to $4 a gallon again?


A: Probably not anytime soon. The market has a huge surplus of cheap oil, and that should continue to weigh down gas prices somewhat, compared with last year.


The Energy Information Administration said last week that crude supplies swelled to 351.3 million barrels, enough to fuel 15 million cars for a year. It's also nearly 16 percent higher than year-ago levels.


Even if demand jumps suddenly, gas prices could fall back below $2 a gallon later this summer, prices not seen in some time during the driving season, Flynn said.


"If we have hurricanes this summer, that could change things," he said. "But I think we're definitely going to see the lowest prices we've seen in five years."


Q: Were prices at the pump last summer a fluke?


A: Actually, most experts say you're in for a nasty surprise if you believe that. When oil prices fall to a certain level, it no longer makes sense to drill in some places, or to look for oil in others.


That's already happening. Houston-based Baker Hughes Inc. reported last week that the number of active oil and natural gas rigs dropped to 1,126. That is the lowest point since February 2004.


The economy will eventually recover, and experts say the same demand issues that helped drive prices sharply higher at the pump are not that far removed. And the ability to find new oil? That hasn't changed either: It's getting more difficult.


"We are, three, four, five years down the road, setting up a template for a rise to $150 to $200 oil," Schork said. "Absolutely."



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