Gas prices hit record, will keep climbing for now

http://biz.yahoo.com/cnnm/080311/031008_gas_prices.html

Gas prices hit record, will keep climbing for now
Tuesday March 11, 2008
By Steve Hargreaves, CNNMoney.com staff writer

Gasoline hit record levels Tuesday - and experts say it will likely continue to soar in tandem with the skyrocketing price of crude.

The national average retail price for gas has risen 27 cents in the last month to $3.227 a gallon, matching the all-time high set on May 24, 2007, according to the motorist organization AAA.

And experts say motorists should prepare to pay nearly $4 a gallon - and in some places even more than that - before the price of gas finally comes down in the late spring as high prices crimp demand.

The price of gasoline usually increases this time of year. Several factors contribute to the runup: Low refinery output due to maintenance, a switch from winter to pricier summer blends, and the looming high-demand summer driving season.

Experts say this time around the spike will be more pronounced, mostly due to the surging price of oil and, to a lesser extent, refiner's attempts to grow their profit margins.

"It's all crude," said Tom Kloza, chief oil analyst at Oil Price Information Service. "The crude market is morbidly obese."

Oil prices - which account for 80% of the price of a gallon of gas - have jumped 20% in just over a month as investors pour money into commodities of all types.

Commodities like oil are seen as a hedge against inflation and the falling dollar - which has been trading at record lows - triggered by economic woes and interest rate cuts from the Federal Reserve.

Oil, already trading near $90 a barrel on the back of strong global demand, took off in February as the economy worsened and the Federal Reserve cut interest rates with crude now spiking to record highs on a near-daily basis - settling at a record $107.90 on Monday.

But as oil prices rose gasoline prices stayed stagnant and profit margins enjoyed by refiners shrank. Now those profit margins have become so small refiners have little incentive to make gasoline.

"The refiners are saying, 'Hey we're not making any money,'" said Tim Statts, vice president of risk management for Summit Energy, a firm that buys energy for big users. "The gasoline price almost has to come up to continue bringing the product to market."

According to John Kilduff, an energy analyst at the trading firm MF Global in New York, refiners are making about $6 off of every barrel of oil they turn into gasoline. That's down from over $38 a barrel last spring.

Refiners are operating at just 85%capacity, down from a normal rate of around 90%, according to figures from the Energy Information Administration.

Killduff said the low operating rate is partly due to refiners being shut down for maintenance but also due to the small profits they're getting on gasoline.

"There's no market incentive to rush your unit back into production," he said. "[Gas prices] can't go any lower in relation to crude."

So how high will gas prices go?

While several areas will see prices over $4 a gallon, Kloza said he expects the nationwide average to peak somewhere between $3.50 and $3.75. Kilduff is calling for a high of $3.50, and Statts thinks we'll see the $3.30s.

All three analysts think prices will peak early, in April or May, then decline as the economy worsens and demand for gas - already flat or falling - continues to deteriorate.

"[The falloff in demand] that occurs around $3.25 a gallon takes a lot of the mojo out of gasoline," said Kloza. "These prices are real speed bumps for the economy."

By July 4, when many Americans pack up the sedan and head for the mountains or beach, prices could be back around $3. If anyone can still afford a vacation.