Summer travel: Gas prices are up, but no surge seen
The good news: There will be no 'gas pump shock' like the one that occurred last summer at the end of the leveraging bubble, when you could pay less for dinner for two than to fill up your gas tank.
The bad news: Even though the nation is still in a recession, and gasoline demand is down on a year-over-year basis, gasoline prices are still likely to rise at least through mid-summer, energy sector experts say.
A better summer for gas prices
U.S. gasoline prices averaged about $2.25 per gallon as of May 8, according to data compiled by the U.S. Energy Information Administration. That's about 40 percent higher than the low of about $1.60 per gallon registered in December 2008. Still, the $2.25 tab is ions below the truly dizzy -- and GDP growth-sapping -- prices of $4.00 per gallon that many regions of the U.S. suffered last summer.
Further, the reasons for this season's gas price rise are many, but chiefly it comes down to two factors, says energy trader Paul Schmidt: 1) the price of crude oil and 2) refinery output.
Crude oil prices have made an impressive comeback, Schmidt told Daily Finance Friday. "Few thought oil prices would accelerate out the $35 lows to above $50 so quickly, or with such strength." Schmidt said. "Crude oil accounts for about 55-60 percent of the price of gasoline, so every time the price of oil rises $1, tack another four or five cents on to gasoline's price."
Oil Friday traded down 46 cents to $58.16 per barrel. Schmidt, who is short oil with several monthly contracts, like many energy traders, expects the price of oil to fall this spring and summer, due to record-high inventories and weak oil demand stemming from the U.S. and global recessions. So far, it has not happened, befuddling many oil bears. "I still expect oil's price to decline to at least $45 in the next three months, but so long as it remains up near $60, that's one major factor that will keep gasoline prices where they are now, in the $2.25 range," he said.
Second, refiners, who earlier cut back gasoline production due to low refining margins, are only now slowly bringing production back on-line, and that's also helped support gasoline prices, Schmidt said. "Refiners are in a difficult spot. If they put too much gas out there, and demand remains soft, they could get caught with a lot of gasoline they can't sell for an adequate profit, so they've been really cautious," Schmidt said.
That cautious stance, and the seasonal, mandated switch to cleaner fuels in the summer – which reduces refiners' capacity to make other fuels – typically adds "about 20 to 30 cents to the price of gasoline in the summer months," Schmidt said.
And as is the case throughout the year, the tens of thousands of gasoline sellers will create large price variations, as will the higher expenses of the U.S.'s largest cities. "Prices can vary even as much as 15-20 cents between stations a few blocks apart, with the variation driven by a station's overhead costs," Schmidt said.
If you're going to San Francisco . . .
Schmidt knows that price variation all too well. A native of San Francisco, Schmidt has experienced some of the nation's highest gasoline prices throughout his life. He paid $4.35 for unleaded regular while filling up in the city by the bay last summer. "It's a great city," Schmidt says, "but bring your gas card or a fat wallet."
Another high-cost city? You guessed it: the capital of the world, New York, where prices are already pushing toward $2.50 per gallon, Schmidt said.
Conversely, drivers in the lower-cost areas of Oklahoma, Missouri, and in much of the south (except Florida) will experience prices 20-25 cents below the national average, Schmidt said. Oklahoma will be among the cheapest, with prices there currently around $2.05 per gallon.
Energy Analysis: Travel is expected to be down this year, due to the recession, so that also will help contain gasoline prices. And if Schmidt is correct, a price break to the downside in crude oil would really send prices lower, particularly after the 4th of July. And these days, Americans will take any price break they can get.