Gasoline: $3 by Christmas and a 'Mini-Apocalypse' in Spring?

gasoline prices
gasoline prices

With crude oil prices at the highest level in more than two years, holiday shoppers face the agony of $3-a-gallon gas this holiday season -- and much higher prices likely by springtime. "It now look as if December 2010 is probably going to be the most expensive month for gasoline in the U.S. since September 2008," says Tom Kloza, chief oil analyst at Wall, N.J.-based Oil Price Information Service.

Crude oil hit $90 a barrel on Tuesday, its highest point since 2008, when prices were plunging from that summer's high of $145 a barrel in the worst energy crisis of the last decade. Gas topped out at $4.11 a gallon, prompting people to sell their SUVs, buy gold and worry about the future.

Gas prices nationally now average about $2.95 for a gallon of unleaded regular, but they're already at $3.22 in New York, $3.21 in California and $3.02 in Illinois. Philip Verlger, an oil analyst at the University of Calgary who publishes The Petroleum Economic Monthly, says the current price spike was initially caused by a problem at a refinery in Nova Scotia that hit the U.S. East Coast first. "Gasoline prices went way up, and that pulled crude up," Verleger says. "Add to that the fact that it got cold, when heating-oil and natural-gas prices tend to go up, and they went up a little. That added $10 to the price of crude."

Kloza believes gasoline prices will hover around $3 a gallon until Christmas, and then drop back until spring. But then he expects them to surge dramatically, perhaps as high as $3.50 a gallon. "That will be a mini-apocalypse for a lot of people," Kloza says, adding that while the price increase will be painful, he doesn't think it will be long-lasting.

Soaring Diesel Demand in China

While U.S. gasoline demand is about the same as last year -- a recession year -- demand for oil and oil products such as diesel is increasing elsewhere, especially in developing countries like China, India and Latin American nations. "There is a perception that the world is using more oil than it is producing," Kloza says. "We've got huge stocks, but we're starting ever so slowly to draw down stocks."

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In China at the moment, the government is trying to meet air quality commitments it made earlier this year. So, it has decreed a reduction in electricity production, which has caused a huge increase in demand for diesel oil from electricity users, Verlger says.

The U.S. has never had $3-a-gallon gas at Christmastime, reflecting the fact that gas prices typically get lower as the days grow shorter. Gas was at $3 for about six months in 2008 and for brief periods after hurricanes, but never in the winter months.

Verlger thinks oil prices may hit $3 later this year but then fall back a bit as demand for products such as gas and heating oil on the East Coast eases after Christmas. Says Verleger: "Products lead crude."