5 Reasons We'll See $4-a-Gallon Gas by Memorial Day
By Kyle Woodley, InvestorPlace Assistant Editor
No one will throw a ticker-tape parade about fuel prices as long as gas is above $3, but drivers probably did at least a little less complaining at the pump in the latter half of 2011. That's because fuel prices actually were dropping at a pretty good clip -- around 20%, down to about $3.25 -- since they spiked to around $4 last spring.
Hope you enjoyed it while it lasted.
Fuel prices have been back on the rise ever since Baby New Year shook his 2012 rattle, and are already back up around the $3.50 mark, with plenty of room to go higher. Tom Kloza of the Oil Price Information Service told USA TODAY he expects the average price at the pump to hurdle the $4 mark by May, and a slew of factors could prove him right.
Here are five reasons why we'll see $4 gas by Memorial Day:
1. Improved U.S. economy: Unemployment is down to 8.3%, and the U.S. economy is showing a little spring in its step. No full-blown recovery, but when things are looking up, people start to spend -- including on travel. Several surveys show 2012 is primed for increased traveling, and when more planes, trains and automobiles get running, you get higher demand for gas.
2. Global Demand: Of course, while we're piddling around at home, parts of the rest of the world are really growing. China's overall fuel imports for 2011 were up "only" 6% from 2010 after the previous year's 17.5% growth. Goldman Sachs (GS) expects China to overtake the U.S. as the No. 1 oil importer by 2013, and India, already among the world's top five oil importers, is only getting bigger.
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3. Seasonality: Think summer's the worst for gas prices? Wrong -- at least sometimes. While summer traditionally sees the highest gas prices, fuel also has spiked around late April/early May, including during the past two years. Some of the price run-up comes from annual refinery maintenance. According to AAA spokeswoman Jessica Brady (via the Atlanta Journal-Constitution), refineries across the country begin shutting down in February and March to switch production from a winter fuel blend to the pricier summer fuel blend, which also puts upward pressure on gas prices.
4. Tensions with Iran: It's still a big "if," but the standoff between Iran and the U.S. and Europe over Iran's attempts to produce nuclear weapons could become one of the single-greatest upward forces on gas prices. Iran has responded to sanctions against its oil exports by threatening to close the Strait of Hormuz - a narrow waterway through which 20% of all globally traded oil is transported. Iran recently conducted military exercises near the strait, and Britain has said it could send extra military forces to the area to deter a blockage.
But should the strait be closed for business, you'll know about it within an hour, according to Duquesne University professor Kent Moors. In an interview with Marketplace.org, Moors said crude oil prices would jump $10 to $15 per barrel -- and gas prices jump between 30 cents and 40 cents per gallon -- "almost immediately."
5. Oil Takes More Work: There's a reason the word "fracking" has quickly entered the vernacular. Oil players of various sizes -- from Exxon Mobil (XOM) to Kodiak Oil & Gas (KOG) -- are tapping into North Dakota's Bakken Shale through the costly process of hydraulic fracturing, and while fracking costs are on the downswing, it's still a more expensive process than traditional drilling.
Oil companies also are accelerating their efforts in tar sands and deepwater drilling -- also pricey endeavors. And until these methods become more economical, energy companies need high oil prices to help finance production. Add it all up, and the chances for sub-$4 gasoline after Memorial Day seem mighty slim.
Kyle Woodley is the assistant editor of InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.
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