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|  | AUGUST 17, 2004
By Chris Palmeri Why Crude Is Up, but Gas Is Down Despite oil's recent climb again, pump prices aren't following suit, thanks to ample gasoline supplies. That may not last for long There's a contested referendum vote in Venezuela and an accident-related outage at a major refinery in Indiana. Oil is skirting $47 a barrel. And hanging over it all is the continued threat of terrorism. Yet, the Dow and Nasdaq both closed sharply higher on Aug. 16, buoyed by a slight retreat in oil prices from record highs, and it's getting cheaper to fill up your gas tank. What gives? Despite the link between crude oil and gasoline, their prices don't necessarily rise or fall in tandem. And analysts caution that the recent drops at the pump shouldn't lull Americans into a false sense of security. True, gas prices have dropped 5 cents a gallon in the past month, to a national average of $1.85 for regular unleaded, per the Automobile Association of America, but these low prices are probably temporary. Here's what happened: Gasoline prices soared last spring, when demand took off along with the U.S. economy. Industry pundits were predicting a strong summer travel season, and refining-industry profits hit all-time highs in the second quarter. "Gasoline was just off the charts," says Tom Kloza, a senior analyst at the research firm Oil Price Information Service. "It was ridiculous." "NO LONGER WORRIED." The market responded with refiners cranking up their gasoline production, and more gasoline imports arrived at U.S. ports. Yet consumers, spooked by higher prices and fears of a supply shortage, began to cut back on their driving. As a result, gasoline-demand growth, which had been averaging 4% in the second quarter, began to taper off to half that level. This seesawing left the refining industry over a barrel. Gasoline inventories, currently at 208 million barrels, are up 10% from where they were this time last year, according to the U.S. Energy Dept. On Aug. 16, wholesale gasoline for delivery in September closed at $1.30 per gallon on the New York Mercantile Exchange, down 4 cents from last week. "People are no longer worried that there'll be a summer gasoline shortage," says Jacques Rousseau, an oil company analyst at brokerage Friedman, Billings, Ramsey Group. Meanwhile, the surging cost of crude -- a result of strong worldwide demand and supply disruptions in Iraq and Russia -- is squeezing the refiners. In the past three months, their profits have been cut in half, to $5 a barrel on the U.S. Gulf Coast, according to Rousseau. He's recommending that investors avoid the shares of large refiners, including Valero Energy (VLO ), Sunoco (SUN ), and Tesoro Petroleum (TSO ). "High crude prices aren't good for us or our customers," says Bob Beadle, senior vice-president for feedstock, supply, and trading at Valero. "We have to pay the higher prices, too." NEW HIGHS COMING? And that's why pump prices could be going up again very soon. "It's scary. You don't want to talk about it," says Mark Baxter, director of the Maguire Energy Institute at Southern Methodist University. He predicts that gasoline will hit a new high in coming weeks if crude prices stay elevated and Labor Day driving demands deplete inventory levels. Other analysts' predictions aren't quite as dire, calling for hikes of just a few cents per gallon. However, one thing is clear: You should enjoy the joy ride while you can.  With Stephanie Anderson Forest in Dallas Palmeri is a correspondent in BusinessWeek's Los Angeles bureau Edited by Patricia O'Connell
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