Markets & Finance

Spring Fever at the Pump


It has become an annual rite of spring. Along with the rain and blooming flowers comes pain at the pump. Gas prices have risen between March and May in 21 out of the past 22 years. Like bears coming out of their winter retreats, refiners must stretch this time every year, replacing winter's fuel formulation with newer, more environmentally friendly summer blends. During that transition prices traditionally spike.

But this year's kickoff to the summer driving season is worse than most. Gas sold for an average of $2.72 a gallon on Apr. 17, up 31 cents from last month and 53 cents from this time last year. This spring's sting is being fueled by other factors including a tense global oil market. Venezuela has seized an oil field from one foreign company, and cancelled another's contract (see BW Online, 4/4/06, "Venezuela's Seizure Ups the Ante").

"PETRO-POLITICAL FEARS." Nigerian production is still recovering from a peasant uprising, and Iran is threatening to launch suicide-bomber attacks if the U.S. interferes with its nuclear energy program. As a result, oil settled at a new high of $70.40 a barrel on Apr. 17. "It's a combination of petro-political fears," says Peter Beutel, president of energy risk-management firm Cameron Hanover. "It's such a nervous market."

The high crude prices are compounding a summer gasoline transition this year worsened by the phasing out of the additive MTBE -- which was found to lead to groundwater contamination. It's being replaced by ethanol, an additive made from corn (see BW Online, 3/16/06, "A New Spike at the Pump?").

The increased demand has sent ethanol prices through the roof. Tom Kloza, a gasoline-markets analyst for the Oil Price Information Service, figures ethanol producers such as Archer Daniels Midland (ADM) are enjoying profits as high as $65 out of every $115 barrel. That's contributing to the gasoline price run-up as refiners pass those costs along.

RELIEF COMING? The surge in ethanol prices has some politicians calling for action. Connecticut Governor Jodi Rell has called for a repeal of a 54-cent per-gallon tariff on imported ethanol. That would allow for increased imports from Brazil, which subsidizes its ethanol production even more than the U.S. (see BW Online, 3/30/06, "Why Gas Prices Could Keep Climbing").

Don't bet on the tariff getting repealed, however. "There's a bunch of states that produce ethanol and a lot of warm, fuzzy feelings toward (the environmentally friendly fuel)," Kloza says.

There is hope for drivers. After the initial spring run-up, gasoline prices have tended to drift down every year, as refiners get full production up for the summer blends and gasoline imports arrive from around the world. The U.S. Energy Dept. predicts that gasoline will average $2.62 per gallon through September. That's lower than current prices but still 25 cents higher than last year. Barring any major disruptions like Hurricane Katrina, prices should be lower by next fall, the government says.

THIRSTY WORLD. But some energy industry experts are skeptical of that scenario. "We've got to see some kind of demand response," says Eric Melvin, chief executive of Houston-based Mobius Risk Group, an energy-purchasing consultant. "The market's asking, 'Where's the pain?' At what the price do you start to see a change in behavior?"

Melvin thinks oil prices will top $80 a barrel this year, as continued strong demand in China and India bump up against tight worldwide supplies. Blame ourselves as well. Americans have continued to hit the road every Memorial Day in record numbers, even if a few more folks are driving hybrid Toyota (TM) Priuses.


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