A wise man once said that the hardest thing in the world to predict was the future. To which we would add: “Especially gasoline prices.”
Fuel prices have indeed been a moving target over the last couple of years. Now, summer is upon us, a season when gas price increases are as commonplace as beery backyard barbecues and melting ice cream cones. Many economists have been saying for months that as the economy began to recover, oil prices would increase, which would lead to a hike in the price of petrol in turn. Certain indicators in the last couple months suggest that the economy has indeed been recovering, slowly.
Which brings us back to the folly of trying to predict the future price of gas. The conventional wisdom about a summer price hike was dramatically upset when the national average price per gallon dropped 16 cents from May 5 through May 26, from $2.93 to $2.77, according to AAA.
Happily for motorists, this summer should be an atypical one when it comes time to fill up the tank, according to industry analysts. Indeed, barring any major upheaval – like a hurricane, or a war breaking out in a leading oil-producing nation, etc. – the average summer price will probably fluctuate between $2.60 and $2.80, according to those that make these sorts of predictions for a living. The key word, of course, is “probably.”
“Now, if we wake up tomorrow and some military operation has erupted in North Korea, or if Iran is pot-boiling again, that would certainly change the calculus,” says Tom Kloza, chief oil analyst for Oil Price Information Service, based in New Jersey.
John Felmy, chief economist for the American Petroleum Institute, concurs: “If there were to be a disruption on supplies due to unrest in certain countries, or, say, if the demand for fuel in China were to increase significantly, which mopped up a lot of the existing supplies, then that would cause prices to go back up.”
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As for the disastrous BP oil-well explosion -- and its otherwise unstoppable gusher of oil into the Gulf – that will not have an impact on gas prices any time soon, says Felmy. The well was mostly for experimental purposes and didn't have an impact on our daily consumption.
From an environmental-impact perspective, the staggering amount of oil gushing from that well is indeed a catastrophe of epic proportions, “but it only represents a small percentage of all of the oil that is being pumped right now,” said Felmy.
“And, remember, that oil wasn’t slated to be produced yet," said Felmy. "They were going to cap that well and then decide how and when to produce, refine and distribute that oil. So, in that respect, it won’t have any impact on the supply of oil or price of gasoline, not in any short-term scenario.”
Kloza summarizes his summer gas-price forecast by offering up this slightly sardonic analogy: “You know, the New York Mets could win the World Series this year. And, the price of gas could increase to more than $3 a gallon this summer. But the likelihood of either happening is about the same.”
So, what precipitated the recent price drop and upset the notion that price hikes are always to be expected come in summertime, when the weather is hot, and we’ve got cruisin’ on our minds? Kloza says that recent assumptions regarding fuel prices, as related to an economic recovery, were based on the economic ups and downs of the last two years. Since this was a period so fraught with financial turmoil, he thinks this was done in error and instead the last two years should have been regarded as outliers.
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“In ’08, the world lost its mind on just about everything, from the price of real estate to the price of grain to the price of oil,” he says. “We got disconnected from reality, which is why the price of gas spiked to more $4 a gallon that summer, and then dropped 75 percent by the end of the year.”
And in 2009, the nation struggled to try and recover from a “super recession,” something the U.S. has never had to cope with during the modern era. “So, the markets just didn’t know how to behave when coming back from that abyss,” offers Kloza.
Another factor, according to many analysts, is that supplies of gasoline have risen steadily in the two months prior to the price drop. In fact, as of April 30, the U.S. had squirreled away 225 million barrels of gasoline, a supply increase of about five percent over April 2009. Concurrent with that, demand had decreased, relative to previous estimates.
“That, in turn, was partly due to the record amount of gasoline produced thus far in 2010,” says Felmy. “In March, we set an all-time record for gasoline production: 9.3 million barrels per day. And April was not far behind, with 9.1 million barrels per day,” he says.
Thirdly, Europe’s escalating debt crisis cast some serious doubt about whether the global economic recovery was real, or at least whether the recovery would proceed at the rate that forecasters had assumed. That doubt prompted institutional investors to seek refuge in the U.S. dollar, relative to European currencies. When the value of the dollar increases, it almost always follows that oil prices drop.
One key point to consider, though: The above prices are national averages. Consumers are paying more in certain states, like California, New York, Nevada, Illinois and Hawaii. That’s due to one of two factors, says Felmy, either higher taxes or because the state is a long distance from the “hub” of the nation’s oil-refining industry along the Gulf Coast.
The cost of hauling fuel across the country can add many, many pennies to the retail price of fuel. “Hawaii, obviously, is a long way away, as is Alaska. And Alaska is also massive, which further adds to the transport costs. So the distribution costs to those states can really add up,” says Felmy.
Taxes vary significantly across states. “Chicago, for example, has the highest in the country. There’s the gasoline tax, and state excise tax, and then federal tax on top of it,” says Felmy.
Kozla shares a thesis that oil-industry analysts and traders frequently chew over: That some time this decade, or even in the next five years, we could be paying those summer 2008 prices again.
“But I keep saying: ‘Not yet – and not this year,’” he says.