By John W. Schoen Senior Producer
msnbc.com
updated 5/1/2007 8:14:34 AM ET 2007-05-01T12:14:34
Analysis

As reliably as the rise of temperatures and the hopes of baseball fans, the  price of gasoline is on a steady march to an average $3 a gallon. Thanks to strong demand and a series of refinery outages and breakdowns, the predictable spring surge in gasoline prices is coming sooner than usual.

The national average price for a gallon of regular, unleaded gasoline rose 10 cents last week to $2.97, or 5.2 cents higher than a year ago, according to a weekly Energy Department survey released Monday.

With prices in many parts of the country, especially on the West Coast, already well above $3 a gallon, some of the most pessimistic forecasts calling for peaks above $4 a gallon in some locations.

“I think it’s probably one of the worst-looking years we’ve seen," said Antoine Halff, head of energy research at futures broker Fimat. "And that's probably why you’re seeing more apocalyptic forecasts than is typically the case.”

Pump prices typically rise in the spring as refiners shut down for maintenance and a switch to summer fuels while demand picks up as the weather improves. On average, summer pump prices peak at nearly 60 percent higher than winter lows, according to Tom Kloza of Oil Price Information Service, which tracks prices daily at 120,000 service stations.

This year, prices are already up about 80 percent from their January lows. But Kloza said that although the run-up has come fast and furious this year, it may not have much further to go.

“You can find $5 — just return that rental car without the full tank,” said Kloza. “But with the exception of California and the West Coast, we should be getting very close to the top here in the next 10 days or so.”

West Coast drivers already are paying an average $3.28 a gallon for regular, according to the Energy Department. Among major cities, San Francisco had the highest gasoline costs at $3.46 a gallon for regular, up 6.6 cents.

Meanwhile the nation's best deals on gasoline can be found on the Gulf Coast — home to about half of the country's refining capacity — where prices were up 10 cents last week to an average $2.85. Houston had the lowest city pump price at $2.82 a gallon, up 7.5 cents.

Diesel fuel prices fell 4 cents to $2.81 a gallon — the second straight decline and 8.5 cents lower than a year ago.

On top of the usual maintenance, refiners have been hit with a series of unplanned outages —everything from power failures to fires — that have cut production by 2.6 percent in the past two weeks. That’s left gasoline producers relying more heavily on inventories, which have dropped for 11 straight weeks. Inventories now stand at 15 percent below February levels and are well below their five-year average for this time of year. Gasoline stocks are at their lowest levels since October 2005.

Imported gasoline, which has taken up some of the slack in the past, is also in short supply. European refiners have shifted more production to diesel fuel as European motorists gravitate toward the higher fuel efficiency that diesel vehicles provide. Imports are running about 12 percent below year-ago levels.

"It is going to come down to refinery runs and imports," said Mike Wittner, head of energy research at the investment bank Calyon. "Gasoline prices will be on the high side, but there won't be any supply shortages."

One bright spot this year will come from ethanol prices, which have come down from last year as government subsidies help promote more production. Last year, tight supplies of the corn-based fuel, used as an additive in many parts of the country, sent ethanol prices surging. That added roughly 25 cents to the retail price of a gallon of gasoline, said Kloza. This year, expanded production has helped moderate ethanol prices.

Higher gasoline prices are supposed to discourage demand and encourage more production. But so far, there is little evidence that higher pump prices have prompted significant changes in driving habits or a shift to higher efficiency vehicles — despite loud complaints from drivers. Gasoline demand is running 2.4 percent above this time last year, according to the Energy Department. Typically, demand peaks in July or August.

Refinery profit margins have been rising along with demand and pump prices. Refiners made an average of $15.75 for every 42-gallon barrel in the first quarter, more than 30 percent higher than last year, according to Eitan Bernstein, an analyst at Friedman, Billings, Ramsey.

That higher profit will keep refiners focused on getting production back up to full speed as soon as possible, said Kloza.

“There is so much profit to be made running refineries, there is tremendous motive to run those refineries full out,” he said. “So these (outages) will give way to higher production.”

Refiners also plan to expand production capacity. While no new refineries have been built in the United States in 30 years, producers have been steadily expanding their existing operations to keep up with demand.

In recent years, much of the industry’s capital investment was devoted to upgrading fuel  quality to meet clean-air standards, including tougher requirements for low-sulfur diesel and the elimination of an additive to make fuel burn more cleanly.

With those upgrades out of the way, there are billions of dollars worth of ongoing and planned expansion that will add as much as 1 million barrels a day of refining capacity over the next few years. Among the key projects:

  • Motiva, a joint venture of Shell and Saudi Refining, is in the midst of an expansion that would add 325,000 barrels per day of capacity to its refinery complex in Port Arthur, Texas. That’s  the equivalent of building a new refinery, according to company officials.
  • Marathon Oil is spending $3.2 billion to expand production of diesel fuel by 180,000 barrels per day at its Garyville, La., refinery.
  • Chevron shut down its Pascagoula, Miss., plant late last year for more than two months to boost production capacity by roughly 10 percent to about 5.5 million gallons per day. Chevron says that, over the past few years, it has boosted its U.S. refining capacity by 6 percent, or 1 million gallons per day.

But efforts to expand capacity may face additional hurdles as refiners scramble to find contractors and skilled crews to build out the planned expansions.

“Many of these expansion plans will very likely be delayed and take longer than expected,” said Halff. “Because the cost will be much higher than initially estimated or because we’ll simple have problems finding the workers and getting it done."

(Reuters contributed to this report.)

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