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Eight reasons pump prices are moving higher

Pump prices typically fall back again when summer winds down. But it’s far from clear just how high prices will go before they fall again.
Pump prices typically fall back again when summer winds down. But it’s far from clear just how high prices will go before they fall again. Don Ryan / AP file
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With the summer driving season officially underway, pump prices have begun another seasonal move higher. After the July 4th weekend kicked off an exodus of vacationing motorists, U.S. gasoline supplies remain tight — raising the odds that gas prices are moving even higher.

After a sharp run-up in March and April, pump prices fell a bit from peak levels reached in mid-May. Still, at $2.94 a gallon, the average price of regular unleaded logged by the Department of Energy in its latest report is still 71 cents higher than this time last year.

Pump prices typically head higher between July 4th and Labor Day, as an armada of car-towing RVs and fully loaded SUVs roll out across the country for the peak vacation season. That increased demand puts upward pressure on gasoline prices. The goods news is that pump prices typically fall back again when summer winds down. But it’s far from clear just how high prices will go before they fall again.

“We are talking about an ultimate uncertainty here,” said Tom Kloza, chief analyst of the Oil Price Information Service. “But I think when you factor in the probability of it, we’re much more likely to see updrafts of let’s say 10 to 40 cents a gallon than we are to see any significant dips in prices."

A lot, of course, depends on how well U.S. refiners can keep up with demand. Hurricanes are just one wild card in this summer’s pump price forecast. This year, say analysts, there are a number of factors to watch. Here are eight to keep an eye on:

1. Overall demand: When commodity prices go up, the economic textbooks say demand is supposed to go down. For a brief period this spring, there were signs that high pump prices were putting a damper on discretionary travel. Sales of gas guzzling SUVs tumbled, for example.

But a relatively strong U.S. economy continues to fuel strong demand for gasoline and diesel. While high fuel prices have clobbered lower-income consumers and businesses like trucking and taxi companies, American pocket books seem to have been able to absorb the price shock at the pump. Despite loud complaints, Americans haven’t cut back on the number of miles they’re driving.

In its latest weekly report, the Department of Energy said that Americans burned through more than 9.6 million barrels per day of gasoline for the week ending June 30; despite the rise in pump prices, demand is running a bit higher than this time last year.

2. Big travel plans: AAA estimates that a record 34.3 million travelers hit the road by car over the July 4th weekend — a 1.3 percent increase from a year ago. Though a few travelers may have decided to cancel summer driving plans altogether, it’s more likely they’ll rearrange their trip to stretch their travel dollars, according to AAA spokesman Mantill Williams.

“They may drive a little closer to home, they may not eat out as much, they may make other adjustments in their travel budget,” he said. “But the reason (the high price of gas) doesn’t stop people from travel is that it’s still one of the smallest parts of a travelers overall budget. So it’s not going to be a deal killer.”

And that higher demand will keep up the pressure on prices.

3. Production interruptions: U.S. refiners have repaired most of the damage from last fall’s hurricanes, and, as of last week, were operating at more than 93 percent of capacity — up from a low of 75 percent last October after Katrina and Rita shut down a quarter of U.S. refining capacity.

But with refiners now running as hard as they can to take advantage of higher prices, any production interruption could be quickly felt at the pump. Those interruptions don’t have to involve a hurricane: a summer power outage or lighting strike can force a refinery to shut down.

Last month, for example, a crude oil spill near Lake Charles, La. shut down barge traffic and crimped oil shipments to nearby refineries, cutting an estimated million barrels of gasoline output, according Jacques Rousseau, an analyst with Friedman Billings and Ramsey. With supplies so tight, any production loss can inflict pain at the pump.

4. Ethanol: The net benefits of ethanol — a motor fuel made from corn — remain controversial. But the recent move to rely on ethanol to make gasoline burn cleaner in the summer threw a major crimp in this year’s switch to summer blends. For starters, the entire supply chain — from refineries to pipelines to storage tanks — had to be flushed out to eliminate the old additive MTBE, which was phased out after it was found to be contaminating water supplies.

The surge in demand for ethanol has stretched the rapidly expanding ethanol production and distribution system in the U.S. — and pushed prices sharply higher. Ethanol prices topped $3.60 a gallon last week and $4.00 a gallon on the West coast, more than double a year ago; spot prices in some areas hit $5 a gallon. Since summer gasoline typically includes about 10 percent ethanol, those higher ethanol prices are being passed along to consumers at the pump.

Last month, U.S. Energy Secretary Sam Bodman said he was concerned about the jump in ethanol prices, but he said lifting the U.S. tariffs on ethanol imports from Brazil -- one of the world's largest producers -- won't increase supplies enough to make a difference.

5. Lower imports: Even at full capacity, U.S. refineries alone can’t meet American drivers’ demand at the pump. Last year, imported gasoline made up about 7 percent of  the gasoline supplied in the U.S. But tighter regulations for summer blends have made it increasingly difficult to find foreign-made gasoline that meets those requirements.

Now that those summer rules are in force, the volume of imported gasoline has fallen sharply — from about 1.6 million a day in mid-May to 1.2 million barrels per day as of last week.

6. Tight inventories: In summers past, spikes in gas prices — especially in local markets — have often been caused by temporary shortages. That’s more likely to happen when there’s not a lot of gasoline in storage to smooth out any distribution hiccups.

“Every year becomes more of a logistical nightmare,” said Kloza. “We operate on about the same storage that we had 20 years ago. So the storage system is still very, very shallow.”

7. Futures fear factor: In the end, weather holds the potential to create the biggest havoc — as back-to-back hurricanes demonstrated last fall. Though the odds are slim that such severe damage will be repeated, memories are fresh of what bad weather can do to gasoline prices.

That means that investors and commercial customers who buy and sell gasoline in the futures markets will likely remain skittish as this fall’s hurricanes approach. And since futures prices tend to spill over into the wholesale and retail market price, the “fear factor” will continue to be felt at the pump.

“There’ll be enough fear, apprehension and general anxiety about what could happen to keep prices high,” said Kloza.

8. Mother Nature: Though it’s impossible to predict just how bad this hurricane season will be, the odds are against the kind of devastating damage seen last fall in the relatively small Gulf Coast corridor that produces nearly half of U.S. gasoline supplies.

But it wouldn’t take another direct hit by a Category Five storm to sent pump prices higher. Hurricanes and severe tropical storms anywhere in the Gulf would likely interrupt shipments of crude oil to refineries as well as tanker shipments of gasoline to local market.

And any spot shortages can be counted on to produce short-term local spikes in pump prices.