Will gas top $4 a gallon this summer? I say yes.

By Andrea Karim on 7 May 2007 (Updated 9 June 2007) 19 comments

Before you go jumping all over the place and pointing out that I have done no real market analysis to back up my prediction, I would like to point out: I have done no real market analysis to back up my prediction. This is just a gut feeling.

Like a good, Birkenstocked liberal, I was listening to NPR on my commute home today, and it was announced that gas prices had just topped $3 a gallon in the US.

This wasn't exactly news to those of us living on the West Coast. Our gas prices topped $3 a gallon a couple of months ago.

This time around, prices are being blamed on reduced output at refineries, although no clear-cut reasons are being given for the reduction.

Refineries operated at 87 percent capacity last week, below pre-Hurricane Katrina levels in 2005. They produced 8.9 million barrels of gasoline per day, while the country has been consuming 9.2 million barrels per day, or 1.6 percent more than this time last year.

NPR had the audacity to quote someone, I believe it was a AAA representative, as claiming that the refinery difficulties stem from refinery technician lay-offs in the 1980s. I've never been good at economics, and my memory of the 80s is sort of clouded by hairspray fumes and Madonna lyrics, but something about that explanation struck me as disingenuous. Lots of companies had lay-offs in the 1980s, but most major corporations have managed to rehire people, you know, over the past couple of decades.

Also, it's not as if gasoline demand increases are unpredicatable - summer's coming, so prices are expected to increase, but the increase started much earlier this year than last. It would seem to me that oil refineries have had twenty-odd years to correct their personnel reduction.

A slightly more plausible explanation that encompasses a broader range of possible reasons for the gas price hikes:

Conspiracy theories aside, a number of factors are preventing more supply from flowing into the U.S. market. The overall picture is a system under such strain that any outages or disruptions ricochet quickly into retail prices. Because of high costs and a lack of public support, refiners haven't built an entirely new plant since 1976. While they've been expanding existing plants, the industry isn't keeping pace with growing demand. Any additional stresses -- hurricanes such as Katrina or the persistent power outages -- curb output. Add to that a shortage of skilled workers and government rules mandating cleaner fuels, and the reasons behind scarce supplies emerge.

I love how they manage to turn something like suspecting that oil companies are greedy for profits into a conspiracy theory. Nice touch. The thing about conspiracy theories is that they are, on occasion, correct. I remember how, when I lived in the Silicon Valley back in 1999-2002, and we were experiencing those "rolling blackouts", most everyone was grumbling about how suspicious the entire thing was. NPR and mainstream news outlets called it a "conspiracy theory" back then, too, but it turned out to be, well, a freaking conspiracy.

As someone who does care deeply about the over-consumption of fossil fuels, even I understand the importance of maintaining an afforadable fuel supply to the US economy until alternative infrastructure can allow us to rely on other means of moving ourselves from one place to another. For those of us with fewer options other than driving, gas prices are very important. I'm curious as to why the media isn't delving more into this topic, really investigating why prices are going up the way they are right now.

Lots of people believe that this current supply reduction has everything to do with the kind of accidentally-on-purpose reduction in output that occured during the well-engineered energy "crisis" that we experienced in California back in 2000 and 2001.

It looks as though certain Congressional minds are at least pretending to care about the whole thing.

The recent hike in gas prices has prompted Sen. Charles Schumer - who has received plenty of calls from those motorists - to call for a federal investigation into the oil refineries that make the gas.

He said he thinks the hefty prices could have resulted from oil companies being lax on maintenance, thus short on capacity.

"The looming question is, are they putting money into maintenance and keeping up refineries as they should?" Schumer asked. "Or are they happier with lower production and higher prices?"

Me, I'm going to call it now. Gas prices well above $4 a barrel on the West Coast and averaging $4 a barrel nationally, before July. That's what I'm putting my money on. I'll be happy to eat humble pie if I'm wrong (note to self - dig up good recipe for frugal humble pie).

Next up: What to do about the rising cost of gasoline. Does it make sense, from an economic standpoint, to take the bus (if that's even an option)?

(Photo by xophersmith)

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Guest's picture
Steve

Though I wouldn't be surprised if your prediction is right (any feelings on what tonight's lottery numbers will be, by the way?), but just in case, here you go: A quick Yahoo! search turned up a recipe from recipezaar.com for what looks like a vegetarian-safe Humble pie. As I really don't want to pay $4 a gallon, here's hoping you end up needing it!

Guest's picture
jo

It is all I can do not to cry when I pump gas, I'm not exaggerating. It TRULY has hurt me in the wallet & I feel like no one gives a sh**.

Guest's picture
Cheryl

The price keeps going up, there is never a valid reason for it, and as long as we continue to put up with it - it will go to $4/gallon. Unfortunately, I do not have public transportation that runs from my community into the city. So, I have to drive 20 miles each way to work. Everyone is moaning about the high price of gas, yet I still see gas guzzling cars on the road, and even heard a news blip this morning that there has no been a reduction in sales of these larger vehicles! And, at the end of each quarter , I keep reading about how many freaking billions that the oil companies made! It's only going to get worse here in Florida, the first sign of a Hurricane forming and they will use it as an excuse to bump the price up 20 cents a gallon!

Bill Bradle's picture

Andrea,

How about looking into the reason no one has built a refinery in this country for the past 20 plus years?  Why go through the hassle?

Bill 

 

 

Andrea Karim's picture

Bill - thanks for reading. I did mention the reasons that are frequently given for no new refineries being built, but to be honest with you, I have a feeling that the reasons being given are bunk.

Remember a couple of years back, when Bush was pushing nuclear power? Fox News and  other media outlets kept repeating, "There hasn't been a new nuclear power station built in the US in 30 years!" implying that somehow, the nuclear industry was being thwarted by pesky anti-nuke types. And it turned out that no one had even applied for a permit to build a new facility? I feel it's likely the same story with these refineries.

Why go through the hassle? Well, maybe because the demand for gasoline is increasing. The better question to ask is, why NOT go through the hassle? Businesses go through all kinds of hassles to get to new oil sources. Are refineries struggling to build new facilities, only to face strong opposition from tree-huggers and their ilk? Or are they perfectly happy to see capacity go down and prices go up?

Steve - thanks for the recipe link! I sincerely HOPE that I end up making the pie rather than being correct on my prediction.

Guest's picture
Guest

The idea that refineries are happy enough to see low supply only makes sense if there is a single organization controlling all American refining. "The refineries" are not a monolithic structure, neither are they a cartel. Since multiple companies are competing to produce refined gasoline, the motivation is too high not to increase your supply and cut prices. Even if there was some mysteriously undiscovered cartel amongst refineries, there is no enforcing authority, so the motivation to jump ship and up your supply remains. So why hasn't a new refinery been built in so long? I honestly don't know. Perhaps they don't apply because the cost is high and their chances of being approved are slim. But I have a feeling that the executives of Misc Oil Company #7, as Gordon Gecko-ish as they may seem to us, probably know more about the relative costs and benefits of such an investment far better than any of us do.

As to whether there is a "valid reason" for prices to increase, I would say that there are only ever two "valid" reasons for any price increase. Either the supply goes down or demand goes up. The same commenter that decried the lack of a valid reason for price increases also noted that demand is increasing, so there we have an answer to her problem.

But there's another answer: supply decreases every Spring because refineries are required by law to make a heavyside switch from winter to summer blends and most do so at the end of April. As a result supply is disrupted this time of year and prices increase like clockwork, only to fall again later in the year. This is honestly not a mystery, and I don't see any reason to posit a conspiracy when there are well-known and understandable causes evident.

Andrea Karim's picture

Thanks for taking the time to comment.

Prices are not JUST increasing in a predictable manner - they are going up higher and higher every years. Oil company profits are up, and the price of gasoline is up. Sure, the price will go down next fall, but not to the same levels (even considering inflation) as they were last fall. The rising price is not commesurate with the rising demand, and the decreased capacity this year is a bigger reduction than we've ever seen outside of a natural disaster. Not remotely suspicious?

Guest's picture
Jared

Your original post was about the seasonal rise we've seen (and will likely continue to see, as you point out) in recent months. It was this short-term flucuation that I attempted to responded to.

You have an excellent point about longer term price increases coincident with record profits. I honestly don't know why the seasonal adjustment would be higher this year than in the past, or why profits are growing proportionally faster than sales. Let me point out though that higher profits are also a function of decreased upcoming investments, probably due to regulatory burdens. (That is something that could hurt consumers 5-10 years from now, but has no relation to higher retail prices now.)

In that regard, you're right to pin California's c.2001 energy problems on the corruption of Enron, but that's only one of two causes. Enron forced PG&E to buy power at a higher rate, but state regulation prohibited PG&E from increasing retail prices. Both were necessary to precipitate the collapse we saw. I'm as likely to be suspicious of well meaning but ineffective or counterproductive regulation as of some secret industrial cartel.

Finally, I don't think there's any more reason to believe there's a price fixing conspiracy among five competitive oil companies than I am to believe there's a conspiracy among unversities or movie distributors, two groups whose prices have also outstripped inflation and increased at even higher rates than have gasoline.

I'm not trying to say anyone shouldn't be suspicious: suspicion keeps people honest and that's good for everyone. I'd just like to see our scepticism spread around among the possible causes instead of being directed solely at corporations.

Andrea Karim's picture

I want to thank you for your thoughtful comments. What you say about university tuition is a very interesting point - I'd love to aim my skepticism and highly tuned sense of suspicion towards universities as well.

Paul Michael's picture

How can the oil industry report massive record profits month after month (billions upon billions of dollars) and not pass that profit back to the consumer somehow? IS there not some law against making huge profits from unregulated pricing? I'm sure Bush, the oil man at heart, wouldn't really care because his family is no doubt making millions from oil profits, but surely something can be done. And by the way, isn't it unfair to make such huge profits when the country is at war and not share the wealth?

Andrea Karim's picture

I have a few theories on your comment:

1. The doctor's drugs have really taken their toll on you.

2. You are a communist.

3. You are making a brilliantly sarcastic point about my whining about capitalism.

4. You really believe this.

I attach no judgement to any of these possibilities. I like people who are tired, hungry and grumpy. I think communists are cute. Sarcasm is my favorite, and you have every right to believe that unregulated profits should somehow cycle back to the consumers (that would be trickle-down economics, which doesn't actually work). :)

Let me know which one it is, eh?

Paul Michael's picture

I choose all 4. And no 5.

Andrea Karim's picture

I mean, that's cool and all, but I'm surprised by your stance. I know that the US isn't a PURE market economy, but I can't think of a time in which we have required a business that is doing well to give back to the community or the consumers in any way - the way most businesses give back is through increased profits meaning better payout for stockholders. I believe that stockholders get priority over customers. Does that sound correct?

Paul Michael's picture

Why are you surprised by my stance Andrea? I'm European. America is the capitalist giant of the world, and it seems money rules everything here. Did you know when an American and European motor company tried to merge a few years ago, the biggest problem was getting the US CEO and Executives to agree to the massive pay cuts that would be required in order to fall in line with what real pay should be (they didn't by the way). The income gap between the top management and the workers in Europe is way, way smaller than over here, where a CEO of Comcast can earn $28 million a year and no-one bats an eyelid. How do you even justofy $28 million a year.

I for one don't think capitalism is so bad, I'm all for making money. But when it gets to the point that the divide between rich an poor is so great (and the middle class is being wiped out) then I think something is wrong. Stockholders may have the priority over customers, but is it right?  When you find out that people lose jobs by the thousands, production costs are slashed, products are made with cheaper materials and the consumer gets price increases, all so the stock can rise 1/4 point and make a few people very rich, do you agree with that? It seems cutthroat. I don't know, maybe Americans and Europeans will never see eye to eye, but this country sometimes staggers me with its attitude to money. The mighty dollar (which ain't so mighty by the way...it's now less than half of the British Pound at current exchange rates) is worshipped in this country. America considers itself a family nation, yet the average Joe works more hours per year than a Japanese worker now, takes less vacation, less sick days and is working himself/herself to death for money. Imagine what would happen if the big oil companies decided to use one half of their proifts (record profits) to help feed and cloth the hungry and sick in America? Wouldn't we be closer to a more civil society.

I'm fairly clear on this. I like to save money, but I'm not mercenary and I don't want a seat at the great capitalist gang-bang. I despise big oil, big corporations that choose wealth over people, and I hate the arms industry too. If that makes me a communist, or a socialist, then as I often say at the end of my posts...POWER TO THE PEOPLE. In fact the reason I write for Wisebread is to help the little people get deals whenever they can from the big corporations. When I found out my paper-reams post was doing so well, I was happy. Big Corporation ZERO, Average Joe Consumer ONE. And to be honest, I'm surprised at your stance Andrea...as a Wisebread blogger, I thought you'd be behind the customers, our readers, and not the capitalist stockholders and giant corporations.

Does this mean we're not friends any more? When you drive by in your Ferarri and I'm in my little Civic, I'll still wave hello. 

Andrea Karim's picture

That's not my stance at all - I was just stating what I believe to be United States economic policy, and seeing if that was the general consensus - that the US doesn't legislate that businesses, be they American or foreign, to pass along profit to consumers. I'm acutally not much of a history buff, so I don't know.

Sorry if I came across as mocking - I was just kidding about you being a commie, but I'm looking at that comment I wrote and it's roughly half as funny as it originally appeared in my head.

I agree that corporations who are doing booming business are morally obligated to give something back. They just aren't currently legally obligated, and I'm not sure how anyone could go about changing that.

Paul Michael's picture

Sorry Andrea.

Maybe it is the drugs and the lack of food. I thought you were actually behing big business for a second, which actually made me really upset because I know how smart and cool you are.

NOw that I see that you were simply taking about what is law, not what is right (as we all know, they are poles apart) then I am humbly sorry in all the ways that a man in my state can be.

Did I mention I'm still sick? And a moron to boot.

As a side note, during the major world wars, I'm fairly sure big business had to contribute to society in some way. Any historians out there with actual facts? Please fill us in.  

Andrea Karim's picture

You're not a moron, Paul. I didn't state my point very clearly at all, muddled my arguments, and sent a very mixed message by combining a serious topic with a flippant tone. No sweat.

Paul Michael's picture

This via The Consumerist

http://jalopnik.com/cars/the-end-of-the-world-is-nigh/407-for-premium-in...

If you were a betting person, you could fill your tank with your winnings.

Andrea Karim's picture

I love saying "I told you so", but not in this case.