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$4 a gallon? Some fear it's on the way

WASHINGTON - The last time gasoline prices approached $3 a gallon nationwide, hurricanes had ripped apart the Gulf Coast oil infrastructure and world oil supplies were stressed. Today, oil supplies aren't pinched, but rusty U.S. refineries aren't...

WASHINGTON - The last time gasoline prices approached $3 a gallon nationwide, hurricanes had ripped apart the Gulf Coast oil infrastructure and world oil supplies were stressed. Today, oil supplies aren't pinched, but rusty U.S. refineries aren't producing enough gasoline to meet demand, which is driving up pump prices ahead of summer's peak driving season, and some fear $4-a-gallon gas looms soon.

To be sure, experts disagree. Some think today's high gasoline prices - a nationwide average of about $2.85 a gallon - are near their peak. Others warn that we haven't seen anything yet.

"I am in the camp that we will go higher, perhaps a lot higher. I think we are one disruption or problem away from $4-a-gallon gasoline," said Phil Flynn, a veteran oil analyst for Alaron Trading, a Chicago-based commodities trading company.

One potential disruption is a threatened union strike May 9 at four Belgian refineries. Collectively, they process almost 1 million barrels of oil daily. Increasingly, the U.S. depends on imported gasoline to make up the difference between the 8.7 million barrels per day (bpd) produced in the United States and the 9.4 million bpd that we consume.

"Europe is now our marginal supplier at this point, and we need those barrels from Europe. Any dislocation out of Europe is going to cause problems," said Andrew Lebow, senior vice president of the energy division at Man Financial in New York.


No refinery has been built in the U.S. since 1976. As demand for gasoline grows here, Americans increasingly depend on foreign refiners to provide imported gasoline.

Still, if the Belgium strike is averted and there are no more shutdowns at U.S. refineries, the worst prices may soon be over for motorists, Lebow said.

"We're creeping back up toward $3 (a gallon) . . . but should there be no geopolitical, political or refinery upsets, I think that the peak for gasoline is in sight," he said. "However, because things are so tightly balanced, one major plant going down is going to have enormous impact on the price."

U.S. gasoline inventories are at a 20-year low. The latest statistics released Wednesday from the U.S. Energy Information Administration, an arm of the Energy Department, show gasoline inventories this week at 194 million barrels - or just under 21 days' worth of national use. EIA described that number as "well below the lower end of the average range." During the same week last year, inventories stood at 208 million barrels.

The weekly statistical report also showed that the nation's refineries were operating at 87.8 percent of capacity, hampered by fires and other mechanical failures that have reduced the amount of domestically supplied gasoline.

The National Petrochemical and Refiners Association, the trade group for refiners, believes a shortage in skilled labor has added to today's gasoline supply problems.

"I buy gasoline like everyone else and watched prices go up . . . I don't think you can overemphasize the change in the labor situation," said Jeff Hazle, technical director for the trade association in Washington, D.C. "Part of it is because there is still a great deal of craft labor, skilled labor, that is being taken up by reconstruction following the hurricanes (Katrina and Rita) . . . It's kind of thrown the industry for a bit of a loop."

In the aftermath of the 2005 hurricanes, U.S. refiners operated at above-normal levels and put off maintenance and repairs as they struggled to supply the nation. Now, they're trying to catch up on repairs, and there aren't enough skilled workers to do both that and the annual production switchover to summer fuels. The net result is delays on both maintenance and switchovers.


For gasoline prices to drop, a lot of things must go right at the same time. Aging refineries must ramp up their gasoline production with no further glitches, they must escape damage from hurricanes, gasoline imports must remain steady and crude oil prices must remain at or below their already high levels.

"When you look at the big picture, the trends are very discouraging. We haven't seen a drop in (gasoline) supply like this since the early '90s, and it is happening at a time when the demand for gasoline seems like it is not going to retreat," said Flynn.

American motorists also shoulder some of the blame for today's high prices. Gasoline consumption grew 2.3 percent over the past month and 2.2 percent over the past year, according to EIA.

"The consumers need to understand that if they continue to drive the same as they always have - or even more, which is what has happened - it's going to put additional pressure on the supply system . . . and it's going to put upward pressure on prices," said Hazle.

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