NEW YORK -- Gasoline prices, which for months lagged the big run-up in the price of oil, are suddenly rising quickly—and echoing CSP magazine's February cover story—several market analysts and economists are predicting $4-a-gallon gasoline could hit as early as this spring. Diesel is hitting new records daily and oil closed at an all-time high on Tuesday of $100.88 a barrel, reported The New York Times.
With economic growth slowing, high energy prices that were once easily absorbed by consumers are now more likely to act as a drag on household budgets, leaving people with less [image-nocss] money to spend elsewhere, the report added. These costs could exacerbate the nation's economic woes, piling a fresh energy shock on top of the turmoil in credit and housing, it said.
"The effect of high oil prices today could be the difference between having a recession and not having a recession," Kenneth S. Rogoff, a Harvard University economist, told the newspaper.
As of Tuesday, regular gasoline was selling at a nationwide average of $3.14 a gallon, according to motor club AAA, up from $2.35 a year ago. The price has jumped 19 cents a gallon in two weeks. Energy specialists predict that as demand picks up further this spring and summer, retail prices will surpass the high of $3.23 a gallon set last Memorial Day weekend.
On Tuesday, diesel prices rose to a record $3.60 a gallon, compared with $2.62 a gallon last year.
As oil prices spiked last fall, low wintertime gasoline demand helped keep prices in check. But now, experts said, the price of oil is finally showing up at the pump.
With the run-up in prices in recent years, economists said energy's share of disposable income is slowly creeping up again. Last December, that figure reached 6.1%, the highest level since 1985.
"You're adding an oil shock on top of a crunch on credit and a housing collapse," Nigel Gault, an economist at Global Insight, told the newspaper. "Even the U.S. economy cannot withstand all of that at the same time."
American consumers have responded belatedly by cutting back on their energy use, the report said. Oil demand in the United States grew by just 0.4% in 2007 and is expected to be flat in 2008.
But global oil demand, the relentless driver behind higher prices, is still expected to increase by 1.4 million barrels a day this year, analysts estimated. That growth, from China and the Middle East, may help keep prices up, whatever happens to the American economy, said the report.
According to the Times, citing the U.S. Department of Energy's latest forecast, gasoline prices should peak near $3.40 a gallon this spring. That figure would match the inflation-adjusted record price for gasoline that was reached in early 1981. But many outside analysts consider the government's forecast conservative, foreseeing a sharper spike as refiners come out of the seasonal maintenance period and start producing summer-grade gasoline in March and April, the paper added.
"We've gone this high without the normal summer dynamics," Tom Kloza, publisher and chief oil analyst at the Oil Price Information Service, told the Times. "That's when I think we will have the big jump—of 50 cents to 75 cents a gallon." He said he expects gasoline to peak around $3.50 to $3.75 a gallon nationwide.
Geoff Sundstrom, AAA's spokesman, echoed that view and added that $4-a-gallon gasoline is possible this summer. "We've gone from a worrying situation for gasoline to one that is quite alarming," Sundstrom told the paper.
Oil prices are unlikely to drop any time soon, analysts said. Barclays Capital recently raised its long-term prediction, saying prices could reach $137 a barrel in 2015, up from a previous target of $93 a barrel. "The remorseless move up in long-run prices has not yet fully played out," Barclays analysts said in a note to investors cited by the paper.
While demand keeps growing, producers are struggling to catch up. They are not replacing the oil they are pumping out of the ground fast enough because of various restrictions on access to fields, as well as rising costs. Meanwhile, demand from China, India and the Middle East is expected to push oil consumption up by more than one million barrels a day, each year, for the next decade.
"An oil crisis is coming in the next 10 years," John Hess, the chairman of Hess Corp., said at a recent conference in Houston hosted by Cambridge Energy Research Associates. "It's not a matter of demand. It's not a matter of supplies. It's both."
Meanwhile, during yesterday's White House press briefing by President Bush's press secretary Dana Perino, a reporter asked, "How would you characterize the level of concern here about the specter of $4-a-gallon gasoline that many analysts are now warning of, given the current trend?"
Perino said, "Obviously, high gas prices have a huge impact on the economy, on families across America, and especially on businesses, small businesses in particular—those especially that have transportation as a part, integral to their business, like florists or plumbers—that those type of businesses, it really does have an impact. So we're mindful of it.
"It's not a problem that was created overnight; it's not going to be solved overnight. But the President is aware of it. He's going to be getting an economic update tomorrow that will include the issues such as the high price of fuel.
"The thing that we have to consider is that demand for crude oil is…very high across the world, especially in developing nations like India and China. And what we have tried to do here is put forward policies that will help us find alternatives to traditional oil use, increase efficiencies, such as in raising [the]…miles-per-gallon standard that the President signed in December, which was part of his 20-in-10 initiative, as well as make sure that we are doing everything we can to wring efficiencies out of our businesses, which we have been able to do over the past several years.
"But in order to have economic growth, you have to have a good, strong power supply and a fuel supply. And so increasing the amount of production that we have in the United States is important, as well."
Click hereto view CSP magazine's February cover story on fuel volatility.
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