The Gas-Price Tango

National average breaks $4 a gallon

Samantha Oller, Senior Editor/Fuels, CSP

WASHINGTON -- Like a demonic tango building into a bigger and bigger crescendo, the national average for unleaded gasoline stepped past the $4-a-gallon mark this month, with observers predicting prolonged highs at least through the July 4 weekend. "We'll probably see gas prices continue higher through most of June," Brian Milne, refined fuels editor, DTN, Omaha, Neb., told CSP Daily News. "Demand has been coming off. So we'll see. I think there's a limit nationally of how long we'll stay above $4, unless something happens."

Through the month of May, prices jumped anywhere from seven to 14 [image-nocss] cents week after week, with the average price for unleaded hitting $4.02 nationally for the week starting June 2, according to the Washington, D.C.-based Energy Information Administration (EIA).

"High prices are just killing independent petroleum marketers," Dan Gilligan, president of the Petroleum Marketers Association of America (PMAA), Arlington, Va., told CSP Daily News. "From every aspect, costs related to the business are going up, but volumes are down, margins are generally flat and have no opportunity to recover."

Milne of DTN said refiner cutbacks on production (only recently coming back on line after spring product reformulations) and a rise in demand for ethanol "has made it a little tricky to figure out what gasoline is going to do. Ethanol has been trading at a pretty big discount to gasoline right now."

He said they've been seeing ethanol used widely, which can offset what would otherwise be higher prices of gasoline. Ultimately, demand will play a key role in which way prices go into the summer, Milne said.

"There has been lot of anecdotal information out there that shows people have been conserving on gasoline," he said. "Look at how truck sales are plummeting—people figured large SUVs and trucks were going to take a hit on downside, but it's even larger than they thought. Look at other studies showing hybrid sales moving higher. Then if you look at California, demand is getting lower continuously, although I saw a bump up in February, with Florida showing strong demand."

For Gilligan, central to the entire issue of price is futures trading and practices that need to become "more transparent." He said talk on Capitol Hill has grown around the matter, with key hearings going on this week and into the summer that will continue to stir the pot. "There are so many big hedge funds and investment banks out there that can buy and sell an entire winter's production of gasoline in one week," he said. "We'd just like to see the process become transparent, so no single company or group of traders can influence price."

Even the CEOs of major oil companies who recently testified in Congress said the nation pays a 25% to 30% premium for product because of the speculative nature of the futures markets, Gilligan said.

"Fuel prices are based less on the fundamentals and more on the [sheer] notion that prices are going to go up," he said, noting how a "bubble" similar to the technology phenomenon in the early 2000's is due for commodities like crude. "We don't want catastrophic losses, but we want to return to the fundamentals and prices that are based on supply and demand."

Click hereto view CSP Daily News coverage of diesel prices reaching $5 per gallon milestone in some markets.

[Editor's Note: With gas prices steering the country's economic mood, convenience retailers find themselves in the hot seat. For more on what retailers can expect for the remainder of 2008, look for the June cover story of CSP magazine.]