Eight reasons pump prices may move higher

John W. Schoen Senior Producer • Profile • E-mail

With gas prices holding steady — and even dropping a bit in the past few weeks — the consumer outrage that flared up this spring has calmed down considerably. Pump price photos have fallen from front pages and politicians proposing solutions are visibly absent from cable TV channels. But as the July 4^th weekend kicks off an exodus of vacationing motorists, U.S. gasoline supplies remain tight — which raises the odds that gas prices are about to make another move higher.

After a sharp run-up in March and April, pump prices have fallen slightly in the past two weeks from peak levels reached in mid-May. Still, at $2.87 a gallon, the average price of a gallon of regular unleaded logged by the Department of Energy this week is still 65 cents higher than this time last year.

Pump prices typically head higher between July 4^th and Labor Day, as an armada of 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 9.5 million barrels per day of gasoline for the week ending June 23, 2006, the highest weekly average ever during the month of June. And that consumption is likely headed higher.

2. Big travel plans: AAA estimates that a record 34.3 million travelers will hit the road by car this July 4^th weekend — a 1.3 percent increase from a year ago. Though a few travelers may decide to cancel 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 week, 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.

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