Experts expect pump reprieve in U.S. to be brief

New Orleans CityBusiness, Jul 23, 2007 by Emilie Bahr

For weeks, drivers have welcomed declining or stable gas prices. But with continuing U.S. refinery problems, rising crude oil prices and escalating demand, industry experts say the recent reprieve is temporary. The overall trend for pump prices is up.

"The last seven weeks or so the U.S. Department of Energy has reported gas inventories have built," said Eitan Bernstein, an energy analyst with Friedman, Billings, Ramsey & Co. investment firm in Arlington, Va. "That has calmed prices down a little bit."

Bernstein attributes inventory growth to refineries coming back online and stepped up production in anticipation of traditionally high summer demand.

"We've had some builds that have some people saying we've seen the peak of gasoline prices because refiners are coming back online and things are going to calm down," Bernstein said. He said gasoline inventories have expanded but remain 7 million barrels below last year's level. The low inventories are thanks in significant part to refinery outages across the country - a problem exacerbated recently when flooding wiped out 100,000 barrels of daily refining capacity in Coffeyville, Kan. - and unrelenting consumer demand.

The Department of Energy projects Americans will consume an average 20.9 million barrels of oil per day in 2007, up 1.4 percent from about 19.8 million barrels in 2006.

"Within the context of summer driving season holidays and low inventories," Bernstein said, "there's certainly the potential for gasoline prices to make a comeback before the summer's over. With rising demand in July and August and with refinery problems continuing, I wouldn't bet on things loosening up much before September."

Gasoline prices rose for the second consecutive week this week, the Department of Energy said in its report released Wednesday. The average national price for regular gasoline was up almost 7 cents from the week before to $3.04 per gallon July 16.

Gulf Coast residents, who typically pay some of the lowest gasoline prices in the country, have been granted a slight break with gas prices up just more than 3 cents from the week before. The average price for a gallon of regular unleaded gasoline Wednesday in the New Orleans area was $2.89, according to AAA.

"Some thought that by July we should see prices come down close to what we're paying for diesel," said Don Redman, spokesman for AAA Louisiana. "But no one's really expecting any dramatic drops through the end of the summer. The Department of Energy is saying don't be surprised come August to see a significant increase.

"And of course, if there are any storms in the Gulf, all bets are off."

In its Wednesday report, the Department of Energy predicted the refining situation could lead to further gasoline price fluctuations over the next several weeks but said strong crude oil prices were likely to prevent any dramatic drop in retail gasoline prices "and could lead to further retail price increases as the summer progresses."

Mark Conlin, owner of an Amoco station on Airline Drive in Metairie, has grown accustomed to customers' grumblings over high gas prices.

"They say, 'Here we go again,'" Conlin said.

Fortunately, he said his customers have grown increasingly sophisticated in their understanding of gas pricing. He said they realize he doesn't like raising his prices any more than they like paying them.

"We hate it," Conlin said of high gas prices. "When gas goes up, we make less," he said, thanks to pressure to remain competitive by keeping prices as low as possible.

Even if gas prices dip again, Americans are not likely to see dramatically lower pump prices any time soon, if ever, said Eric Smith, associate director of the Entergy Tulane Energy Institute.

"With less oil being found, crude prices hovering around $70- plus a barrel" and continuing geo-political tensions, he said, "the price (of gasoline) really will bounce around but it will always be trending upward from now on."

Why?

"Because we're running out of the cheap crude that was easier to produce," he said.

"It's a very volatile market," Smith said, "But the overall trend is up because the underlying fundamental - the cost of finding the oil and the cost of refining it to meet all of the new regulations - are making it more expensive. We're not falling off the edge. We're not going to run out of crude tomorrow. ... But we drill more and we get less for what we spend."