Getting Gassed

Gasoline Prices Are Forecast To Keep Rising By WALID AL-SAQAF and THADDEUS HERRICK Staff Reporters of THE WALL STREET JOURNAL April 8, 2005; Page B3 WASHINGTON -- Gasoline prices will keep rising in coming weeks and will average $2.28 a gallon for the summer, a 20% increase over a year ago, according to the latest government forecast. A big reason for higher prices is persistent strong demand despite the rising costs of filling up. "The main factor behind the rise in gasoline prices is the increasing domestic consumption over the global increase in crude-oil prices," said Guy Caruso, administrator of the Energy Information Administration, which released the report yesterday. The EIA report also highlighted various supply factors likely to keep prices elevated for a long time. For one, the level of spare crude-production capacity, already thin, is expected to fall further through next year. In addition, there is a lack of U.S. refining capacity, with refiners unable to substantially increase their supplies of products such as gasoline, jet fuel and heating oil, even as demand grows with the proliferation of gas-guzzling vehicles. The International Monetary Fund, in a separate report released yesterday, warned that those trends could crimp growth world-wide. "The oil market will remain tight in the coming years and high and volatile oil prices will continue to present a serious risk to the global economy," the IMF's annual World Economic Outlook said. The report focused on the long-term oil outlook, saying that demand will increase globally, potentially raising prices to unprecedented levels. The EIA, the statistics arm of the Department of Energy, said U.S. gas prices will hit a peak of $2.35 a gallon in May, up from $2.22 at the beginning of this week. Mr. Caruso said he is expecting demand to increase 1.8% over a year ago, and that "is above the average growth of the last five years." As for production, Mr. Caruso said that "world oil spare capacity got extremely low in 2004, and we see that tightening further in 2006." Specifically, the EIA estimates that the amount of unused capacity that oil producers can bring on line will fall below one million barrels a day next year. That is just 1% of world demand and leaves the economy vulnerable in the event of a big supply disruption. At the same time, refining capacity is down about 10% to 16.8 million barrels a day from a high of 18.6 million barrels a day in 1981, according to the National Petroleum Refiners Association. Refiners have been reluctant to invest in new plants for a variety of reasons, including historically low returns and stricter environmental regulations. But refiners also have sought to keep their inventories low and, with the help of new technology, have reduced their inventories considerably over the past 10 years, according to the EIA. Another factor facing the industry: Many refineries are ill-equipped to process heavy, high-sulfur crude, which is usually more readily available than the more expensive light, sweet crude. The upshot: A refining system increasingly unable to respond to market forces. The same is true internationally, creating a tighter market for gasoline imports. According to the New York-based Petroleum Industry Research Foundation, global oil demand grew by 4.6 million barrels a day in 2003 and 2004. Meanwhile, net additions to refining capacity were less than 700,000 barrels a day.