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Gasoline Prices Top $3 a Gallon Amid Concerns About Supply

U.S. gasoline prices topped $3 a gallon on Friday, and threatened to rise even higher, as concerns mounted that refineries are simply not making enough gas to meet peak summer demand.

Average retail gasoline prices in the world's top consumer reached $3.012 a gallon, the AAA travel group said Friday, up more than 30 cents since early April and near the record of $3.057 hit after hurricanes slammed Gulf Coast oil installations in 2005.

Gasoline futures for June delivery rose 1.13 cents to $2.2589 on the New York Mercantile Exchange.

This year, companies struggling to retool refineries to meet new environmental standards, have faced longer, more extensive maintenance and serious outages, draining gasoline inventories ahead of peak summer demand.

"The problem this year is our continuing and increasing inability to refine enough gasoline to meet growing demand," said Geoff Sundstrom of AAA. "I think it is very possible that we will set a new record high price this month."

Jan Stuart, an oil economist at UBS, told CNBC's "Power Lunch" that he expects the U.S. economy will be able to withstand the pressure of higher gasoline prices even if they rise above $4 a gallon this summer.

"This summer - $4 a gallon - even if you do get it, we suspect a repeat from last summer," Stuart said. "That is that you see savings decline. You see other measures. you don't really see the big impact immediately on the economy."

However, Derek Burleton, a senior economist at TD Bank Financial Group, said the economy is more vulnerable this time around than it had been in past gasoline-price spikes.

Refinery Outages

U.S gasoline stocks have dropped by 15% in three months, with refineries now running at around 88% of capacity, well below the 92% analysts say is normal this time of year to build up summer gasoline stocks.

"By this point in the season, nationwide gasoline inventories should be building, or at a minimum plateauing," Stephen Schork of the Schork Group said in a report.

But there have been a number of refineries announcing prolonged shutdowns in recent weeks. The latest of these announcements came on Thursday when BP said its 400,000 barrel-per-day refinery in Whiting, Ind., will not be operating at full capacity for several months due to unexpected repairs.

New lower-sulfur fuel specifications have forced refiners to increase the complexity of their equipment, making them more prone to outages. The outages have been reflected in weekly government data which has shown gasoline inventories to be falling at a time of year when most analysts think they should be rising.

"There's ongoing anxiety about refining capacity, refinery outages," said Tim Evans, an energy analyst at Citigroup Global Markets.

Demand On The Rise

In addition, gasoline demand is strong and showing no signs of slowing down as vacation season approaches, said Jason Schenker, economist for Wachovia Bank.

"We're in the first week of May -- the driving season hasn't really begun. If we are nowhere near peak demand, we're nowhere near peak prices," said Schenker. "I think we could very likely see $3.25 as a national average and quite possibly spikes to $3.50," he said.

Despite high prices, Schenker said he thought motorists were unlikely to cancel planned vacations.

Government officials have expressed concern about summer gasoline prices, but added they had no plans to temporarily relax environmental regulations to ease supply problems. But AAA said rising prices highlights the need for government to take a closer look at energy policies.

"Today, we have $3.00 a gallon gasoline for the third time in the last three years. Alarm bells ought to be going off in the offices of every member of Congress and among the presidential candidates," said Sundstrom. "We simply have to increase our ability to refine gasoline, we need a much more aggressive conservation program, we need to improve our ability to store gasoline on an emergency basis."

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