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Oil Prices "Gushing" And Sorry To Say, No Relief In Sight

Monday, 21 Apr 2008 | 9:21 AM ET
CNBC.com

I've been asked to talk about gas prices a lot lately. The outlook is a bit disturbing and has many folks trying to figure out ways to bike, hike, walk or run--anything but drive--to their destinations.

Gas prices are on the rise by every measure. AAA says today regular unleaded gasoline is averaging $3.50/ gallon nationwide.

The U.S. Energy Department has said it expects retail gasoline prices will average $3.60/gallon in May and June, some analysts say gas prices could easily reach that level by the end of next week.

Reformulated gasoline futures here at the New York Mercantile Exchange--which indicate where retail prices are headed--hit $3 this morning. Typically you can add $.60 to the futures price to get the national average retail price for gasoline. So it's very possible we could see regular unleaded gasoline hit $3.60 before the end of the month.

And with crude oil topping a mind-boggling $117/barrel this morning, it's not a stretch to expect gas prices to hit $4 this summer (the statewide average for premium grade gasoline has already topped that mark in California, Alaska, Illinois, Connecticut, and Hawaii.) Unlike year's past the run-up in gasoline prices isn't due to a supply and demand issue or the usual increase we see as refiners switch from processing winter grade gasoline to the more expensive summer grade. At least not yet.

This year it's all about the price of crude oil. Oil makes up about half the cost of gasoline. Crude oil prices have shot up like comet more than $50, or 84 percent--since this time last year. Gasoline prices were a little over $3 a gallon when oil was at $63 barrel. So this rally in gas prices could have a long way to go.

How high? That's what everyone wants to know and that really depends on how much higher oil prices climb. Surging consumption in China and India coupled with OPEC's conviction that they will not pump more oil along with decreasing output from Russia leads many to worry about global supplies meeting growing demand. The lower the dollar falls, the more valuable dollar-denominated oil becomes. And the flow of investment dollars from investors large and small looking for the most profitable asset class continues to prop up oil prices.

A major supply disruption--political attack on an oil rig or pipeline, refinery outage or major storm that hits oil platforms or refineries--could be all that is needed to send oil and gasoline prices into another stratosphere. I hate to be the bearer of bad new, but I just can't see any relief in sight unless this comet that is the price of crude comes crashing down.

Questions? Comments? energysource@cnbc.com