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Why Gas Prices Aren't Likely to Hit $5 This Summer

Tuesday, 6 Mar 2012 | 10:41 AM ET

Predictions that gas prices will rise to $5 a gallon or higher by Memorial Day are running rampant.

Gas prices over four and five dollars are posted on a Shell station on Olympic Boulevard in Los Angeles, California.
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Gas prices over four and five dollars are posted on a Shell station on Olympic Boulevard in Los Angeles, California.

Nationally, the average price for a gallon of regular gasoline has jumped nearly 30 cents in the past month to $3.76 a gallon, according to AAA.

A spike to $5 a gallon for the national average by the summer would mean that the rise in gas prices over the next few months would have to exceed the 8 percent climb we've seen over the past four weeks.

Is it possible? Perhaps. Inevitable? Not really.

"There's nothing inevitable about it," says IHS chief economist Nariman Behravesh, speaking on the sidelines of the CERAWeek Energy Conference in Houston. "To a large extent it depends on what happens in the Middle East."

If tensions between the West and Iran escalate further and result in a supply disruption from OPEC's second largest oil producer, then oil prices (Brent crude futures , specifically) could spike $30 to $40, Behravesh says, and gas prices could hit $5.

"But that's about a 20 percent scenario," he says. "The most likely scenario is that we get to $4.25 a gallon in the peak driving season."

Prices are already at $4.25 a gallon or higher in some parts of the country.

The statewide average price for a gallon of regular gasoline in Alaska, California and Hawaii has topped the $4 mark. Gas prices in Connecticut, New York and Washington, DC are almost there too.

"The most likely scenario is that we get to $4.25 a gallon in the peak driving season."" -IHS Chief Economist, Nariman Behravesh

Some stations in the New York City area are charging nearly $5 a gallon for premium gas. Some Florida drivers are reportedly shelling out almost $6 a gallon.

But at under $3.25 a gallon, gas prices in Colorado, Wyoming and other mid-continent states helping to reign in the national average.

Plus, gasoline consumption continues to fall at a dramatic pace. Last week, the four-week average for U.S. retail gasoline demand posted a year-over-year decline for the 49th straight week, according to a report from MasterCard SpendingPulse, falling nearly 6 percent compared to the same period in 2011.

Even former Shell CEO John Hofmeister, who has forecast gas prices will hit $5 by the end of the year, has qualified his assertion, saying there's only a "better than 50 percent chance" of gas prices hitting that mark.

In the media frenzy over the call for $5 gasoline by some forecasters, there is often little explanation about whether this refers to certain locales or the average price nationally. It's a distinction that should be made in order to assess the true impact on the nation's economic recovery.

"The bad news from oil and gasoline prices is not yet bad enough to drive the economy back into recession — and it has probably been outweighed by the stream of other good news, for example, from the labor market and from auto sales," according to a report by IHS economists.

But if there is a serious oil supply disruption in the Middle East and Brent crude prices top $150 a barrel, pushing the national average for gasoline prices to $5, that's a different scenario, say IHS economists. "We would be staring recession in the face," they say. "But we are not near that point now."

Follow Sharon Epperson on Twitter: @sharon_epperson

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