Consumer Nation

Gas Prices Unlikely to Spike Despite Growing Gulf Oil Spill


Don't panic about gasoline prices yet.

Gas Pump
Mark Lennihan

Even though the oil gushing from a mile-deep well in the Gulf of Mexico shows no sign of abating, oil analysts do not expect the disaster to drive up prices at the gas pump yet.

BP, the operator of the well, the U.S. government and others are caught in a race against time, hoping to stop the flow of oil that is feeding an oil slick in the Gulf.

The ever-growing oil spill threatens the wildlife in the area and the livelihoods of area residents who fish or cater to tourists.

But for the moment, the shipping lanes remain open and passable, and that is key to keeping gasoline prices from spiking as a result of this event. Only a few oil rigs in the Gulf have been shut and the refineries along the coast haven't been affected.

"There are shoes yet to drop," said John Kilduff, co-CIO at Round Earth Capital. Still, he's being "reasonably cautious" about his expectations for oil prices.

Kilduff expects that oil prices have shifted to the upper-end of their recent trading range—at the moment around $86 a barrel—as a result of the potential for this disaster to impact supplies of crude oil.

However, Kilduff doesn't expect oil prices to move much higher unless ships are prevented from traveling to ports in the Gulf region. If that occurs, Kilduff said, oil prices will "spike up into the nineties."

The Gulf ports are important ones for the oil industry. The Louisiana Offshore Oil Port, for example, handles about 13 percent of U.S. petroleum imports. If the oil spill worsens, the Coast Guard could shut some shipping lines for safety reasons.

In the short term, supplies of both crude oil and refined gasoline are healthy enough levels to cushion the blow of a brief disruption in shipping to the Gulf ports.

Still, some oil traders appear to be betting that this situation will continue for some time—as may well be the case—and have pushed the bidding on oil contracts for crude oil scheduled for delivery several months from now into the nineties already.

Oil prices are at "already inflated levels," said Fadel Gheit, an oil analyst at Oppenheimer & Co. "The markets are taking this with a grain of salt," he said.

According to AAA auto club spokesman Troy Green, oil has been trading more on "investor mood and sentiment" rather than the fundamentals of the oil demand.

The leaking well was exploratory, and so it is not affecting market expectations for oil supplies, Green said.

There also should be an important distinction made between this event and Hurricane Katrina, which interrupted refinery production in the region.

Right now refinery production is running at historically low levels of utilization, which means it would be very easy for refineries to shift into a higher gear and refine more product if needed to compensate for any potential disruption in oil supplies.

This is all good news for drivers, especially because Memorial Day is only a few weeks away. That's when demand for gasoline typically begins to rise as consumer begin taking longer jaunts in their cars.

Last year, the weak economy dampened demand for gasoline as consumers stayed closer to home. This year, with the economy appearing to be coming back, it's unclear how much consumers will drive. AAA will be releasing their forecast later this month, Green said.

At the moment, many analysts suspect gasoline prices this summer will average around $3 a gallon, which is slightly higher than the current national average of about $2.90 a gallon.

There is concern that if prices soar much higher than $3 a gallon, it will slow the economic recovery. And that's why, all eyes will be on the Gulf shipping channels, hoping that they remain navigable.

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