Market Insider

Why More States May See Gas Prices Above $4


Refining issues and higher crude prices have lit a fire under gasoline prices and could push them above $4 a gallon in more parts of the U.S. in the next few weeks.

Gas Pump
Mark Lennihan

Gasoline has risen 30 cents a gallonin the past month, to a national average of $3.696, according to AAA. In the past week, unleaded regular has risen eight cents a gallon, but in some areas, like California, where a Chevron refinery fire knocked out significant refining capacity, gas prices are rising even faster.

While experts see gasoline prices rising, they do not expect a big spike in the national average because the rising prices also coincide with the end of the summer driving season. (Read More: Gas Prices Set to Rise for Rest of 2012?)

“I think it’s biased to the upside for the next three weeks, but it’s biased to the downside after that,” OPIS oil analyst Tom Kloza said. “I’m not talking about going back to the April highs of $3.93 (nationally). I’m talking about a few sore spots, like California, Chicago, and New York. It’s not going to be the apocalyptic move many people fear…first of all, you have a very high price of gasoline which motivates refiners to produce as much as they can.”

The spike in corn prices to record levelsabove $8 a bushel is also contributing to the rise in gasoline prices. Ethanol, which a component of gasoline, is made from corn. On Friday, the government severely downgraded its forecast for the U.S. corn crop, based on its field observations. It now expects to see the lowest yielding crop in 17 years.

Oil prices have , particularly the international benchmark, Brent crude, which is the type of gasoline favored by east coast refineries. (Track energy prices here)

“Brent is up more than 9 percent since the beginning of August and was trading Monday above $114. One factor affecting the price of Brent is the lowered projection for North Sea output, forecast to be its lowest level ever in September. WTI is also moving higher, up nearly 6 percent this month to a high above $94 a barrel Monday.

“The price of crude is one-third the driver of this move that has taken place since June 28” when gasoline prices bottomed, said Kloza. “Two-thirds has been refinery glitches and events. The one thing you can count out is demand. Demand has been poor.”

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The latest refinery fiasco was the fire at Chevron’s Richmond, Calif. refinery, the state’s second largest. A fire last Monday resulted in the . IIR Energy, an industry intelligence group, said that the crude distillation unit at the refinery could be shut down for four to six months. Chevron Monday said the crude oil unit was still shut down but that other parts of the plant are operating. Refinery outages and a ruptured pipeline in the Midwest have also added to the surge in prices.

The average price of a gallon of gasoline in California is $4.08, and in Illinois, it’s $4.03, according to AAA. Spot prices in California immediately rose $0.25 to $0.35 a gallon after the Richmond fire.

Oil prices have risen as traders have become increasingly concerned about instability in Syria and tensions between Israel and Iran. (Read More: Oil-Price Volatility Bedevils Business and Consumers)

“It’s mostly geopolitics and the Brent North Sea production issues,” said John Kilduff of Again Capital. Kilduff said he believes gasoline is close to making a top. “Corn is backing off. Crude prices are struggling here,” he said.

About 42 percent of the much diminished corn crop this year is expected to go to ethanol, according to the U.S. Department of Agriculture. The USDA Friday said it now sees U.S. ethanol use at 4.5 billion bushels, of the total expected 10.8 billion bushel crop this year. Ethanol is the biggest user of corn, followed by livestock, which is expected to consumer 4.1 billion bushels.

Andrew Lipow, president of Lipow Oil Associates, said ethanol probably added about six cents a gallon to gas prices since the middle of June. In that time, ethanol futures have gone from about $2 a gallon to around $2.60. Ten percent of gasoline is ethanol, and the rise in corn prices has stirred speculation that the Environmental Protection Agency might be encouraged to temporarily drop the mandate.

But ethanol at its lows had helped pull down gasoline prices earlier in the year. Ethanol is still cheaper than RBOB gasoline futures, which were trading at $3 a gallon Monday. Speculation that ethanol use will be limited helped send ethanol lower, after it hit a high of $2.72 a gallon in mid-July.

But Kloza doesn’t believe the use of ethanol will be curbed, and the current talk about it is political posturing. “If they suspended the mandate, prices would initially skyrocket,” he said. “You would have chaos because the infrastructure in the petroleum gasoline motor fuel refining industry has transitioned to 10 percent ethanol as part of the gas. You couldn’t just flip a switch and ask all these refiners and suppliers to get to 87 octane.

“Refiners have changed the kind of gas they make. They make a low octane gas because they know ethanol is going to be added,” Kloza said.

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