Motorists got a barrelful of bad news Wednesday when oil prices soared to a new high, gasoline set another record in California and the Department of Energy warned that pump prices could remain above $2 a gallon through much of next year.
The latest round of woe was spurred by a spate of refinery problems in the U.S., increasing instability in the Middle East and a growing imbalance between demand for petroleum, which is rising rapidly, and production capacity, which isn’t.
After briefly touching $65 a barrel, the U.S. benchmark crude closed at a record $64.90, up $1.83, or almost 3% on the New York Mercantile Exchange. That was up 46% from a year ago and boded ill for motorists already paying sky-high prices for gasoline — which also hit a new national record Wednesday.
“It is scary. We are in limbo,” said Yolanda Chacon, a Lancaster resident who paid $51.97 to fill her minivan Wednesday afternoon at an Arco station in Echo Park. “It feels like it’s going on and on and on,” said Chacon, who sometimes gases up twice a day while ferrying her husband and daughter to and from their jobs in Los Angeles and Santa Clarita.
“I’m really spreading it thin,” she said.
Nationally, pump prices rose an average of 2.2 cents a gallon to $2.376 on Wednesday, according to AAA — 27% above a year ago. In Southern California, where gasoline prices typically run well above the national norm, a gallon of regular hit a record $2.676 on Wednesday, up almost 13 cents from a month ago and 26% higher than the year-ago price of $2.120. Diesel fuel prices also set new records in California and around the country.
The latest jump in crude prices — which have climbed 14% in the last three weeks — killed a Wednesday morning rally on Wall Street as investors fretted that high energy prices could throttle the U.S. economy.
Economists, however, noted that oil would need to rise to more than $85 a barrel to top the inflation-adjusted peak hit in 1980. That, and the fact that the United States uses fuel more efficiently today, helps explain why the economy has been able to absorb the surge in energy costs.
“We as a nation are not as oil dependant as we were back then,” said Christopher Thornberg, senior economist at the UCLA Anderson Forecast.
Consumers in Europe and Japan have been paying close to $4 a gallon for gasoline for years, he added. “To some extent, people are going to have to suck it up and realize this is a new reality.”
The Bush administration said this week that although high energy prices were taking a toll on consumers, they were not slowing the overall economy.
“It’s been a resilient economy, it’s responded well and job creation has proceeded apace,” said Ben Bernanke, chairman of the White House Council of Economic Advisors.
That’s little relief to Eric Valdez, though. He has a job, a car and a place to live, but finds that the rising cost of fuel for the daily commute between his home in Chatsworth and his job in Glendale is gobbling up what’s left of his paycheck after the rest of the bills are paid.
“I’m frustrated,” the 21-year-old jewelry store employee said. “The amount of money I make plus the cost of the commute to work and the cost of living means I’m just barely breaking even.”
Some analysts and economists believe that kind of pain will have to be shared by much of the population before oil prices start dropping.
The high prices for both crude oil and refined petroleum products such as gasoline, heating oil and jet fuel show “we haven’t hit the price yet where we have significantly curtailed demand,” said oil analyst John Snell, a principal at Chicago-based Risk Management Inc., an energy cost advisor to industry.
Gasoline consumption is up 1.4% from this same time last year, the Energy Department reported. And with the national thirst for fuel running at a record pace, refineries that have been working overtime to keep up have begun breaking down, shaving production of gasoline and diesel fuel at the peak of the summer travel period.
“It seems every day there’s a story of a refinery with a problem,” said Rick Mueller, senior oil analyst at Energy Security Analysis Inc. in Wakefield, Mass.
“Chevron in El Segundo, BP in Texas, Exxon Mobil in Illinois…. Speculators are wondering if we aren’t pushing the refineries too hard and are looking at more outages,” Mueller said.
The narrow margin is beginning to show up in the nation’s gasoline stockpiles, which are down 2.5% compared with the week ended Aug. 6, 2004, according to government figures released Wednesday.
That helped boost the price of gasoline for September delivery by 7.39 cents to $1.896 a gallon after briefly hitting a record $1.899 in New York futures trading. The price one year ago was $1.10.
For traders, the decline in gasoline stockpiles took precedence over a rise in crude inventories, which gained 2.8 million barrels to 320.8 million barrels last week, according to the Energy Department. Many analysts say the market no longer pays heed to crude oil inventories and instead frets about energy security issues.
“At least $15 of the price of a barrel is psychological, because of traders’ worry about the future and stability of supplies from the Middle East,” said Loren Beard, fuel supplies specialist for automaker Chrysler Group in Auburn Hills, Mich.
“People in the industry that I regularly talk to tell me we will see prices at $60 a barrel and higher just as long as things remain unstable,” Beard said, referring to recent terrorist threats against Saudi Arabia, the world’s leading oil exporter.
Additionally, speculators “all are looking at the fourth quarter now, not at today’s situation,” Mueller said. “A cold winter could put real pressure on the market to meet demand” for heating oil, he said. That would keep crude prices high because a big jump in demand for heating oil would offset seasonal declines in the demand for gasoline.
Indeed, the federal Energy Information Administration, citing government forecasts released this week, said Wednesday that pump prices were expected to average above $2.10 a gallon nationwide at least through the end of next year, assuming oil — which accounts for half the price of a gallon of gas — stays above $55 a barrel.
In addition to the concerns over heating oil demand, the agency pointed out that the government was forecasting an active hurricane season this year, which could disrupt both oil production in the Gulf of Mexico and gasoline refining along the Gulf Coast.
“There’s just no reason to expect this market will put itself into reverse,” said Ben Brockwell, editor of the Oil Price Information Service.