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Gas prices have risen for seven straight weeks, tacking on $0.36
per gallon to the national average since July 2.
The national average is now $3.710 for a gallon of regular gas,
according to the
AAA Fuel Gauge report
, up from $3.587 a year ago. That means 2012 is on track to be the
costliest year ever at the pump.
Don't expect a reprieve from high gas prices anytime soon,
either. Three factors will keep gas prices soaring over the next
few months. They are:
- High oil prices
- Low refining capacity
- Bad weather
Let's take a quick look at each…
Oil Prices on the Rise
Of all the factors that influence the price of gasoline, oil
prices have the most direct effect. And right now, oil prices are
trending higher.
Oil prices have increased 7% so far this month, topping $95 a
barrel for the first time since early May.
A significant decline in U.S. inventories was a big reason for
that surge. Stockpiles fell by 3.7 million barrels in the week
ended August 11, marking the third-largest decline in as many
weeks. Analysts predicted a decline of 1.5 million barrels,
according to Platts.
Better-than-expected retail sales and housing starts provided
additional tailwinds, as well.
Meanwhile, things got nastier overseas, as political tensions
flared up in the Middle East.
Last week, the Supreme Leader of Iran, Ali Khamenei, said that
Israel would "disappear from the landscape of geography," and its
land will be returned to the Palestinians. While Israeli officials
threatened to strike Iran's nuclear facilities.
The heated rhetoric, coupled with tighter U.S. sanctions, has
made the Middle East particularly volatile. That's bullish for oil
prices, since this region was responsible for 33% of global oil
production last year according to
BP Plc's
(
BP
) Statistical Review of World Energy. It held 79% of proved
reserves, the report said.
So as long as tensions in the Middle East remain high, oil
prices will, too.
Refineries Burned Out
Another thing keeping gas prices high is the dearth of refining
capacity in the United States.
U.S. refining capacity was already stretched thin, since slack
demand and high input costs squeezed margins and forced the sale or
closure of facilities.
For instance, last September, Sunoco - the second-largest
independent refiner by capacity - announced plans to exit the
refinery business. Sunoco, which started refining back in 1895,
said it's lost $1 billion on refineries over the last three
years.
Other refineries have packed it in, as well, leading to a 1.5
million-barrel drop in daily refining capacity over the past few
years.
And the industry suffered another blow earlier this month when a
fire broke out at a
Chevron
(NYSE:
CVX
) refinery in Richmond, California. The refinery is one of the
nation's largest, and produces 16% of the west coast's daily
gasoline supply.
The fire was especially damaging because it occurred in a unit
that makes a specialized blend of cleaner burning gasoline that
satisfies air quality laws in California, Oregon and
Washington.
The unit might be shut down for about six months. The average
price of a gallon of gasoline in California already stands at
$4.08.
Meanwhile, East Coast refineries don't have as much access to
the cheaper, West Texas Intermediate (
WTI
) crude coming out of the Midwest. That means they have to rely
more on overseas imports, which are tied to more expensive Brent
crude. Brent crude is currently trading above $116 per barrel
compared to $95 for WTI.
Climate Catastrophe
As if this all wasn't bad enough, we still have the weather to
worry about.
The hottest U.S. summer on record led to a massive drought
across the Midwest, sending corn prices to record levels above $8 a
bushel. This impacts gas prices because refineries are required by
law to mix ethanol into gasoline.
Based on its field observations, the U.S. Department of
Agriculture has downgraded its forecast for the U.S. corn crop. It
now expects to see the lowest-yielding crop in 17 years.
In all, about 42% of the diminished corn crop this year is
expected to go to ethanol.
As a result, Andrew Lipow, President of Lipow Oil Associates,
told
CNBC
that ethanol probably added about $0.06 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.
Furthermore, this year's hurricane season is expected to be
busier than normal, due to higher-than-average ocean temperatures.
That could damage - or temporarily halt - oilrigs operating in the
Gulf of Mexico, further jeopardizing supplies.
A normal Atlantic season produces about a dozen named storms.
But this year, we're likely to see 12 to 17 tropical storms alone,
with as many as five to eight hurricanes. That would mimic what the
Atlantic experienced last year, which was one of the busiest
seasons on record with 19 named storm systems.
The Atlantic has already seen tropical storms Alberto, Beryl,
Debbie and Florence - and hurricanes Chris and Ernesto.
Even if the storms don't actually disrupt oil drilling in the
Gulf, the mere threat of these storms will drive oil prices higher
as they approach.
Bottom line: With supply already at risk and refinery capacity
on the decline, don't expect the traditional drop in gas prices
that usually accompanies the fall season.
