Gasoline and Diesel Prices Will Spike

Retreating gasoline prices this week are sure to reverse course as the price of oil climbs higher.

By Jim Ostroff, Associate Editor, The Kiplinger Letter

July 20, 2007

Get ready for another gasoline price spike in coming weeks as tensions abroad escalate oil supply worries. The national average will climb to $3.15 a gallon, just shy of the mark reached in May, before dropping to $2.85 in Sept. By year end it’ll hit $2.70 a gallon.

The culprit? Crude oil. Its price is will move sharply higher after remaining fairly moderate in the $50- to $60-a-barrel range from January through late spring. Crude oil prices, now about $74.50, could well rise another $5 per barrel by end of the month. For the year as a whole, a barrel of oil should average $63, about $3 less than the 2006 average.

"Oil prices are rising because of concern that supplies are vulnerable with reduced oil production in Iraq, Nigeria, Norway, and the feeling that during this hurricane season, at least one big storm will threaten production in the Gulf of Mexico," says John Kilduff, senior vice president with Man Financial Ltd., a commodities trading firm.

But the price spike will be tempered by growing U.S. gasoline inventories as well as by reports that several refineries are returning to service. "Refiners bought heavily at the beginning of this year when oil was priced around $50 a barrel, but ended up with a near glut because so many refineries were out of service," says Phil Flynn, a vice president with Alaron Trading Corp., a commodities trading firm. "Consequently, refiners have been able to dial down their usual summertime oil import spree, buying less of the $70-plus a barrel of oil than they would otherwise."

Diesel fuel prices are also going up in the next few weeks from an average of $2.95 a gallon to $3.10 or so before easing in September. Diesel's prices are being buoyed, not only by rising oil costs, but also by robust demand in a variety of sectors, such as trucking and construction that peaks during the summer months.

All bets are off if a big hurricane hits the Gulf of Mexico. Gasoline would soar to $4 a gallon or even higher, and stay there for weeks in the event of storm damage to fuel refineries in the South and oil pumping facilities in the gulf. The nation's petroleum reserve wouldn't be much help if refinery facilities were out of commission. And, gasoline imports wouldn't be able to fill the gap, since virtually all foreign gasoline makers are operating at capacity now.

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