Gasoline prices could break the $4 barrier in some places this summer despite falling demand in the United States, the world’s largest oil consumer, the government’s energy forecasting agency said yesterday.
Diesel prices already have soared past $4 a gallon, and prices for regular gas are verging on $4 in high-cost states like California. By Memorial Day, more regions will see spikes above $4, the Energy Information Administration (EIA) said, although the average price nationwide will probably peak around $3.60 in May or June.
The U.S. has rarely had to contend with record gas prices at a time when the economy is in recession. Demand for fuel already is falling at a 1 percent rate because of an economic contraction in the first half of the year, the agency said, and that will continue through the summer.
In the past, such a slump in the U.S. would have sufficed to pull down prices. The U.S. uses about a quarter of the world’s oil. But strong global demand for energy has kept gas prices stubbornly high, posing a risk of prolonging and deepening the first-half recession that both the energy agency and the Federal Reserve predicted in separate reports yesterday.
“These high energy prices will take a toll on everything,” said Michael Rose, an energy trader at Angus Jackson Inc. “The longer we stay up here, the more damage it does to the economy.”
Consumers have been hit the hardest. Confidence and spending have plunged this year, with consumers often citing the high cost of gas as their reason for cutting back in other areas. Retail sales have barely grown all year as the high cost of fuel and food has set back consumer purchasing power, causing inflation to outstrip the average growth in wages.
“The consumer is trying to maintain consumption, but failing,” said Lee Olver, economist at SMH Capital. “The falloff in consumer spending has slowed the economy to near zero growth.”
High fuel prices are causing a wide path of destruction across the economy. Truckers are striking because they are barely able to make ends meet, some airlines are starting to buckle under pressure from high jet fuel prices, and energy-intensive companies like Alcoa are reporting financial difficulties.
Gas prices have remained stubbornly high despite the U.S. economic troubles because demand outside the U.S. remains robust, particularly in developing countries that have not been hit by the mortgage and housing crisis emanating from the U.S.
Growing fuel use in China, India, Russia and the Middle East is pushing up demand for oil worldwide by 1.2 million barrels this year, while U.S. petroleum demand declines by 210,000 barrels, the EIA said. Supplies of oil worldwide are barely growing fast enough to keep up with growth in demand, it said.
The strong global demand for fuel prompted the energy agency to project an average price for premium crude above $100 a barrel this year for the first time.
The projection of $4 gas prices in the U.S. is based on the assumption that premium crude this summer averages $103 a barrel. The highest-quality crude is needed to make summer fuel blends that meet strict environmental requirements. Yesterday, premium crude ended the trading day at $108.70 in New York.
“Oil prices significantly above the projected level would greatly increase the prospects for $4 per gallon gasoline in some parts of the country,” the EIA said.
The prediction of $4 gas comes as little surprise to many U.S. drivers, who have been anticipating the development all year.
“Do I hear a bid for $5?” said motorist Jim Graham of Akron, Ohio, upon learning of the agency’s forecast.
“We need to get the prices back down, or no one is going to be able to live,” said Daniel Tautges of Wisconsin.
While the government forecaster foresees high fuel prices as a permanent fixture of the world economy, many private forecasters say they are befuddled by the relentless rise in prices which they think are defying the laws of economics, particularly with slumping demand in the U.S.
Many private forecasters attribute high prices to manipulation by the Organization of Petroleum Exporting Countries and speculation in the oil market, which reached record levels in the first quarter.
Joe Stanislaw, an independent energy adviser to Deloitte & Touche, calculates that the physical realities of supply and demand point to an oil price of $50 a barrel. The possibility of supply disruptions due to political strife in Iran, Venezuela and Nigeria might add another $10. Anything above that, he argues, is due to oil’s popularity as an investment.
But the EIA said that oil prices would still be high — about $90 — even if speculators were barred from the oil market.
“Market speculation could be adding as much as 10 percent to crude oil costs and may not have peaked yet,” Guy Caruso, the head of the EIA, told the Senate Energy and Natural Resources Committee last week.
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