Analysts dish on our pain at the pump

By Thomas V. Bona

BusinessRockford.com

If the dollar rebounds and worldwide demand for oil pulls back, gasoline prices could fall to $3 a gallon by summer’s end, according to several analysts.

But if natural or man-made events — a hurricane or earthquake or war — disrupt international supplies, prices could hit $7 a gallon, although when that might be is harder to predict, some experts say.

Prices hit $4 in Rockford last week, a stunning 30 percent increase in three months. It’s left motorists wondering when they’ll see some relief.

There’s no easy answer. Experts point to a laundry list of unpredictable factors: global demand, global supply, the weakness of the dollar, the effect of speculation on the commodities market.

But they agree that motorists should get used to paying at least $3 a gallon for gasoline around here, and likely closer to $4 for a while.

Short of a major catastrophe, prices could top out at $4 to $5 before falling, said Phil Flynn, an energy analyst for Alaron Trading in Chicago. But if everything goes right, prices could be back to $3 by July 4.

“I don’t think there’s any way (crude oil prices) can go up $2, $3 a day forever,” he said. “We’re already seeing the effect of higher prices on demand. If that continues, that will give the market some time to catch up on supply, and that will bring crude oil down as well.”

Demanding markets
China’s rapidly expanding economy has a voracious appetite for fuel.

Since 2002, the second-largest user of oil has increased its daily consumption by about 50 percent, according to the U.S. Energy Information Administration. It’s expected to increase an additional 5 percent this year.

India also is seeing massive gains as it moves up the oil-consumption list. The world as a whole uses almost 10 percent more oil than it did in 2002.

That’s one reason oil prices have spiked.

“Demand from India and China snuck up on us and caught everybody, including myself, off guard,” said Jim Ritterbusch, president of Ritterbusch & Associates in Galena, an oil-trading advisory firm.

In addition to a booming economy and a sharp rise in demand to fuel its new factories, China is stockpiling diesel to run its generators during the Summer Olympics, Ritterbusch said. Pulling back after the Games could help. But if China keeps increasing its consumption and other Asian nations follow suit, prices will keep going up.

Many countries, especially in Asia, subsidize fuel prices to encourage residents to use more and expand their economies, Flynn said. Some countries actually lifted their subsidies last week because they can’t afford the rising prices.

But it would take bigger steps to really slow demand. The U.S., for example, still uses a quarter of the world’s oil, and its demand hasn’t dropped in years.

“We need to see conservation efforts. We need to see people carpooling and consolidating trips to the grocery store and taking public transportation,” Ritterbusch said. “Not just in the U.S., but around the world.”

Supplying the world
Meanwhile, global oil production has remained flat in the past two years, so demand is outpacing supply.

The U.S. Energy Information Administration reported last week that domestic inventories of crude oil and gasoline dipped.

“That scares people,” said Linda Casey, spokeswoman for Marathon Petroleum Co., which operates several local gas stations and a supply terminal. “They get real concerned, and when something’s scarce, prices go up.”

The tightness of the market makes it “vulnerable to actual and perceived supply disruptions,” the energy agency said. That’s why any threat globally or domestically — Iran cutting production, troubles in Nigeria, conflict in the Middle East, refinery fires, hurricanes damaging infrastructure in the Gulf of Mexico — causes the market to fluctuate wildly.

Dan Arnold, president of Rockford-based gas station chain Road Ranger, thinks this is part of the cyclical nature of the oil industry. He compared it to perceived shortages in the 1970s that caused prices to spike.

“There’s a whole lot of panic and hysteria out there that is somewhat warranted, and yet it’s somewhat uncalled for,” Arnold said. “There is a limit to supply and demand, and it eventually will straighten itself out.”

But proactive steps need to be taken to increase global energy supply, experts say.

For some, the key is pushing alternative energy by either raising government standards or giving companies more incentives.

Others, particularly those in the domestic petroleum industry, said it will also take an increase in North American oil production. They point toward proposed drilling in the Arctic National Wildlife Refuge, mining of Canadian tar sands, and building more U.S. refineries and pipelines as keys.

“If America would go after it with the same zest that we went for the space program in the ’60s, I think the markets will react,” said Bill Fleischli, executive vice president of the Illinois Petroleum Marketers Association/Illinois Association of Convenience Stores. “The markets would stabilize and even retreat a bit.”

Money trouble
The dollar just doesn’t go as far as it used to.

Consumers at the grocery see that. So do domestic-energy traders.

In 2002, a barrel of oil was worth the same in dollars and in euros. Now, a $120 barrel of oil trades for less than 80 euros, the energy agency said.

By some accounts, most of the gas price increase of recent years was caused by the falling value of the dollar.

“Gas is going to be expensive for a while,” Arnold said. “We’re going to compete on a world basis, and our dollar is very, very weak.”

Ritterbusch said the weak dollar also prevents oil producers from increasing their production levels. Oil is traded globally on the dollar, so their revenues don’t go up as fast.

That’s an incentive for producers to hold the line and see prices rise to offset the weaker dollar.

Just as economists disagree on whether the nation is in a recession and when it will recover, oil analysts don’t know when the dollar will rebound. But it won’t fix things overnight.

“We’re going to need to see a sustained strengthening in the dollar, and we’re going to have to see a change in long-term trends for that to have any bite,” Ritterbusch said.

Market speculation
Imagine you could put your money in an account that increased your savings fivefold in five years, an account with seemingly no ceiling. You’d put your money in that account, not the chancy stock market.

That’s why so many investors are pouring money into the oil market. Oil is providing a great rate of return, the same as food and gold are.

Again, the more demand for a product, the higher the price.

Analysts disagree on how much an effect that’s having on the actual price of oil.

“This is driven now by the speculative market,” Fleischli of the petroleum marketers group said. “They’re basing it on the perception that there may not be enough supply for the summer months in the world.”

That raises the price of oil futures — product ordered today for delivery in a couple of months. He thinks there will be a market correction at some point, similar to that of the housing market if not necessarily in scope.

But don’t be so quick to blame speculators, Flynn said. He thinks they’ve moderated the price increases by keeping the market fluid. Basically, they buy and sell oil freely, while others might be more likely to stockpile and hold on to their supplies, further driving prices up.

“If we didn’t have an active speculative market, ... we could see gas lines or shortages,” he said.

Ritterbusch said speculation doesn’t drive the market as much as it follows it. He said investors wouldn’t be buying oil if they didn’t see some fundamental reason for the price to rise.

They may accelerate the increases, analysts say. But if any of the other issues driving oil prices higher turn around, speculators could just as soon accelerate any decreases.

But they’ll only go down so far. We don’t know the ceiling for oil and gas prices, but we probably know the floor.

“It’s not going to be a situation where we’re going to get up to $140 for oil and they drive it down to $70 and it stays there,” Ritterbusch said. “That could take us down to below $110. That doesn’t sound very comforting, but that will be almost $25 below where we are now.”

In other words, $4 for a gallon of gasoline may be temporary. But $3 a gallon isn’t.

Contact staff writer Thomas V. Bona at 815-987-1343 or tbona@rrstar.com.

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