Why US pump prices are on the rise – once again

Some refineries face outages. Prices could rise to $3 a gallon by Memorial Day.

Memorial Day is almost seven weeks away, but consumers are already paying prices at the pump usually associated with the peak of summer.

In California, motorists are forking over an average of $3.25 a gallon. Nationally, the average price has hit $2.87 a gallon. There are even reports of isolated shortages, particularly in the Southeast. Refiners' profit margins on gasoline are the biggest they've been since hurricane Katrina.

According to energy specialists, the bad news at the pump stems from multiple problems at refineries: Fires and other outages – some even attributed to animals – have resulted in curtailed production.

"It just keeps piling on and piling on," says John Kilduff, a senior vice president at Fimat USA, an energy trading company in New York. "It looks like the national average will hit $3 a gallon by Memorial Day."

The rising costs serve as a reminder that the nation's gasoline supply network does not have much stretch. To satisfy demand, the United States is relying on gasoline imports, which are subject to shifts elsewhere in the global thirst for energy. Even so, US demand for gasoline only continues to rise, despite the higher prices of the past several years.

"When you look at the data, you see some refinery capacity increases, but demand increases have resulted in tighter markets," says John Felmy, chief economist for the American Petroleum Institute in Washington.

Higher cost is a spring occurrence

It's not unusual for gasoline prices to rise in the spring as refiners shift over to the summer grade of gasoline, which is more expensive to produce. The fact that it happens so regularly prompted the National Association of Convenience Stores (NACS) to issue a gasoline price kit, or explainer, on Feb. 2, Groundhog Day.

"It's like the movie: Every year, we have the same thing happen over and over again," says Jeff Lenard, an NACS spokesman.

But this year, as Mr. Lenard notes, the price rise since February – about 61 cents a gallon – has been the fastest since 2000.

Part of the run-up has been the fairly sharp rebound in crude-oil prices. The week of Jan. 15, they had dropped to $50.51 a barrel, but today, the price is about $64.59 a barrel. The increase has added 37 cents a gallon to the price at the pump.

"Crude rose when the Iranians were holding the British sailors," says Neil Gamson, an analyst at the Energy Information Administration.

The cold February and March didn't help either, as oil companies had to continue to produce home heating oil. "They may not have shifted over to produce gasoline as much," says Mr. Gamson.

In some parts of the country, gasoline shortages – that is, strains on supply that can send gas stations scrambling – are becoming an issue. The Tennessee Oil Marketers Association reports that gasoline shortages in the state are not unusual. "We're at the end of the pipeline," says Marylee Booth, executive director. "We don't get outages, but we do get shortages."

The Denver area has also seen shortages this spring, reports Roy Turner, executive director of the Colorado Petroleum Marketers and Convenience Store Association. The supply problems cropped up after a fire in February at Valero Energy's McKee Refinery in Sunray, Texas. The refinery normally processes about 170,000 barrels of oil per day, with a significant amount going to the Denver area.

"A number of Valero stations have been out of product, and other refiners have tried to pick up and help out. But the supply has not kept up with demand," says Mr. Turner.

Valero hopes to restart the refinery by mid-April, according to Bill Day, communications manager for Valero.

There have also been several refinery incidents that can best be described as bizarre. "A month ago, a raccoon and a possum, separately, took out two electrical substations, and two refineries had to shut down," says Mr. Felmy. "They weren't out for long, but in California, any disruption causes problems. And because the state has its own blend of gasoline, there is very little you can get elsewhere."

Impact on gasoline demand

The higher prices may be starting to have some impact on consumer behavior. Last year, the rate of increase in demand for gasoline was one of the weakest in years, says Mark Routt, an energy analyst at Energy Security Analysis in Wakefield, Mass. That trend is continuing, he says.

With the price of crude oil off its highs, the price of gasoline will come down – eventually, says Mr. Routt. "The good news is that there has been less of a price rise at retail than would be suggested by the crude price rise," he says. "But the bad news is that as prices drop, it may take longer for them to come down at the retail level."