If $4 Gas Is Bad, Just Wait
Market Watch
By Anna Raff and Jessica Resnick-Ault, The Wall Street Journal
May 22, 2008

Judging from the futures markets, shock at the gas pump is bound to get worse. Maybe much worse.

Since the beginning of the year, benchmark oil and gasoline futures on the New York Mercantile Exchange both have increased by more than a third, but the average retail price of gasoline in the U.S. has risen by 22%. That bodes ill for consumers.

higher_gas_prices_ahead (10K) So far, oil refiners and petroleum-product distributors have absorbed much of the increase, but their ability to continue to swallow losses and operate at thin margins is limited. Many analysts consider $4-a-gallon retail gasoline across the U.S. a foregone conclusion this summer driving season, a period of typically peak demand, but those estimates take only current record-high oil prices into account. Thursday, light, sweet crude futures breached $135 a barrel, more than double the price a year ago.

If oil hits $200 a barrel, which is the upper end of Goldman Sach's prediction for prices over the next six months to two years, the gasoline picture changes quite dramatically. At $200 a barrel, crude alone would cost $4.76 a gallon. Add on the costs of refining and distributing as well as taxes, and pump prices could rise to a range of $6 to $7 a gallon.

U.S. drivers haven't radically changed their behavior, and it is unclear at what price it becomes unprofitable for Americans to go about their usual day-to-day activities, said Eric DeGesero, executive vice president of the Fuel Merchants Association of New Jersey.

"Maybe at $6 or $7 a gallon, it becomes less attractive to go to work," Mr. DeGesero said. "We haven't hit that point yet, but we might soon."

Retail gasoline prices have topped $4 a gallon in Alaska, California, Connecticut, Illinois and New York ahead of the Memorial Day holiday weekend, according to the AAA Daily Fuel Gauge Report. Nationwide, gasoline averages $3.831 a gallon.

Consumers have already taken note, with U.S. gasoline demand down 0.6% this year compared with the same period in 2007, according to the Department of Energy.

The erosion in demand is likely to accelerate if gasoline prices shoot above $6, but a radical cutback in consumption will occur only if high prices weaken the U.S. economy further and contribute to increased unemployment.

In regions of the U.S. that have been particularly hard hit by weakness in the housing market and economic instability, the fall in gasoline demand has already outpaced the national average, said Ann Kohler, an energy analyst with New York investment bank Caris & Co.

"There would still be additional hurt if there was further escalation in gasoline pricing, because other parts of the country would become involved," Ms. Kohler said.

Write to Anna Raff at anna.raff@dowjones.com and Jessica Resnick-Ault at jessica.resnick-ault@dowjones.com

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