Gas Prices

Attorneys General from more than 30 states are investigating the underlying cause for sudden and dramatic increases in gasoline prices across the country.

The multi-state probe will focus on the factors that generated the rapid escalation in gasoline prices in days following Hurricane Katrina.

"Hurricane Katrina was an event totally outside human control," Pennsylvania Attorney General Tom Corbett said. "We want to determine if storm-related factors were the only things responsible for this sudden and dramatic jump of prices at the gas pump."

California Attorney General Bill Lockyer announced he will subpoena records from refiners and probe the pricing practices of gas station owners in his state.

Hurricane Katrina has broken families, devastated communities and destroyed lives, said Lockyer. Its during times such as this that its most important we pull together, act with one heart, and rebuild with a sense of community. To unjustly profit from tragedy is unconscionable. I hope this investigation does not find that such greed has afflicted oil companies and gas station operators in California.

In Florida, Attorney General Charlie Crist has sent teams of investigators and sworn law enforcement personnel from his office to locations throughout the state to look into complaints of price gouging on the price of gasoline.

Crist said investigators will be looking to determine whether the rapid rise of gas prices meets the legal definition of gouging, and vowed to prosecute any violations of the law.

As of 1:00 p.m. Friday, the Attorney General's toll-free consumer hotline had received 1,050 complaints about skyrocketing gas prices in the days since Hurricane Katrina ravaged the Gulf Coast.

"When we hear of 75- to 90-cent price spikes within two days, or reports that surcharges are being tacked onto consumers' fuel costs, then it is our duty to investigate," said Crist. "Floridians understood that damage from Hurricane Katrina would lead to some disruptions in fuel supply and some cost increases, but these spikes lead to legitimate questions that must be answered. Gouging will not be tolerated."

Alabamas AG, Troy King, said What we have seen in the last few days is a crisis unfolding throughout America and particularly in the Southeast -- on top of the terrible natural disaster of Hurricane Katrina -- with gas prices rocketing to such a degree as to create serious allegations of price gouging."

Other Attorneys General and I are committed to getting clear and understandable answers about why gas prices have risen so rapidly and dramatically, and if the law is being violated, we will take action," said King.

Gas prices have spiraled to more than $3.00 per gallon across much of the country since Hurricane Katrina smashed into the Gulf Coast earlier this week.

When the price of gasoline goes down, as it has since August, consumers typically don't question why. They just fill up and consider themselves lucky for now, waiting for the inevitable price spike.

A month ago the national average price of self-serve regular was $3.40, which was down significantly from the month before. But today the average price is below $3.20 a gallon, with motorists paying well below $3 in a handful of states, according to AAA.

It provides a nice break for consumers heading into the holiday season, but can it last? It just might.

In an exclusive this week, Reuters reported that Saudi Arabian oil officials have privately told industry colleagues they would be comfortable with lower oil prices for an extended period of time.

For years the world price of oil has hovered north of $100 a barrel. The Saudis reportedly said they wouldn't mind if the price continued to fall, to between $80 and $90 a barrel.

2 year respite?

There are many factors that affect the price of gasoline but the price of oil is a big one. If oil sold between $80 and $90 a barrel for an extended period – and the Saudis are reportedly talking about 2 years – then the price of gasoline should remain at present levels, or even drift lower.

Why would Saudi Arabia, which depends on its oil revenue for nearly all of its income, so willingly accept lower prices? Do they finally feel sorry for U.S. consumers? Hardly.

Because Saudi Arabia is so dependent on oil revenue it has become extremely worried about the shale oil revolution in the U.S., that has dramatically increased domestic production and made the U.S. less reliant on foreign sources. The Saudis see this as a significant long-term threat.

But extracting oil from shale is an expensive process. As long as the price of oil has remained over $100 a barrel, U.S. oil production has been highly profitable. If the price falls below $90, however, it cuts into shale oil profit margins.

There will be less money for research and development. In short, it's a squeeze play.

According to Reuters, the Saudis appear willing to sacrifice short-term profits for a long-term strategy to weaken a competitor. Whether it works remains to be seen but it suggests how potent a force the Saudis consider U.S. shale.

Speculators find oil less attractive

In the meantime, U.S. consumers stand to benefit. Once it becomes clear that the price of oil is on the decline, there will be less hedge fund money in the oil futures market, money that in the past has tended to drive up the price.

But won't rising global economic activity increase demand for oil and drive up the price? That was the reason we were given for oil's price surge in the mid 2000s.

It's a different story now, with economic activity slowing world-wide, especially in Europe. The supply and demand factor seems to be favoring the U.S. consumer, at least for now.

Finally, U.S. motorists are benefiting from a strong dollar. The U.S. currency rose sharply in the third quarter and is still gaining strength against other currencies. Since oil is priced in dollars, it takes fewer dollars to buy the same quantity of oil as it did a year ago.

None of these appear to be systemic changes but neither do they appear to be short-term trends. The end result is that filling up might not be quite as painful for some time to come.

In most areas of the country gasoline prices have started to drift lower again after rising during most of January and February. It's a pattern that tends to repeat itself every year.

But why? And why this year, when crude oil prices have remained at multi-year lows?

There are two main reasons and both, at least indirectly, are the result of U.S. government policies.

During February, U.S. oil refineries switch over to producing a summer blend of gasoline, which costs more to refine than the grade of gasoline used during the winter months. According to Popular Mechanics, winter gas is cheaper to produce but worse for the environment.

There is another complicating factor. Because of overlapping state and federal regulations, U.S. refiners must blend about 20 different grades of gasoline to meet these regulations.

Smog prevention

The regulations were put in place to control volatile organic compounds, known as VOCs. When fuel has more VOCs during hot weather these compounds are more likely to produce smog.

The switch-over process can also produce added costs for consumers. That's because it normally reduces a refinery's gasoline output temporarily. That smaller output reduces the nation's stockpile for gasoline –again, only on a temporary basis.

But because gasoline – like oil – is a commodity sold in a market, its price will fluctuate, based on what market traders expect the cost to be in the future. Patrick DeHaan, senior analyst as Gas Buddy, a company that tracks retail gasoline prices nationwide, says news of a refinery problem anywhere during the winter can send prices higher.

“Unfortunately motorists are stuck paying the price traders are buying at,” DeHaan told ConsumerAffairs. “A refinery kink develops and traders are forced to increase their bids. It's unfortunate that motorists are on this wild rise because, essentially, there's a declining number of refineries.

Fewer refineries

That's another contributing factor to volatile gasoline prices – there are fewer refineries in the U.S. turning crude oil into gasoline. DeHaan says just two decades ago the U.S. had 100 more refineries than it does now.

“They were smaller in size and more spread out, which is part of the reason why they closed,” DeHaan said. “Not to say the Clean Air Act is bad but some smaller refiners decided it wasn't worth the cost of compliance with some of these air pollution requirements that had been placed on them by the EPA and instead of installing controls they've closed.

As a result the U.S. now relies on fewer but larger refineries. That, says DeHaan, makes consumers more vulnerable to price volatility.

“When there is an event at one of these refineries it is more disruptive of the flow of gasoline to the pump,” he said.

Sen. Bob Corker (R-TN) and Sen. Chris Murphy (D-CT) are winning praise for their bold proposal in an election year. But chances are none of that praise is coming from the growing number of consumers who struggle to make ends meet.

The average price of self-serve regular these days is $3.68 a gallon, according to the AAA Fuel Gauge Survey. It's nearly a dime more than consumers were paying a year ago and 37 cents higher than at the start of the year.

Consumers aren't exactly getting raises at work, so another increase in gas prices – 6 cents a year for 2 years – is going to make a dent in the wallet. So the question has to be asked: Are Corker and Murphy out of their minds?

Highway fund running out of money

The two lawmakers make what they say is a rational argument for the tax hike. The gasoline tax revenue goes into a fund to pay for highway construction and maintenance and they point out the fund is nearly broke.

The gasoline tax – 18.5 cents a gallon – hasn't been raised since 1993. Looked at that way, perhaps it isn't unreasonable to conclude that the tax should be raised to cover the cost of the roads that motorists use.

What seems to have been overlooked, however, is the extremely regressive nature of the gasoline tax and what raising it could do to consumers – and the economy.

High income drivers will have no trouble absorbing a higher price for gasoline. On the other hand, it's going to be a problem for a single mom who hasn't had a raise in 4 years. Could there be some way to cushion the blow for her?

Budgetary footwork

In an effort to prevent the tax increase from being seen as a tax increase, Corker and Murphy propose to restore some unnamed tax breaks that are scheduled for elimination. But Forbes' Howard Gleckman says that won't cut it.

“Thus, instead of moving cash from the general fund to the highway fund, they’d reduce the amount of money the general fund collects in the first place,” Gleckman writes. “The effect on federal borrowing is exactly the same.”

And there's an added problem. The tax burden has shifted to consumers who drive – including the single mom. Is she likely to benefit from those restored tax breaks? Don't count on it.

The problem, it seems, is that the price of gasoline has less to do with supply and demand and more to do with what the market will bear. The U.S. Energy Information Administration (EIA) estimated in 2009 the real costs of producing a barrel of oil was around $52. The current price is north of $106.

When gasoline prices reached their record highs – over $4 a gallon – in 2008 the market established where the breaking point was. It's probably no accident that the prices haven't fallen too far below that since.

State gasoline taxes

Besides the current federal gasoline tax each state also levies its own gasoline tax, and in nearly every case the state tax far exceeds the federal levy. That's partly responsible for the wide swing in prices from state to state.

According to the American Petroleum Institute California adds nearly 53 cents a gallon to the price of gas while New York adds 42 cents. South Carolina, meanwhile, tacks on less than 18 cents – one of the only states with a tax lower than the federal rate.

Would the states cut their tax rate to offset a federal tax hike? Again, don't count on it. Most states have budget crises of their own.

The good news for drivers is that, in an election year the gas tax hike proposal is probably going nowhere. The bad news, however, is that gasoline prices – tax hike or no tax hike – will continue to go up.

The former CEO of Shell Oil USA says there is a “better than 50 percent chance” gasoline prices will hit $5 a gallon by sometime this summer.

John Hofmeister, founder of an advocacy group called Citizens for Affordable Energy,” says even though demand for gasoline is weak in the U.S., global demand for oil will keep driving the price of gasoline higher.

“What’s really unprecedented is developing countries, particularly China and India, have this insatiable need for more oil and that has not been taken into account when we think of public policy in this country,” Hofmeister said in an interview with CNBC.

Disagrees with the government

Hofmeister took issue with a report last week from the U.S. Energy Information Administration (EIA) that once again lowered its estimated demand for oil in the months ahead. His group advocates increased and faster U.S. energy development.

Hofmeister is not alone in forecasting higher gas prices, though most other predictions stop short of $5 a the pump. Since last year, some industry analysts have been warning consumers to prepare for $4 a gallon gasoline.

In the last four weeks the average U.S. price of self-serve regular has risen about 12 cents a gallon, to $3.50 a gallon, the highest it's ever been in February, according to AAA. The trend matches the one from last year, when oil prices rose in reaction to the “Arab Spring” movement that some feared would interrupt oil supplies from the Middle East. Civil war did, in fact, interrupt the flow of oil from Libya.

Projecting a peak

In 2011, the average gasoline price peaked in early May at $3.98 a gallon before a slowing economy began to drag it down over the summer. Is it possible to project from last year's rise what will happen to gas prices this year?

At this time last year, the average gasoline price was $3.12 a gallon, so the increase to $3.98 amounts to a 27 percent increase.

Today's average price is $3.50. If last year's same set of economic circumstances remained in place this year, and prices rose 27 percent from today's price of gasoline, the result would be a peak of $4.44 a gallon, a bit shy of Hofmeister's prediction, but enough to severely hurt consumers.

Ironically, U.S. consumers are paying more at the pump when supplies of gasoline are piling up. In the latest EIA weekly report, stockpiles of gasoline increased by 1.6 million barrels.

U.S. refining companies are caught in the squeeze between rising oil prices and falling U.S. gasoline demand. That puts severe pressure on their profit margins. Refineries are selling so much less fuel that three Pennsylvania refineris say their profit margins are not enough to keep them operating.