Gasoline Is Approaching $3 a Gallon

With oil prices heading higher and fuel-supply worries mounting, market watchers say that $3-a-gallon gasoline nationwide is a near certainty as the U.S. gears up for the summer driving season.

And along the way, refiners’ profits are soaring.

The nationwide average pump price shot up 9.5 cents in the last week to $2.683 for a gallon of self-serve regular, the Energy Department said Monday, based on its weekly survey of service stations. The latest average is 44.3 cents above February’s low.

In California, the average cost of regular rose 6.8 cents during the same period to $2.811 a gallon, up more than 37 cents since Feb. 27. A smattering of California gas stations already are charging more than $3 a gallon for regular, and the statewide average for premium grade jumped across that mark in the last week, landing at $3.011 a gallon.

“It’s going to get pretty ugly. It’s ugly already,” said Phil Flynn, senior market analyst at Alaron Trading Corp. in Chicago. “We’re going to hit $3 a gallon nationwide.... That’s the number that I’m hoping that we’re going to stop at.”

Last year, gasoline prices surged and then fell before Memorial Day weekend, the symbolic start of the summer driving season. California’s early 2005 average peak of $2.592 a gallon was followed by nine weeks of declines, while the nationwide average fell for seven weeks after its pre-Memorial Day peak of $2.28 a gallon. In early September, hurricane damage pushed the U.S. and California averages above $3 a gallon.

Now, however, retail gasoline prices are heading toward $3 well before hurricane season and in the absence of any catastrophic event in fuel production or distribution.

“Hopefully, we’re going to see the worst sooner rather than later,” Flynn said. “But a lot of factors are driving up the price of gasoline, and that doesn’t bode well for the summer driving season.”

Energy experts attribute the higher fuel prices to a range of issues.

Crude oil, which accounts for more than half the cost of gasoline, is a factor. The cost of light, sweet crude for May delivery neared an all-time high Monday, closing up $1.35 at $68.74 a barrel on the New York Mercantile Exchange. Gasoline futures jumped also, finishing the day up more than 3 cents to $2.009 for May delivery of a gallon of regular.

But oil isn’t the leading culprit for gasoline’s leap, according to analysts who track the financial performance of refiners. After subtracting their cost of crude oil -- but not other expenses -- refiners in Los Angeles are averaging gross profit of 65 cents a gallon of gasoline sold, said David Hackett, president of Stillwater Associates, an Irvine consulting firm. That’s up from an average of nearly 38 cents earlier this year.

“What that says is that even though crude oil prices are at near-record highs, gasoline prices are much higher than the crude oil prices would dictate,” Hackett said. Declining gasoline inventory levels and production rates are also playing a role, Hackett and others said.

Some refineries in the Gulf of Mexico are still not up to full production following repairs and extended maintenance after hurricanes Katrina and Rita swept through the nation’s largest refinery hub last year, Flynn said. Other plants are conducting more extensive tuneups because they postponed wintertime maintenance to make more gasoline amid possible post-hurricane fuel shortages.

In addition, large cities in Texas and the East Coast are making an unexpectedly abrupt change to gasoline blends that use ethanol in place of the additive MTBE, or methyl tertiary butyl ether.

The sudden shift has traders worried about temporary fuel shortages as refiners work to secure enough ethanol as well as tanker trucks, storage tanks and other equipment to distribute ethanol to markets where it’s needed most.

“This whole ethanol business has created shortages, and that has raised the price of gasoline to consumers,” Hackett said.

Ethanol advocates have vehemently disputed predictions that the driving season will be marred by shortages of the corn-based additive. Current production, along with imports and some shifting of ethanol between markets, will provide sufficient volumes to meet summer demand, said Matt Hartwig, spokesman for the Renewable Fuels Assn.

The Energy Information Administration, an arm of the Energy Department, has said that tight ethanol supplies could create supply disruptions and price volatility in the coming months.