Gas spike should be temporary

Friday, January 9, 2009
Tribune photo by Karen Hall Jonathan Ring fills up at a gas station on West Commerce Street in Lewisburg.

Worried about the sudden spike in gasoline prices? Concerned international conflicts might send them higher?

Analysts say not to worry -- for now.

The average price of unleaded gas in Tennessee rose almost five cents in one day Wednesday to $1.61, evoking memories of recent runaway price surges at the pump. The price was up from both the day before and in early December.

Over the next couple of months, however, the price should stabilize or even fall, analysts say.

One reason for the optimism is that energy prices tumbled across the board Wednesday after a government report showed U.S. oil reserves were much greater than expected, suggesting demand continues to fall.

Sweet crude for February delivery plummeted more than 9 percent, or $4.54, to $44.04 a barrel after the report was released.

The Energy Information Administration said inventories rose of commercial crude oil inventories rose 6.7 million barrels, well beyond the 1.5 million-barrel build expected that can influence market trading.

Analyst Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates, said it was one of the more bearish EIA reports he's seen in a while.

"This will take a lot of steam out of the geopolitical argument that this Russian-Ukraine standoff is going to disrupt supplies appreciably," Ritterbusch said. "This report's telling us that we've got a big supply cushion out there that can easily absorb a temporary curtailment of European supply."

Russia Prime Minister Vladimir Putin has ordered a stop of all natural gas to Europe through Ukraine.

Jim Lott, district manager for AAA South in Nashville, said local prices are affected by the conflict between Israel and Hamas in Gaza could spread to the rest of oil-rich Middle East and affect supplies.

"It's all about the Middle East," Lott said. "We had seen gas prices going pretty steady, and we didn't see this coming at all. But when a skirmish like this breaks out, spikes can happen."

Lott said he didn't think the price surge meant the return to $4-a-gallon gas this summer.

"Usually, (gas prices) go with the economy, and right now, demand shouldn't be that high," Lott said.

Beyond 2009, however, could be a different story.

The same cheap oil that's providing relief to drivers and businesses in an awful economy is setting the stage for another price spike, perhaps as soon as next year, that will bring back painful memories.

The oil industry is scaling back on exploration and production because some projects don't make economic sense when energy prices are low. And crude is already harder to find because more nations that own oil companies are blocking outside access to their oil fields.

When the world emerges from the recession and starts to burn more fuel again, and higher demand meets lower supply, prices will almost certainly shoot higher.

Some analysts say oil could eventually eclipse $150 a barrel, maybe even on its way to $200. In such a scenario, gasoline would easily cost more than the record high of $4.11 a gallon set last summer. Oil trades at about $50 today.

No one knows for sure, but some analysts say the spike could happen as soon as next year, perhaps in 2011 or 2012.

"I think those supply limits will come back to bite with a vengeance," said Sean Brodrick, a natural resources analyst at Weiss Research Inc.