July 04, 2014
Gas Prices Wallop Wallets
Published in WSJ
As Americans drive to barbecues and the beach in coming days, they will be paying more for gas than on any Independence Day weekend since the record highs of 2008.
A gallon of unleaded gasoline cost an average of $3.67 Wednesday, almost 20 cents above last year's price, according to automobile club AAA. In California, drivers have been paying well over $4 a gallon for weeks.
Prices at the pump are tracking a sharp rise in oil prices over the past month, after Islamist militants took control of several cities in Iraq. Investors and traders have worried that the spreading insurgency poses a threat to the country's oil production. Oil prices have given up some of their gains in recent days, but it will take some time for those declines to be reflected in the cost of gasoline.
The recent run-up in gasoline prices is a reminder that the U.S. still depends on imported oil, despite a rapid increase in domestic production. Global crude supplies are tight, and many analysts think drivers could be in for more pain in the coming months if violence worsens in Iraq or another major oil exporter. Higher fuel prices come at a delicate time for the U.S. economy, potentially stretching consumer budgets and weighing on growth as the Federal Reserve is rolling back stimulus.
Drivers "might cut back on other things, like shopping or dining or going out," said Michael Green, a AAA spokesman. The high cost of gas "really just affects their budget, and the amount they can spend on everything else when they're traveling."
Carla Coleman, an unemployed social worker from Los Angeles, said higher gasoline prices have cut sharply into her budget this summer as she drives to and from job interviews.
"Last night, I drove to Hollywood for a free jazz concert, and my mom told me not to go because I'm using her gas card. I'm more aware of where I'm going and how much I'm spending," said Ms. Coleman, 47, who had just filled her Toyota Camry at a 76 station in Sherman Oaks, Calif., where regular gasoline costs $4.17 a gallon. "I hope the prices go down."
On Wednesday, U.S. oil futures fell 86 cents, or 0.8%, to $104.48 a barrel after Libya's government reached a deal with rebels to restart some exports. Crude-oil prices account for about 65% of the cost of retail gasoline.
The U.S., the biggest consumer of oil and gasoline, is better-equipped to handle uncertainties about global supply than it was six years ago. In July 2008, oil prices soared to nearly $150 a barrel and gasoline prices topped $5 a gallon in many locations, contributing to the country's worst recession in decades.
The nation's production has surged by more than three million barrels a day since then, bringing supplies to records. Government data released Wednesday showed oil inventories fell more than expected last week but remain near the peak of almost 400 million barrels reached in April.
Still, U.S. refineries continue to import oil from abroad. Iraq was the sixth-largest oil exporter to the U.S. in April. The possibility that Sunni insurgents could advance to Baghdad and southern oil fields is keeping investors nervous that those shipments could be cut off.
Recent rulings by the U.S. government to allow some overseas exports of a kind of ultralight oil could lead to a broader loosening of the country's ban on crude-oil exports, which has been in place since the 1970s. Some argue that exports would make U.S. oil more expensive, boosting fuel prices further. Others say overseas demand would encourage producers to drill more, which would keep prices down.
Gasoline prices are rising as more drivers take to the road, reflecting a recovering economy. AAA expects 34.8 million Americans to drive 50 miles or more during the Independence Day holiday weekend, the highest number since 2007.
A jump in gasoline prices is unusual for this time of year. Prices typically peak around Memorial Day, the start of the summer driving season. According to AAA, prices at the pump fell by an average of 21 cents a gallon in June in the past three years. But they rose this year due to the turmoil in Iraq.
California, which pays the highest gas prices in the lower 48 states and accounts for 9.2% of the country's petroleum consumption, is most vulnerable to supply shocks overseas. Refineries there buy nearly half the Iraqi oil shipped to the U.S. The state lacks the pipeline and rail connections to easily bring in cheaper shale oil produced in Texas and North Dakota.
Prices at the pump in California averaged $4.138 a gallon Wednesday, according to AAA.
"California tends to pay something closer to world oil prices for their crudes," said Tom Kloza, chief oil analyst at GasBuddy.com. "They're not really beneficiaries of the shale-oil boom."
To be sure, few analysts or investors expect prices to approach the records seen in 2008, mostly due to robust U.S. and Canadian production. At current levels, energy costs aren't a big enough drag on the economy to derail the recovery, analysts say.
"We could have another 30-cents-a-gallon increase nationally and I really don't think it would have significant effects on consumer sentiment or major spending," said James Hamilton, professor of economics at the University of California, San Diego.
But any escalation of violence in the Middle East or an actual disruption to Iraqi supplies could send oil prices, and subsequently gas prices, shooting higher, analysts said.
That would be unwelcome news for drivers like Tai Gabriel, a fitness trainer in Los Angeles, who said he noticed last month that he had spent an unusually high amount on fuel.
"Gas didn't used to be this important. You didn't think that about gas, and now it's as high a priority as food. It eats away at your lifestyle," Mr. Gabriel, 41, said as he filled his white Jeep.