Gas prices jump as summer approaches, confounding traders

The country is in the midst of its worst recession in decades, layoffs have taken millions of Americans off the roads, sapping gasoline demand, and yet gasoline prices have surged more than 25 cents in the weeks before Memorial Day.

The market has confounded energy traders, economists and consumers alike. What is going on here? DailyFinance spoke with a couple of experts to get their analysis on what for Americans is an annually frustrating experience: rising gas prices heading in to summer, no matter what the condition of the U.S. economy.

U.S. refinery system constrains supply

Economist Peter Dawson argued the nation's refinery network is still creating "a bottleneck of key, formulated gasoline grades." The nation hasn't opened a new refinery since the 1970s, and with refineries running at 82 percent of capacity, that's just enough of a squeeze to force prices slightly higher -- but not 25 cents in a month, he said.

Gasoline prices typically jump about five percent before Memorial Day, Dawson added, which historically marks the start of the U.S. summer driving season, when Americans take vacations and travel by car more as the weather warms. The rising price of oil, which has topped $60 per barrel from lows in the $35 range this winter, also has contributed to gasoline's upswing.



Still, the large increase in gasoline prices in the last six months "is a bit of surprise," says Energy Trader Jim Dietz. The average cost of regular unleaded gasoline has rocketed 43 percent in about six months, from $1.60 per gallon in January to $2.30 today, according to data compiled by gasbuddy.com. "It's one of those anomalies that has confounded traders," Dietz said, adding that he currently is short both crude oil and gasoline, with numerous monthly contracts, all of which are under water, or are losing trades.

Nevertheless, Dietz still expects both gasoline and oil prices to reverse and drop dramatically, mainly on the calculation that high global oil inventories will lead to a plunge in oil prices to $40 per barrel later this summer. However, the tape doesn't lie, Dietz said, adding that he will be stopped out of all trades for losses if oil hits $65 per barrel. "Sometimes you can have every calculation pointing in one direction, and the market just moves against you and ruins you," Dietz said. "That is part of the risk of trading."

Oil traded Wednesday at mid-day up $1.45 to $61.55 per barrel on the belief the U.S. economy may be bottoming, leading to an increase in oil demand.

Speculators at fault?

Further, Dawson senses that speculators have once again artificially, and probably temporarily, boosted gasoline's price, and he still expects gasoline prices to fall after Memorial Day. (Famous last words?) A frequenter of The Westchester Mall in his home town of White Plains, N.Y., Dawson sees little evidence of rising gasoline demand in the mall's parking garages.

"Mall traffic is way down and the parking garage is empty most of the time," Dawson said. "I often feel like I'm the only one out shopping, so it's hard to believe there's been a sudden rise in gasoline demand across the nation. That leads me to believe this a short-term gas price rise, a spike."

Economic Analysis: For the good of the U.S. economy, the gasoline price rise had better be short term. The rise is a de-facto tax increase for American motorists. Conversely, each $1 per barrel drop in oil increases U.S. GDP by $100 billion per year; and every one cent decline in gasoline increases U.S. consumer disposable income by $600 million per year. Hence, if gasoline prices remain at these elevated levels, that will decrease consumers' disposable income and demand, and make it harder for the U.S. economy to enter its recovery phase.

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