Gasoline Prices: What Next, With Prices Already Above $3 Per Gallon?

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In late December, the average national retail price of regular grade gasoline rose above $3 per gallon for the first time since October 2008. However, when gasoline sold for $3 per gallon in October 2008, gasoline prices were in the midst of a sharp decline that saw prices fall from a peak of $4.11 per gallon in July 2008 before bottoming-out at $1.61 per gallon in December 2008. Since then, prices have been on an upward trend.

Figure 1 illustrates that the recent increase in gasoline price mainly reflects an increase in crude oil prices. From June through September, retail regular grade gasoline prices remained fairly steady, averaging about $2.70 per gallon. In October, they began to climb, increasing 34 cents per gallon from beginning of October through the end of December. Over the same period, crude prices increased $13.35 per barrel (32 cents per gallon).



Crude oil prices have risen to over $90 per barrel fueled by world petroleum demand growth, particularly in non-OECD Asian countries such as China and India, and other factors. As highlighted in the Energy Information Administration's (EIA) most recent Short Term Energy Outlook (STEO) and last week’s This Week In Petroleum, EIA expects continuing tightening of world oil markets over the next two years, keeping upward pressure on crude oil prices.

There are many significant uncertainties that could push crude oil prices higher or lower than expected, which would contribute to higher or lower gasoline prices. Should OPEC not increase production as global consumption grows, oil prices could be significantly higher than the baseline forecast. The rate of economic recovery, both domestically and globally, also remains uncertain due to a variety of factors including fiscal issues facing national and sub-national governments, and China’s efforts to address concerns regarding its growth and inflation rates.

The EIA expects regular-grade motor gasoline retail prices to average $3.22 per gallon during the summer (April through September) peak driving season this year, 46 cents per gallon higher than last year. There is regional variation in the forecast, with average expected prices on the West Coast about 26 cents per gallon above the national average. There is also significant uncertainty surrounding the forecast, with the current market prices of futures and options contracts for wholesale gasoline, considered in conjunction with the typical spread between wholesale and national average retail gasoline prices, suggesting more than a 25 percent probability that the national average retail price for regular gasoline could exceed $3.50 per gallon in the June through September period in 2011 and an 8 to 10 percent probability that it could exceed $4 per gallon in August and September 2011. EIA further discusses price uncertainty in the Energy Price Volatility and Forecast Uncertainty supplement to the STEO.

Source: U.S. Energy Information Administration



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