Making Sense Of The Oil Mess

Prices Are Sky High, Some Pumps Are Dry, But Is A Gas Crisis Looming?

(CBS) 

Today, it’s closer to 60 percent, an adjustment that reflects the disproportionately high cost of the crude compared to refining and transporting it, Adelman said.

Aside from the crude oil, when buying a gallon of gas, a driver pays for state taxes (about 23 percent), refining costs (18 percent) and distribution and marketing (12 percent).

While it's easy to take out fueling frustration on convenience-store owners, their pricing is a negligible part of the squeeze on consumers. In fact, they're getting squeezed, too, in order to lure customers who might back off from purchasing at higher prices.

The National Association of Convenience Stores calls it a "high-stakes game of chicken to remain competitive, absorbing some or all of wholesale price increases until they see others pass along their wholesale price increases."

Increased consumption has also driven up oil prices. Future expectations play an important role here too. Adelman says China's rapidly climbing oil consumption has created a belief that "the Chinese are going to keep buying, and that will push prices up."

The traditional pre-summer price spike is adding to motorists' woes.

“This is the time of year that oil companies are switching over from their winter driving blend to the summer driving blend, and during this time they incur a higher cost in processing,” Toews said. “We're coming up into summer driving season, so we always see a bit of a price rise anyhow.”

The blend of refined oil that consumers know as "unleaded" is not only being altered at refineries to lessen its evaporation rate for summer, but is this month being infused with a higher ethanol content. The Energy Policy Act of 2005 (.pdf), signed on Aug. 8, 2005, by President Bush, mandates that that the U.S. uses about four billion gallons of ethanol this year in fuel. Refineries are in the midst of a formula change, which again can decrease their inventories. But the ethanol boost also affects the markets, because there is concern about the availability of enough ethanol to comply with the law — that's said to be causing the unleaded shortages in Philadelphia and Virginia Friday.

All this adds up to the Energy Department's announcement last week that supplies of gasoline fell by 5.4 million barrels.

"You typically see crude's inventories start to build around this time of the year, so seeing that they're decreasing right now, that was a little surprising. But given that we're going through this switchover, you have to decrease your inventories significantly," American Petroleum Institute chief economist John Felmy said.

Many experts believe the summer price of gasoline will hit $3.25 or $3.50 per gallon.

Will gas prices eventually reach the dreaded $4 mark? Experts say yes, but that prices will tick up gradually — barring a geopolitical crisis, which would mean instant pump shock.

“It could happen — it is going to happen.” Toews said. “We're going to see $4 gasoline in the U.S. The days of cheap gas are over.”