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published: Friday, February 17, 2012

Gas expected to rise 60 cents by May

By CHRISTOPHER TUFFLEY

christopher.tuffley@newssun.com

SEBRING -- Gasoline prices have been rising for the last month, on average about 19 cents per gallon. Recent reports predict the rise will continue, with a gallon costing an additional 60 cents by May.

Sebring local Jim Lashley, filling his vintage VW Beetle at the Raceway Station Thursday, is among many unhappy drivers. "It's ridiculous," he said. "I just came back from Georgia and gas is 10 cents a gallon cheaper there. It won't get better until we get rid of (President) Obama. Then they'll start drilling and build the pipeline. It's ridiculous for senior citizens. They can't afford it. It hurts them hard."

Lashley, a past commander at the VFW Post 4300, has two cars. The 1965 Beetle -- which gets 35 miles to the gallon and costs about $21 to fill, and a Lincoln which gets about 18 miles per gallon around town and costs $85 to fill.

The News-Sun spoke with Mike Breard, an energy analyst with Hodges Capital, a mutual fund management company in Dallas, to discuss the reasons why gasoline prices are rising so quickly.

The petroleum industry is very competitive, Breard said, and subject to impacts ranging from world events, recovery costs, increasing demand, environmental rules and seasonal driving habits.

Breard said part of the problem is perception. Gas stations post their prices where everyone can see them every day. The result is a high awareness of price changes. "If milk or O.J. prices were as prominently displayed, you'd be getting the same kind of reaction," he said, because prices for those commodities have risen as sharply.

"In the long term, prices have to go up," he said. Lower prices discourage new technology or exploration because they are not cost effective. "Four dollars a gallon is actually a good price."

There are, however, real pressures on the industry.

For example, higher demand. India and China, he said, are rapidly growing a middle class, which is buying cars, creating a entirely new market. He added that in China 75 percent of car buyers are buying a vehicle for the first time. In 2009, China became the world's second largest consumer of oil. The United States is first.

Electrical service is expanding too, which requires more fuel for power plants.

At the same time, oil is becoming more difficult to retrieve, and the operations more expensive. Drilling is being done in 10,000 feet of water. The cost to build a platform alone is $1 billion. Some older fields are depleted, or nearly so. Mexico and Alaska have already removed roughly half the petroleum from some of their fields.

Political unrest also contributes. Not just with Iran and the Straits of Hormuz, but also in places like Libya, still reeling from its civil war.

"The United States does not buy oil from Libya," Breard said, "so there isn't a direct effect. But, Italy does. Unable to obtain oil from Libya, Italy has turned to Nigeria, from whom we do buy. The increased demand raises prices."

Breard said, "Ninety million barrels of oil are consumed daily world wide. A decline of just 5 percent in production means a new 4 1/2 million barrels of oil have to be found from new sources.

Then there are national factors.

"Subsidies for ethanol ended at the end of the year (2011)," Breard said. "That added roughly another 5 cents to the cost of a gallon."

He added that two refineries were recently closed because they were not operating at a profit, but their loss did affect the availability of gasoline.

This is also the time of year refineries transition from winter products, like heating oil, to gasolines, which are more expensive to produce due to additives and environmental standards. Also people begin to travel more, raising demand.

"It's all inter-related," Breard said. "Government investigations into petroleum companies have not discovered evidence of collusion among them."

Federal and local taxes add to the cost of a gallon of gasoline. These costs vary from state to state, county to county. "Gasoline prices are different everywhere. For example in Oklahoma, 92 percent octane gas is available, which is less expensive because it does not have as many additives."

Breard said as bad as prices are here, they are much worse in other parts of the world. Europeans pay twice as much as Americans for a gallon of gas.

Efforts to reach Taylor and Grimsley oil companies, which market fuel locally, were unsuccessful.