Retail gas prices are likely to increase, but researchers at Rice University's Baker Institute say $5-a-gallon projection is overstated
The unprecedented demand for gasoline during the massive evacuation of Texas and Louisiana during Hurricane Rita resulted in the U.S. effectively having two Labor Days this year in terms of heavy-driving periods.
Although the higher demand will put additional strains on the U.S. gasoline distribution system in the coming weeks and result in higher retail prices, researchers at Rice University's Baker Institute for Public Policy said predictions that national average retail prices will exceed $5 a gallon might be largely overstated.
For this time of year, normal consumption of gasoline in Houston and the surrounding area is about 22 million gallons per day. For the days leading up to Hurricane Rita's Sept. 24 landfall, the evacuation of some 3 million people pushed gasoline demand to an estimated 45 million gallons per day - about two times higher than normal. All else being equal, this increased demand would push national consumption of gasoline during that period to levels comparable to those for the traditionally heavy-driving week of Labor Day, or about 10 percent higher than usual for this time of year, according to estimates provided by energy experts at the Baker Institute.
Research into the historical relationship between U.S. crude oil benchmark West Texas Intermediate (WTI) and average U.S. pump prices indicates that today's national average retail price of about $2.80 per gallon is in line with crude prices of about $75 per barrel, suggesting that consumers should not expect to see a dramatic rise in prices to $5 per gallon. Rice researchers cautioned, however, that many factors affect U.S. gasoline prices besides crude oil price levels, including future uncertainty about supplies involving political developments and other factors, refinery downtime, inventory levels and sudden changes in demand and import levels.
"Many factors have significant statistical explanatory power for gasoline prices," said Kenneth Medlock, Baker Institute energy fellow and lecturer of economics at Rice. "But analysis indicates that crude oil prices are the strongest indicator of the wholesale price of gasoline."
Medlock noted that the study of historical relationships indicates that under normal conditions even a rise to $120 a barrel for WTI would mean that consumers could expect gasoline prices approaching only $4 a gallon, which is far short of the $5-per-gallon prediction cited by media sources. Medlock added, however, that "uncertainty about the ability to provide adequate supplies to meet expected demand could drive a risk premium into the wholesale price of gasoline, which would ultimately result in higher prices at the pump. Low inventories, refinery outages and unexpected surges in demand all contribute to such uncertainty."
Consumer inclinations to keep their automobile gas tanks full can worsen the situation, the Rice researchers said. A consensus shift from half-full to full-tank use represents a near-term boost in demand that can put pressure on the market.
"Consumer response is the best remedy we have," said Amy Myers Jaffe, the Wallace S. Wilson Fellow for Energy Studies at Rice's Baker Institute. Price caps implemented in the 1970s failed to discourage consumers from filling their tanks and left many without needed fuel. Public commitment to voluntary adjustments to habits and practices is the best short-term solution, Jaffe said, adding that the U.S. may be pressed by allies to institute rationing measures if strategic supplies from stocks in Europe and Japan are to be tapped in any significant volumes down the road. "The international emergency stockpiling agreements stipulate demand-control measures as well as stock-supply measures," she said. "We cannot just ask for more fuel and let other countries bear the brunt of changed patterns in usage."
In the longer term, the U.S. should address permanent solutions to abate gasoline demand in an effort to avoid tighter markets, increased uncertainty and ever higher prices, according to Baker Institute policy studies.
Source: Eurekalert & othersLast reviewed: By John M. Grohol, Psy.D. on 21 Feb 2009
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