Rising fuel costs confound experts

If you're having trouble grasping the logic behind rising oil and fuel prices, you're in good company.

As crude oil hit a high of $94.53 a barrel in trading Wednesday, even the experts who study petroleum and gasoline economics for a living all but gave up trying to understand what's driving the market.

"The price of oil right now goes against any grain of rational thought," said Denton Cinquegrana, West Coast markets editor for the Oil Price Information Service in New Jersey. "It's got everybody scratching their heads. When you say, 'Prices can't possibly go up anymore,' that's the day prices go up $2 a barrel."

That instability makes it tough to predict with much precision what motorists will be paying for gasoline through the end of the year and into 2008. What analysts will say with some confidence, though, is that the price of oil, which is a key component in gasoline, won't likely drop below $75 or $80 a barrel in the coming months. That means gasoline prices should pass $3 a gallon by the holiday season, and could stay high through the winter, setting the stage for a "wild spring," Cinquegrana said.

That's not news that Las Vegan Dalia Fradsham wanted to hear as she filled up her 1994 Lexus SC400 Wednesday morning at a Terrible Herbst station on Sahara Avenue.

"It's going to kill us," Fradsham said. "It's going to kill everybody. Christmas will be a lot thinner."

Fradsham said the fuel prices of the past 12 months have already forced her to halt regular road trips into Arizona and Utah, and she's spending less on groceries and clothes.

Fradsham's sister, Tania Hurless, said the two have also scaled back window-shopping trips to the Fashion Show mall from twice a week to once every two weeks.

"When you put money in your car, it takes money away from everything else," Fradsham said.

Analysts say there are few concrete reasons underpinning rising oil and fuel prices.

Gasoline makers say they aren't having any trouble finding and buying oil to refine into fuel, so supply isn't spurring the record prices, Cinquegrana said.

Much of the price gains come instead from simple uncertainty: Commodities traders aren't sure how political tensions in Iraq, Turkey, Iran and other global hot spots might affect future supplies. There's also no telling how long a weak U.S. dollar, which increases foreign demand for oil because it makes the commodity cheaper in other countries, will stay down against other currencies.

If recent oil prices have set highs that market fundamentals don't justify, drivers at least have caught a break at the pump. Gasoline prices have remained well below the record average of $3.20 a gallon in Las Vegas and $3.27 a gallon statewide. Those highs came in late May, when oil prices were running about $65 a barrel. Analysts credited fuel's spring-time price surge to a jump in demand as travelers began their summer vacations.

But consumers shouldn't expect today's cost disparity between oil and fuel to continue.

"The situation is going to start correcting, and eventually, oil prices will filter down to gasoline prices," said Phil Flynn, an energy analyst with Alaron Trading Corp. in Chicago.

Indicators show that trickling-down might have begun.

The statewide average price for a gallon of unleaded fuel reached $3.03 Wednesday, up from $2.84 a month ago, according to numbers from travel club AAA. Fuel cost $2.94 a gallon in Las Vegas, up from $2.76 a month ago.

Experts are watching two other factors in addition to oil prices that could send up gasoline prices by the end of the year.

First, fuel consumption will jump as travelers take to the roads and skies for Thanksgiving, said Michael Geeser, a spokesman for AAA.

Second, interest-rate cuts at the Federal Reserve could continue to drive down the value of the U.S. dollar, which will in turn boost the price of oil as foreign producers demand more dollars for the petroleum they produce. Plus, a weak dollar will mean more consumption in other countries. The outcome: High crude prices, at least through early 2008, Flynn said.

Flynn said he expects national gasoline prices to jump a nickel a week for the next two weeks, and hold at about $3 a gallon through Christmas. Because Nevada has higher fuel taxes than most other states, the Silver State's average could top out at $3.15 to $3.20 a gallon, Flynn said.

For Dave Koby, a project manager at Eagle Windows and Doors in Las Vegas, those prices could mean even leaner times.

Eagle Windows is already hurting from gasoline and oil prices, Koby said as he tanked up his 2007 Ford F150 pickup truck Wednesday at Terrible Herbst. Freighting costs have more than tripled, and prices on the windows the company sells have jumped 5 percent to 10 percent thanks to petroleum-based components such as plastic moldings and trims. A soft housing market has also hurt the company.

Eagle Windows is still having a "good year," Koby said, but the company doesn't have work in the pipeline for 2008, and that lack of pending orders is unusual, he said.

Eagle Windows has adjusted to the higher fuel prices by bundling orders to defray freighting costs and planning deliveries more carefully. Plus, installers won't go on a job unless they have several other projects in the same area, so some buyers have to wait a few days for their windows until the company has other work in the same neighborhood. If prices rise much more, Koby's sacrifices could get more personal.

"Christmas won't be as good, let's put it that way," he said.

Koby and other drivers could catch a price break if a warm winter suppresses nationwide demand for heating oil, Flynn said. Prices for both oil and gasoline would also decline if the economy slides into recession, because demand would drop as people cut back on spending and travel.

Forecasting future prices is difficult because oil isn't priced reasonably, Cinquegrana said. But he expects crude prices to stay high through the winter and into the spring. And starting the spring with already-high oil costs could translate into gasoline prices that go "absolutely nuts" when Memorial Day launches the summer travel season, Cinquegrana said.

The savior could be ethanol, a fuel additive that's designed to help gasoline burn more cleanly. An oversupply of ethanol has made the additive cheaper, and if that trend continues, slightly lower fuel prices could result, Cinquegrana said.

Like other industry experts, AAA's Geeser doesn't expect significant cost savings at the pump through the end of 2007.

"Prices are definitely not following the trends of past years, when we saw prices retreat toward the end of the year," Geeser said. "They're doing the opposite at a time when demand tends to fall off. That would sort of predict prices are going to remain high through the end of the year."

So will oil prices ever fall back to the $40 a barrel they traded for in 2004, and give consumers bigger relief at the pump?

"They will, but the question is whether it will be now or 20 years from now," Flynn said. "The oil market is a story of boom and bust. We're going to have a bust in the oil market. It's going to happen, maybe even next year, if we get into a recession."

Contact reporter Jennifer Robison at jrobison@reviewjournal.com or (702) 380-4512.