How high will gas prices go?

LEXINGTON, Ky. – Most consumers have probably noticed the soaring gas prices as they have filled their tanks in recent weeks. According the Energy Department, the retail gasoline price increased to its highest level on record in the United States during the second week of May.

The national average price of gasoline is more than $1.70 per gallon. The previous record was set last June at $1.68 per gallon.

Farmers especially see the effects of higher fuel prices, according to Gregg Ibendahl, University of Kentucky agricultural economist.

“Not only do they pay more as consumers, but their costs of production are increased from higher fuel prices.”

Ibendahl said fuel expenses account for 7 percent of variable expenses for growing corn and 13 percent of variable costs of growing soybeans.

Price outlook.

Most people are wondering what will happen to fuel prices over the summer months. Will they rise? Have they peaked? Will they stabilize?

“The current runup in fuel prices is probably due more to low inventories than anything OPEC has done,” Ibendahl said.

Inventories of gasoline had slipped to 193 million barrels during March. Typical inventories are 210 million barrels or more.

Ibendahl believes a combination of high demand and some production problems led to these low inventories.

He said capacity utilization dropped to 90 percent during March when some refineries were shut down because of mechanical problems, routine maintenance and a switch to reformulated summer gas products.

Some analysts are predicting gas prices to remain high through the summer months due to the low inventories. Some are even predicting $2 per gallon gas around much of the United States.

Ibendahl believes this scenario is probably a bit pessimistic.

“Refinery capacity utilization has picked up and is now running at 99 percent, according the latest energy report,” he said. “Inventory levels have increased to 199 million barrels. If refineries can keep running at this pace, then inventory levels should keep building.”

Ibendahl said the more likely scenario is that once gas supplies start to consistently stay above 200 million barrels, prices should moderate and become less variable.

Depends on demand.

He also said that scenarios that could lead to higher prices would be problems with gas refining and higher demand.

“Because refineries are currently running so hard, there exists the possibility of breakdowns,” he said. “With tight supplies, an interruption in gas processing could lead to price spikes.”

Higher-than-normal summer demand could also keep prices high. Currently, demand is 8.6 million barrels a day, a level not usually seen until summer. If demand increases more, prices could rise.

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